I think one thing worth noting is also his obsession for quality without growth. At the end of the day, stock prices are driven by earnings and if those end up compounding at barely 5% and you bought into them at very high valuations like Mr. Smith mostly did - you are going to end up with a bad outcome irrespective of how high quality a business.
And this is precisely why i think someone like a Charlie Munger will always be classified as a much better investor given his understanding of the above and investing based on the GARP (growth at a reasonable price) philosophy. Similar story for Peter Lynch and Philip Fisher!
And indeed, it is sad to see the capitulation but also a breath of fresh air to see some high quality growth names being picked up such as TSMC - which meet all the criterion Mr. Smith has always invested with, but with an added layer of solid growth prospects.
Not true - he is free to allocate whatever capital he is working with wherever he wants to and he chose stuff like Unilever, Nike etc. - that is all on him.
A fundamental truth about investing is opportunity cost - as an allocator its your job to choose the most efficient avenue and his choices have been really bad over the past 5-6 years now.
"Permanent capital is the retail investor’s structural edge, and most people don’t even realise they’re holding it."
I agree with your statement here.....as it applies to me. But, I'm 14 years into retirement, divorced, no debt, no expenses for children, etc. When I make mistakes, which I often do, I just look in the mirror and blame myself. No guilt. Just try to learn from it. However, many retail investors are in an entirely different scenario. The minute anyone claims"I will never sell this one", I know they're full of it. Situations change. That capital which seemed permanent may not be. Plus many overestimate their investing acumen. One of the worst things that can happen to an investor is an early big winner. The "It was just so obvious to me" problem. Failure to even consider luck. Creates hubris.
Its unfortunate but his undoing has always been price to me. It never really sat right with me where it seemed like he treated high FCF yields as poor quality. It was basically saying that market price was telling us what was a quality business.
I never really understood why he was so overweight expensive US stocks when he lived in a country that had a lot of quality UK names. I get nobody likes UK stocks but that's the point. Buffett didn't make a fortune buying when everyone loved the business.
Very thoughtful and you get to the heart of the issue: it is a business problem as much as an investment problem. The people marketing the fund sold the process, but the buyers of the fund bought the performance. Funds marketing is a fashion business.
terry should behaviorally insulated ; he is rich, lives on a tropical isles, has many hobbies, and has decades of reinforced discipline.
if he really wants to save fundsmith, then the attempt should be changing the fund structure. it may not succeed, but few are in better position to take the pain. i sense 'legacy' concerns, but fundamental investors would applaud this approach regardless of results.
lastly, adding a bit of momentum weight to trigger orders has been going on for decades , even for value funds if using experienced tradedesks. (my guess is they estimate if 1-2% boosts are likely) this does not seem like that.
for larger discounts, cash secured options have been getting popular.
very well written- Thank You. I think Buffett faced a similar situation in the mid-1960s when money was flowing hand over fist into the Nifty 50 and Gerry Tsai was the hot fund manager on the magazine covers. Buffett decided to return the money because he did not understand the booming market and he refused to change his investment style. In the 1967 letter to his partners he said. "I will not abandon a previous approach whose logic I understand... even though it may mean foregoing large and apparently easy profits to embrace an approach which I don't fully understand."
The Buffett Partnerships were eventually wound up in 1969.
Very good comparison that I actually haven’t thought of. You either change your style (even if you’re not believing in it yourself) or you’re fine with managing less capital or just stop entirely in a fund structure.
Smith has made more than enough money. He should be happy shrinking and seeing AUM go down. Like Dr. Tony Dye he may well be proved to be right eventually .
What sits underneath all of this is not really a change in view, but a change in what the structure will allow.
A process built on patience assumes the ability to let time do the work. Once capital is subject to flows and continuous comparison, time stops being neutral - it begins to work against the process itself.
From there, the pressure to act rarely comes from the underlying businesses. It comes from the surrounding system. And that is usually where disciplined approaches are tested, not because they have stopped working, but because the conditions required to hold them have quietly shifted.
i think it boils down to what you wrote (no billions and no redemption queue and no shareholders emailing at midnight). we are not managing and active fund that constantly underperforms the passive index, and probably gets redemption requests as a result.
this train is too big to stand in its way.
i guess the mental model was - "let's pick good ones that have momentum, and switch back when time for quality returns."
the alternative is to close shop, and try to regain all the relationships with their investors when passive trade flips.
it's true that when the momentum switches they'll be running for the exit too, and as a result losing more, but if you trust the models when passive trade causes a total crash EVERYTHING will burn and being a dirty shirt in a laundry bag would not be as noticeable.
I wish him all the best, because I also feel like I have learned a lot from his approach, and that of Howard Marks. That said, I have been disappointed by Smith's commentary in the last few AGMs that you won't outperform if you don't own the Mag 7. There are plenty of companies that have achieved market-beating gains outside of those stocks.... In fact, the last year has permitted me to pull my all-time performance above the market (S&P 500 or VWRP) without owning those stocks.
I find the Intuit / Sage dichotomy interesting - I researched them both and I feel that Intuit has the higher return on capital, even after MailChimp and SBC, so I am buying Intuit here and I intentionally bypassed Sage, because I didn't feel the price was sufficiently compelling, given the return on capital vs. the cost of capital
I’m a 1999 survivor who worked at a tech firm at that time. I was lucky that most of my money was in KO and BRK. Some very smart people where I worked did make a lot of money on momentum tech (and yes, some eventually lost a lot but still did well, net.) That was their skill set, they really understood tech. I didn’t. The lesson for me is that in momentum markets, those who actually understand what they are buying, are agile and accept the cyclical nature of the business, can do well. I (and many others) are best off sticking to fundamentals and long term investing. Understand your own skill set and stick with it.
I have managed money professionally and I can tell you it’s just as important to cultivate the right kind of aligned investors as it is to pick the right businesses to invest in. People letting you manage their money with a 6-12 month shot clock are going to ruin your long-term performance. Terry should take a step back and really think about what his goals are here.
I think one thing worth noting is also his obsession for quality without growth. At the end of the day, stock prices are driven by earnings and if those end up compounding at barely 5% and you bought into them at very high valuations like Mr. Smith mostly did - you are going to end up with a bad outcome irrespective of how high quality a business.
And this is precisely why i think someone like a Charlie Munger will always be classified as a much better investor given his understanding of the above and investing based on the GARP (growth at a reasonable price) philosophy. Similar story for Peter Lynch and Philip Fisher!
And indeed, it is sad to see the capitulation but also a breath of fresh air to see some high quality growth names being picked up such as TSMC - which meet all the criterion Mr. Smith has always invested with, but with an added layer of solid growth prospects.
Agree. High ROIC without growth (i.e. reinvestment opportunities at these rates) isn’t very valuable.
Depends on one's own perspective/goal.
> ...if those end up compounding at barely 5% and you bought into them at very high valuations like Mr. Smith mostly did...
People tell Mr. Smith what to do (as in "I want to be part of the fund"). Mr. Munger had a different vehicle. Hard to compare.
Not true - he is free to allocate whatever capital he is working with wherever he wants to and he chose stuff like Unilever, Nike etc. - that is all on him.
A fundamental truth about investing is opportunity cost - as an allocator its your job to choose the most efficient avenue and his choices have been really bad over the past 5-6 years now.
"Permanent capital is the retail investor’s structural edge, and most people don’t even realise they’re holding it."
I agree with your statement here.....as it applies to me. But, I'm 14 years into retirement, divorced, no debt, no expenses for children, etc. When I make mistakes, which I often do, I just look in the mirror and blame myself. No guilt. Just try to learn from it. However, many retail investors are in an entirely different scenario. The minute anyone claims"I will never sell this one", I know they're full of it. Situations change. That capital which seemed permanent may not be. Plus many overestimate their investing acumen. One of the worst things that can happen to an investor is an early big winner. The "It was just so obvious to me" problem. Failure to even consider luck. Creates hubris.
Great article.
Its unfortunate but his undoing has always been price to me. It never really sat right with me where it seemed like he treated high FCF yields as poor quality. It was basically saying that market price was telling us what was a quality business.
I never really understood why he was so overweight expensive US stocks when he lived in a country that had a lot of quality UK names. I get nobody likes UK stocks but that's the point. Buffett didn't make a fortune buying when everyone loved the business.
Very thoughtful and you get to the heart of the issue: it is a business problem as much as an investment problem. The people marketing the fund sold the process, but the buyers of the fund bought the performance. Funds marketing is a fashion business.
Well put!
great breakdown.
can add this...
terry should behaviorally insulated ; he is rich, lives on a tropical isles, has many hobbies, and has decades of reinforced discipline.
if he really wants to save fundsmith, then the attempt should be changing the fund structure. it may not succeed, but few are in better position to take the pain. i sense 'legacy' concerns, but fundamental investors would applaud this approach regardless of results.
lastly, adding a bit of momentum weight to trigger orders has been going on for decades , even for value funds if using experienced tradedesks. (my guess is they estimate if 1-2% boosts are likely) this does not seem like that.
for larger discounts, cash secured options have been getting popular.
very well written- Thank You. I think Buffett faced a similar situation in the mid-1960s when money was flowing hand over fist into the Nifty 50 and Gerry Tsai was the hot fund manager on the magazine covers. Buffett decided to return the money because he did not understand the booming market and he refused to change his investment style. In the 1967 letter to his partners he said. "I will not abandon a previous approach whose logic I understand... even though it may mean foregoing large and apparently easy profits to embrace an approach which I don't fully understand."
The Buffett Partnerships were eventually wound up in 1969.
Very good comparison that I actually haven’t thought of. You either change your style (even if you’re not believing in it yourself) or you’re fine with managing less capital or just stop entirely in a fund structure.
Smith has made more than enough money. He should be happy shrinking and seeing AUM go down. Like Dr. Tony Dye he may well be proved to be right eventually .
What sits underneath all of this is not really a change in view, but a change in what the structure will allow.
A process built on patience assumes the ability to let time do the work. Once capital is subject to flows and continuous comparison, time stops being neutral - it begins to work against the process itself.
From there, the pressure to act rarely comes from the underlying businesses. It comes from the surrounding system. And that is usually where disciplined approaches are tested, not because they have stopped working, but because the conditions required to hold them have quietly shifted.
great post, feel like it comes from the heart.
i think it boils down to what you wrote (no billions and no redemption queue and no shareholders emailing at midnight). we are not managing and active fund that constantly underperforms the passive index, and probably gets redemption requests as a result.
this train is too big to stand in its way.
i guess the mental model was - "let's pick good ones that have momentum, and switch back when time for quality returns."
the alternative is to close shop, and try to regain all the relationships with their investors when passive trade flips.
it's true that when the momentum switches they'll be running for the exit too, and as a result losing more, but if you trust the models when passive trade causes a total crash EVERYTHING will burn and being a dirty shirt in a laundry bag would not be as noticeable.
Great comment.
Great review/analysis Rene!
Thank you Hielo 🙏🏻
This is great news! It's yet another sign that even more people have FOMO.
Shocking!
I wish him all the best, because I also feel like I have learned a lot from his approach, and that of Howard Marks. That said, I have been disappointed by Smith's commentary in the last few AGMs that you won't outperform if you don't own the Mag 7. There are plenty of companies that have achieved market-beating gains outside of those stocks.... In fact, the last year has permitted me to pull my all-time performance above the market (S&P 500 or VWRP) without owning those stocks.
I find the Intuit / Sage dichotomy interesting - I researched them both and I feel that Intuit has the higher return on capital, even after MailChimp and SBC, so I am buying Intuit here and I intentionally bypassed Sage, because I didn't feel the price was sufficiently compelling, given the return on capital vs. the cost of capital
Very interesting. Thanks for sharing.
If you are interested, here is my research:
https://showmethevalue.substack.com/p/deep-dive-intuit-intu?r=7vl49u
https://showmethevalue.substack.com/p/sage-group-plc-lsesge-fy2025?r=7vl49u
I’m a 1999 survivor who worked at a tech firm at that time. I was lucky that most of my money was in KO and BRK. Some very smart people where I worked did make a lot of money on momentum tech (and yes, some eventually lost a lot but still did well, net.) That was their skill set, they really understood tech. I didn’t. The lesson for me is that in momentum markets, those who actually understand what they are buying, are agile and accept the cyclical nature of the business, can do well. I (and many others) are best off sticking to fundamentals and long term investing. Understand your own skill set and stick with it.
Very well said, Bill 🫡
Very thoughtful - and sadly accurate
I have managed money professionally and I can tell you it’s just as important to cultivate the right kind of aligned investors as it is to pick the right businesses to invest in. People letting you manage their money with a 6-12 month shot clock are going to ruin your long-term performance. Terry should take a step back and really think about what his goals are here.
Well written. Sad to see, but a good reminder of why we retailers do indeed have an edge if we use it right.