Having delivered an annual return of over 18% since Fundsmith Equity was launched in 2010, Terry Smith is widely regarded as one of the UK’s finest fund managers. I think I can benefit from his approach, especially if I have a limited amount of cash at my disposal.
Buy quality
£1,000 is a great sum to begin investing. That said, any mistakes I make can have a far more significant impact than if I had a larger amount at my disposal to buy a greater number of stocks. For this reason, I’d be tempted to prioritise parking my cash with established businesses of the sort favoured by Fundsmith’s manager.
First and foremost, Terry Smith looks for quality. For this reason, he steers clear of what may be regarded as ‘value’ stocks. In Smith’s view, the vast majority of lowly-priced companies tend to be cheap for a reason. Instead, he looks for blue-chip companies that will “shoot the lights out” by generating high returns on the money they invest in themselves. They also tend to have a competitive advantage of some kind and are resilient to change. Think tech titan Microsoft and payments firm Paypal.
By adopting this approach, Smith has generated a return of 534% in 11 years according to Fundsmith’s latest factsheet. Put another way, my £1,000 will have turned into a little over £6,000. This shows that I don’t need to take outrageous risks to outperform the market.
No trading
Terry Smith is about as far removed from a trader as you can get, describing Fundsmith’s transaction frequency as a ‘black armband’ day for the brokerage industry. In other words, Smith buys and sells very irregularly. Theoretically, this should mean a better return for holders because Fundsmith pays out less in fees.
Of course, this approach isn’t new. US investing legend Warren Buffett has adopted the same ‘buy and hold’ mentality for decades. Armed with £1,000 to invest, I’d try to do the same.
In addition to not ramping up costs unnecessarily, I’d also consider actively saving money where I can. This could involve taking advantage of regular investment plans offered by brokers. These invest a proportion of my cash at a fixed date every month at a far lower cost than I’d pay for buying on the fly. Depending on the provider, there might not be any fees at all!
No market timing
A final thing that Terry Smith has taught me is the folly of trying to time the markets. The fact is, nobody knows what will happen in the world next. Anyone waiting for a crash in arguably-overvalued US tech stocks in 2021, for example, will have been disappointed. Bar the odd wobble, their value has only increased.
Smith encourages investors to recognise that, over time, “it’s what the companies do that matters, not what you do“. Accordingly, he urges us to focus more on the potential long-term returns of staying invested in great businesses rather than speculating about the exact moment to buy or sell them.
This is not to say that he doesn’t take advantage of opportunities when they do appear. No investor wants to pay more than they have to. But staying on the sidelines for too long is dangerous, especially if inflation is galloping upwards. It’s better to get started than never start at all.