When I say I’d invest like Britain’s Warren Buffett, I certainly don’t mean I see myself in that role. No, I’m thinking of Terry Smith, who founded Fundsmith in 2010 and has seen it grow to managing £18.8bn of investors’ cash.
He’s often dubbed the British Warren Buffett due to his similar investing style, investing for the long-term in “high quality businesses that can sustain a high return on operating capital employed,” while eliminating short-term buying and selling to minimize trading costs. I can certainly see the similarity with the chap from Omaha.
UK’s biggest
The Fundsmith Equity Fund is the largest in the UK, and it doesn’t charge performance fees.
A formative day in my investing career came many years ago, when an investors’ conference I attended featured both Terry Smith and the late Jim Slater as speakers. Slater’s growth investing book, The Zulu Principle, was one of the first I read, and I’d also been reading Smith’s Accounting for Growth.
The latter was an exposé of the creative ways companies can manipulate their accounts to hide debts, boost apparent profits, and generally appear to be in far better financial health than they actually are. It was quite a revelation, and it lost Smith his City job at the time, but I reckon it’s helped clean up what can be a seriously dirty business.
Complexity
One thing it taught me is to steer well clear of companies with complicated accounts – things like multiple levels of holding companies dealing with each other, debt and capital moving via chains of intermediaries, and other practices that help make the books pretty much impenetrable.
That was one of the big problems with Quindell (later renamed Watchstone) a few years ago, which ended up being forced to restate several years of accounts (downwards, of course).
It’s also the reason I’ll never buy shares in NMC Health after the serious accusations made by shorting outfit Muddy Waters. Even if the allegations prove untrue, they have exposed opaque accounting practices and less than ideal corporate governance – had the accounts been transparent, things would be abundantly clear with no reason for mystery and controversy.
Doing it
So that’s the first way I’ll try to emulate Terry Smith in 2020, by only investing in companies whose accounting practices are open and transparent. That’s easy to say, but perhaps not so easy to do. For a start, I think I’ll stick to companies practicing and headquartered in countries with better accounting rules. And I’ll run a mile as soon as any doubts are raised.
My other approach is really just to follow the Buffett style strategy that I’ve attempted for years, and that’s to always look for profitable and strongly cash generative prospects that satisfy his “wonderful company at a fair price” criterion.
Who knows, I might even uncover the odd gem that satisfies both the Buffett/Smith approach and Slater’s growth strategy – and what a find that would be. At any rate, it means no more risks like Sirius Minerals for me.
