Friends,
When the three of us are forced to name our favorite investor, Feroldi always has the same answer: Terry Smith. It's easy to see why: Smith's formula for investing success has long produced great results, and it's dead simple:
- Buy good companies
- Don't overpay
- Do nothing
So you can imagine the shock in the investment community when Smith's mid-year letter to shareholders revealed this bit:
We will take more account of momentum -- both fundamental and share price -- in our investment decisions. In particular, we will be much less willing to deploy the time-honored technique of buying quality companies when they hit a glitch. [emphasis added]
It didn't take long for the others to zero in on one word -- momentum -- and pile on to Smith.
The problem is, if you don't read the entire letter, you're not understanding why this matters to Smith, and -- more importantly -- why it doesn't have to matter to you!
The dangers of OPM: Other People's Money
Much of Smith's letter talks -- rightfully so -- about how the landscape of investing has changed... at least for now. He talks about how:
- Active investing has fallen out of favor to passive investing.
- But it's not really "passive" investing thanks to decisions by ETF-makers.
- Most importantly, momentum has become a more powerful force than ever.
Smith goes to great pains to say he's still focused on his top two criteria ("buy good companies" and "don't overpay"), but that the third ("do nothing") will require a minor tweak thanks to the effects of momentum.
But the most important tidbit came buried on page 5 of the letter:
There is another factor at work here — fund flows.
We run open-ended funds, and you can and increasingly have been taking money out, we suspect mostly to join the exodus from active to passive, or possibly to invest in managers who profess that they understand quality better than we do. They may be right, or they may just be closet momentum investors, which will be fine until it isn’t.
However, there will be little point being proved right about the dangers of passive or momentum investment after our Fund has closed. [emphasis added]
Smith isn't tweaking his approach because he doesn't think it'll work over the long run. Smith is changing it because he's struggling to convince others that his approach will eventually prevail.
He must satisfy the short-to-medium-term concerns of investors. That's something that you -- as an individual investor -- never need to do. And it's an enormous advantage.
All of this isn't to say that Smith is or isn't making a mistake. Nor does it mean that we think Smith's original investment style will eventually be vindicated.
The takeaway for those with a long-term mindset
Focusing on things like momentum is fine if it helps motivate you to act. Analysis paralysis can be very real. However, what you're buying matters more. And we think that part of the equation boils down to two simple things.
- Buy mission-driven, antifragile (wide moat + optionality) companies.
- Let your allocation decisions be informed by how cheap/expensive the stocks are.
Over the long run, we fervently believe that it will be a winning equation. And unlike Smith, the only person you need to convince is yourself.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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