RWH054: Billionaire Brit w/ Terry Smith

Summary

Podcast Summary: We Study Billionaires - The Investor’s Podcast Network Episode: RWH054: Billionaire Brit w/ Terry Smith
Release Date: February 9, 2025
Host: William Green and The Investor's Podcast Network

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Introduction

In this compelling episode of "We Study Billionaires," host William Green engages in an in-depth conversation with Terry Smith, the esteemed founder and CEO of Fundsmith Equity Fund. Terry, hailed as the UK's most popular money manager by Bloomberg, shares his extraordinary journey from humble beginnings in East London to becoming a legendary investor. This episode delves into his investment philosophies, personal resilience, and unique approach to both business and life.

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1. Early Life and Background

Growing Up in East London: Terry Smith was born in 1953 in the impoverished area of Forest Gate, West Ham, East London. His childhood was marked by the aftermath of the Blitz, prefabricated housing, and severe deprivation.

• Harsh Educational Environment:
  Terry attended Odessa Road Primary School, which lacked basic facilities. During a harsh winter in 1963, the school had to close for six weeks due to frozen outside toilets, illustrating the dire conditions he endured.
  “The one thing I would say more than anything else about that is it gives you a big incentive to try and do something better.”
  (05:57)

Family Influence: His father, a skilled truck driver, struggled with health issues due to asbestos exposure from working at a brake lining manufacturer. His mother held various modest jobs, instilling in Terry a strong moral compass.

• Parental Traits:
  Terry admired his father’s intelligence and competitiveness, traits that deeply influenced his character.
  “My mother was the kindest person I think I've ever met.”
  (07:29)

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2. Education and Early Career

Academic Pursuits: Terry excelled academically, winning a physics prize at Stratford Grammar School. He pursued a history degree at Cardiff University, graduating with first-class honors in 1974.

• Mentorship:
  Influential teachers played a crucial role in shaping his ambition and guiding him towards higher education.
  “Dennis Blow, my history teacher, kindled my love of history.”
  (18:17)

Joining Barclays: Post-university, Terry embarked on his career at Barclays as a graduate trainee. The rigorous training program covered law, accounting, credit, and more, laying a solid foundation for his future endeavors.

• Early Responsibilities:
  Assigned to build the bank’s management accounting from scratch, Terry demonstrated his analytical prowess and leadership early on.
  “I got the early responsibility of managing the bank's finances directly beneath the CFO.”
  (24:24)

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3. Transition to Investment

Departure from Barclays: Terry’s forthright nature led him to clash with Barclays management after publishing a critical research piece that recommended selling Barclays stock. His honesty, though controversial, ultimately proved accurate as the bank faced significant losses shortly after.

• Notable Incident:
  “BZW says Sell Barclays.” (27:45)
  This bold move cemented his reputation for integrity and willingness to speak truth to power.

Joining UBS Phillips and Drew: In 1990, Terry transitioned to UBS Phillips and Drew, where he continued his candid approach to investment analysis. His insistence on transparent and honest research led to the publication of a groundbreaking book on creative accounting, which became a bestseller despite attempts by UBS to suppress it.

• Book Controversy:
  Terry was fired and sued by UBS for publishing his findings, but the book’s success solidified his standing in the investment community.
  “The book got published and became the bestseller.”
  (35:44)

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4. Founding Fundsmith Investment Firm

Establishing Fundsmith: In 2010, Terry founded Fundsmith Equity Fund, which has since grown to manage over $27 billion in assets. The fund has consistently outperformed the MSCI World Index by more than 200 percentage points with an average annual return of 14.8%.

• Investment Philosophy:
  Fundsmith embodies the "quality investing" approach, focusing on high-quality, durable companies with strong returns on capital.
  “We look for companies with high returns on capital employed, strong gross margins, and excellent cash conversion.”
  (43:19)

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5. Investment Philosophy and Strategies

Quality Investing: Terry emphasizes investing in companies with sustainable competitive advantages, often referred to as economic moats. Key metrics include:

• Return on Capital Employed (ROCE):
  “Warren Buffett said it's the single most important measure of performance.”
  (43:19)

• Gross Margins and Cash Conversion:
  Evaluating how effectively a company converts profits into cash and maintains strong profit margins.

Sector Selection: Fundsmith avoids sectors with inherent challenges and low returns, such as airlines, banking, mining, and real estate. Instead, it focuses on resilient sectors like consumer staples, healthcare, and information technology.

• Avoiding Bad Sectors:
  “Almost every year they do it, you go, well, the good sectors are consumer staples, consumer discretionary, healthcare, IT.”
  (55:00)

Understanding Economic Reality: Beyond financial metrics, Terry insists on understanding the underlying business models and economic realities of the companies Fundsmith invests in.

• Economic Reality Check:
  “How do they do that? What's the economic reality?”
  (38:11)

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6. Personal Life and Traits

Lifestyle in Mauritius: Terry resides on the tropical island of Mauritius, which offers him the solitude and independence required for his intensive investment work. His lifestyle includes practicing martial arts, maintaining a kickboxing gym, and indulging in his passion for collecting over 200 cars.

• Martial Arts and Resilience:
  Terry draws parallels between his investment strategies and his disciplined approach to martial arts, emphasizing resilience and strategic thinking.

Car Collection: His extensive car collection reflects his appreciation for engineering excellence and historical significance, mirroring his investment focus on enduring quality.

• Historical Insight:
  “The stories behind the cars are more important than the cars themselves.”
  (62:12)

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7. Philanthropy and Legacy

Honoring Heroes: Terry spearheaded the campaign to erect a statue of Air Chief Marshal Keith Park in Trafalgar Square, recognizing his pivotal role in WWII and his unsung heroism.

• Keith Park Statue:
  “He was like a wizard in an Arthurian tale, traveling halfway around the world to defend a country that wasn’t even his own.”
  (129:11)

Supporting Youth in Mauritius: Terry is committed to providing opportunities for underprivileged children in Mauritius, aiming to lift them out of poverty through education and support.

• Educational Initiatives:
  “We're setting up a scheme to take two Creole children per annum from Mauritius into the UK school system.”
  (117:00)

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8. Personal Reflections and Challenges

Balancing Intensity: Terry acknowledges the challenges of maintaining personal relationships while embodying a driven and intense professional persona. He strives to separate his work mentality from his personal life but admits that the intensity sometimes permeates his personal interactions.

• Work-Life Balance:
  “I don't treat personal relationships with the same intensity as business decisions, but sometimes the work mentality can intrude.”
  (108:16)

Influence of Adversity: His tough upbringing instilled in him a relentless drive and determination, crucial traits that fueled his success in the competitive world of investing.

• Resilience from Hardship:
  “Growing up in very bad circumstances gives you a determination that's otherwise difficult to encapsulate.”
  (95:01)

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9. Final Insights and Closing Thoughts

Emulating Greatness: Terry draws inspiration from historical figures and business legends like Sir John Templeton, integrating their philosophies into his own approach to investing and life.

• Inspiration from Templeton:
  “If someone like Sir John Templeton used discipline and focus to achieve greatness, so can we.”
  (138:05)

Commitment to Integrity: Throughout the conversation, Terry underscores the importance of honesty, integrity, and a steadfast commitment to quality, both in investing and personal endeavors.

• Integrity in Investing:
  “People in the industry don't read the accounts. We read the actual accounts and base our decisions on that.”
  (36:45)

Legacy Building: Terry’s efforts to honor historical heroes and support future generations reflect his dedication to leaving a meaningful legacy beyond his financial success.

• Legacy Driven by Storytelling:
  “The stories behind the cars and the heroes we honor are what truly matter.”
  (139:22)

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Notable Quotes with Timestamps

• On Early Life Motivation: “It gives you a big incentive to try and do something better.”
  (05:57)

• On Quality Investing: “We look for companies with high returns on capital employed, strong gross margins, and excellent cash conversion.”
  (43:19)

• On Avoiding Bad Sectors: “Almost every year they do it, you go, well, the good sectors are consumer staples, consumer discretionary, healthcare, IT.”
  (55:00)

• On Economic Reality: “How do they do that? What's the economic reality?”
  (38:11)

• On Work-Life Balance: “I don’t treat personal relationships with the same intensity as business decisions, but sometimes the work mentality can intrude.”
  (108:16)

• On Philanthropy: “We're setting up a scheme to take two Creole children per annum from Mauritius into the UK school system.”
  (117:00)

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Conclusion

Terry Smith’s journey from a challenging upbringing in East London to leading one of the world’s most successful investment funds is a testament to his resilience, integrity, and unwavering commitment to quality. His investment philosophy, grounded in deep financial analysis and an understanding of economic realities, has consistently outperformed global indices. Beyond his professional achievements, Terry’s dedication to philanthropy and honoring historical heroes showcases a man driven not just by financial success, but by a desire to make a meaningful impact on society. This episode offers invaluable insights for investors and entrepreneurs alike, highlighting the importance of hard work, ethical conduct, and the relentless pursuit of excellence.

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Transcript

[Terry Smith]

You're listening to tip.

[William Greene]

Hi there. It's wonderful to be back with you on the Richer, Wiser, Happier podcast. Today's episode is one of my all time favorites. Our guest is a legendary British investor named Terry Smith, who manages the Fundsmith Equity Fund. Since his Fund's inception in 2010, Terry has racked up an average return of 14.8% a year by investing in a global portfolio of high quality companies that are extremely durable. Cumulatively, he's beaten the MSCI World Index by more than 200 percentage points over the last 14 years. The financial Times describes Terry as one of the UK's most renowned stock pickers. Bloomberg, which includes Terry on its list of billionaires, calls him the UK's most popular money manager. Terry's success, both in markets and business is even more impressive when you consider the odds that were stacked against him. As you'll hear, he grew up as the son of a truck driver in the 1950s and 60s in a very rough and tumble area of East London that was best known for poverty and deprivation and bomb damage from World War II and plenty of violence, including the criminal enterprises run by the infamous Kray twins. In this conversation, Terry talks in depth about what it took to drag himself out of that environment to the pinnacle of the investment game. You'll get a keen sense of the analytical skills, the investment principles, and the sheer grit and determination required for him to become an investing legend. He's come a long way, both literally and figuratively. Now in his early 70s, he lives on the tropical island of Mauritius off the coast of Africa, about 6,000 miles from London. In his spare time there, he practices martial arts, spars regularly with much younger fighters, and also indulges in his hobby of building a collection of more than 200 cars. As you'll hear, Terry is a remarkable character. Ferociously driven, fiercely intelligent, charismatic, funny, charming, combative, shrewd, and I would say, pretty tough. I suspect he's not the easiest man in the world to live with or work with, and I was slightly wary of him going into our conversation, but I ended it by liking him a good deal and hugely admiring his strength of character and really the sheer resilience and indomitability of the guy. In any case, I hope you enjoy our conversation as much as I did. Thanks so much for joining us.

[Terry Smith]

You're listening to the Richer, Wiser, Happier podcast where your host, William Greene interviews the world's greatest investors and explores how to win in markets and life.

[William Greene]

All right, hi folks. I'm absolutely delighted to welcome today's guest, the legendary British investor Terry Smith, who's calling in from his home on the island of Mauritius, where he now lives. Terry is the founder, CEO and chief investment officer of an investment firm called Fundsmith. His Fundsmith Equity Fund is the largest stock fund in the UK, I believe, with more than $27 billion in assets under management. Bloomberg, which includes Terry on its index of billionaires, often describes him as the UK's most popular money manager. He's definitely one of the most successful, with a cumulative return of over 600% since the fund's inception in 2010, which is roughly 200 percentage points or so better than the MSCI World Index. Terry, it's lovely to see you. Thanks so much for joining us.

[Terry Smith]

Nice to join you. Enjoying it so far?

[William Greene]

So far. We'll see how it goes from here. We're off to a good start. I wanted to ask you about your early years. I've read in different places that you were born in the East End of London in 1953, and that you came from a very modest background as the son of a guy who I've read in different places that he drove a bus or he drove a truck. And my sense is either way that it was a relatively poor area that was probably damaged a lot by the Blitz when you were growing up there in the 1950s. And I wondered if you could just give us a sense of what it was like growing up in the East End, what your family was like, and really how that those early years shaped the person you'd become.

[Terry Smith]

Yeah, I mean, it wasn't a very nice place, as you rightly say. I mean, it was still very damaged by the war, the Blitz in particular, with lots of bomb sites. And some of the housing was prefabricated housing which was built for temporary accommodation. And it was a very poor area. If you look at the statistics of the time for what it was worth in terms of educational facilities and achievement, it was the worst metropolitan borough in Western Europe at that time. West Ham, which is where I technically was. Forest Gate, West Ham is where I was pretty poor. The story I always tell people, just to illustrate it, is I went to Odessa Road Primary School, and in the very Harsh Winter of 1963, we had outside toilets and they froze over. And so we were sent home from school. And when I say sent home school, I don't mean for the day. I mean this lasted for about six weeks or something like that. And that would have been great, apart from the fact we also had an outside toilet which also froze Over, So it wasn't a big help. And the house I lived in with my grandparents and my parents and my uncle and various other people was a very modest house which has been knocked down in some clearance program since I live there. And it had no hot running water and it had no bathroom and it had no inside toilet. I mean, that's kind of where I was. And the one thing I would say more than anything else about that is it gives you a big incentive to try and do something better.

[William Greene]

And tell me about your parents.

[Terry Smith]

Yeah. My father was, as you've touched upon already, a lorry driver, truck driver, very talented driver, you don't have to be to drive buses and lorries. But he drove other things as well. Worked for a company. His undoing was he worked for a company embarking in Essex, which, amongst other things, made brake linings, which I guess was where he got involved with them. And the problem was that they used asbestos. And that was his undoing. He got. People say asbestosis, but that's a kind of loose term. He got mesothelioma and lung cancer and was wiped out by that. And due course, as was the entire shift of the place. And my mother was. Worked in various very, very, very modest jobs. She was a cleaner. She worked in a factory making dart board. She worked at a factory making brooms and so on. So they were. Yeah, it was a very poor sort of background, frankly. Yeah.

[William Greene]

And where do you think you got your intelligence from? Were both of your parents really smart or.

[Terry Smith]

My father, I think, was one of these people who was trapped by his background. He was one of 12 children, which is pretty amazing, and had to leave school at 14 and go to work. So there was no alternative but to that. But he was clearly a very intelligent man. In the time when people did crosswords in newspapers, he regularly won crossword competitions. Day in day every week, a book or something would arrive where he was winning cross. And he did eventually, before he died, aspired and became a manager of a cold storage transportation facility and things like that. So he was clearly a guy who had native intelligence, sort of brain power, who hadn't had the education to be able to capitalize upon it, I would say.

[William Greene]

Yeah. I often think of my grandfather who grew up in London and who left school at 12 because he was like this poor Jewish kid and didn't have. From an immigrant family and didn't have, at a certain point, the sole in his shoe had had worn out so much that he actually couldn't even hold it together with newspaper because there was nothing to hold the newspaper in. And so he became an apprentice tailor, but he was a world class bridge player, which makes you realize, oh, God, how much intelligence there must have been that sort of got wasted because they were just doing these. These menial jobs or really, really underpaid jobs. So do you. Do you feel like you've been very much shaped by that background? I mean, I know you've said before that you really. Money was important to you.

[Terry Smith]

Yeah, money and just a feeling of wanting to escape as much as just money, I think. I mean, the thing that more than anything affected my thinking, which is strange. People always ask things, and there are teachers I could talk about, my mother I could talk about. But one of the things was in 1968, I went to the ABC cinema in Upton park, which is between us and the West Ham football ground, and I watched the Thomas Crown Affair. The movie, as I always say, you know, it's Steve McQueen. That's pretty good start. He's wearing several row suits. He drives a Rolls Royce and flies a glider and plays polo. It's like. And I literally watch this thing. And so there's another world out there, isn't there? There's just another world out there.

[William Greene]

So you think that that was the start also of you wanting to collect all of these beautiful cars that had been in movies and the like?

[Terry Smith]

Yeah, I've got that Rolls Royce, but, yeah, I partly. And my father as well, he was very interested in cars and motorcyc. And one of the earliest photographs I've got of me is me sitting on my father's motorcycle. And so I could sort of ride motorcycles and drive cars and fly planes and helicopters and things from a, you know, relatively easily. He definitely had a talent for it. It wasn't just that he drove buses and trucks. He had some talent beyond that, I think, probably. Yeah.

[William Greene]

So now the image I have in my mind, Terry, is that you're sort of the Steve McQueen of the investing world.

[Terry Smith]

Well, as it happens, Steve McQueen's first.

[William Greene]

Name wasn't Steve, it was Terry.

[Terry Smith]

Yeah, Terrence. As is mine. Yeah.

[William Greene]

That's interesting.

[Terry Smith]

I'm sure it's just a coincidence, as they say.

[William Greene]

Yeah. They named him after you.

[Terry Smith]

No, no, no, he was born before me, so.

[William Greene]

No, I'm kidding. I know you've. You. You're a big fan of boxing and you've talked a lot about. And. And then became, I think, a Muay Thai practitioner as well, pretty regularly.

[Terry Smith]

I've been to Thailand a couple of times and stayed in Muay Thai camps for weeks and. And trained at Mai Thai. And I do Mai Thai. I sponsor a Mai Thai fighter here in Mauritius. She's actually in Cambodia at the moment. She just fought for a belt in Cambodia, but I trained with her most days. And I've got a gym, a kickboxing gym here in Mauritius, which I bought and equipped and gave to the coach and the kids to use. And I turn up occasionally and train and spa with them. I'm a kind of a curio. I'm this old white guy who turns.

[William Greene]

Up and does this grow out of coming from a relatively tough area as a kid? Tell me about that.

[Terry Smith]

Well, I went to Stratford Grammar School and the school uniform was red as an owl. In fact, I went past there quite recently and the concrete owl statue is still outside. And so the badge was an owl, which was on your cap and your blazer. And I had to walk past the secondary modern school on the way home. And so I got into a fight more nights than I didn't really on the way home. If you can imagine some kid going to the sort of the local posh school as it. As it was regarded a bit coming home with an owl on his head and his blazer was. Was. I may as well just draw a target, you know, and. And so. And my. My uncle who lived in the house, my Uncle John, was, amongst other things, a boxer. And so after a bit of this, he said, I think I'm going to teach you how to fight. And so he did. And. And it was something I liked. I've always liked and felt at home going into boxing gyms. So, you know, in boxing gyms, whether they're in London or Rock, Mauritius or New York, I've always kind of liked the atmosphere of. Of going into them. It's. I said here when I was setting up the. The gym for the kids, I went to see them in a municipal hall that they had, where they had no facilities, where they didn't have a boxing ring and they couldn't keep their stuff there. And I went in there and somebody who knows I'm a bit of a softy for these things took me along to see them and train with them and so on. And they said, well, what is it you most like about this? And I said, they just remind me of me when I was at their age. You know, this is their outlet. This is something which they probably look forward to every week.

[William Greene]

You know, what do you think you were like at that age?

[Terry Smith]

What was I like at that age? I don't Know, it's difficult, difficult to go. Probably shy, intense, I would say, probably for that age. Sponge.

[William Greene]

Sponge. Yeah. I read an article that you wrote, I think, back probably in 2011, when Smoking Joe Frazier, that the great boxer had just relatively young, I think, 67, of liver cancer. And there was a beautiful quote there where you quoted George Foreman saying, I kept knocking him down and he kept getting up. After six times, I was awarded the championship of the World. He was still trying to get me when they stopped the fight. And I was wondering. That seemed to me. There's something about that resilience and determination that clearly resonates for you personally.

[Terry Smith]

Yeah, but I much admire people like that. I mean, people, obviously, Ali certainly in that era was regarded as fantastic, and he was. But he probably wasn't the greatest professional heavyweight of all time. I think Joe Lewis and Rocky Marciano got better records. He probably wasn't the greatest heavyweight of all time. Teofilo Stevenson, the Cuban amateur, had a fantastic record as well. But he was a huge global personality. And in so being, he needed. And that's why I tried to bring out the article. He couldn't be that on his own. He needed to fight other men. And Foreman and. And Fraser in particular, but also Ken Norton, some others. He hadn't had those. He couldn't have been great like that. But those men that he thought were different to him, because if they were different, it wouldn't have worked. They need to be different styles to engage the enemy. And one of the things that I think it brings out is that your enemies and those you engage with shape you the way that you engage with them and so on. It shapes you. And one of the sort of common sort of thoughts that people have on smoking Joe was it. He was a sort of slugger and so on. He wasn't. He wasn't that. He was. If you look at the analysis of the first fight, the fight of the century in Madison Square Garden where he knocked Ali down and broke his jaw, Eddie Fuchs, his trainer, had trained him very specifically. He worked out that Ali couldn't throw an effective uppercut and was vulnerable at that point. And so he said, whenever you get with him, Ranger Frog. And eventually he caught him throwing this uppercut, and it was just a piece of Eddie Fuchs, because boxing is, you know, people think it's just blind as well. No, there's a fair amount of analysis goes into successful boxing as well. Eddie Fuchs trained four of the five men who beat Ali. That's probably not a coincidence. Probably not a Coincidence.

[William Greene]

When I think of your life, and we'll get into this, obviously a lot more as this conversation unfolds. There is something about your reputation as being this kind of combative guy. And there's also something, I think, just in terms of the drive and the grit that it must have taken for you to get out of the East End of London and become a billionaire and be as successful as you've been. When you think of yourself, does the image of you as a sort of. As a fighter, as someone who's kind of defiant, is that sort of your combative and determined. Like, what's your own image of yourself?

[Terry Smith]

I don't really see myself that way. I think I'm a big softie, actually. I really do. And I think I am in many respects. I think a lot of people who know me well might tell you that. As opposed to the sort of the public image that people have got. If you look on my WhatsApp, where you can put a phrase. I've got a phrase up there. I like movies, by the way, apart from the Thomas Crown Affair, I finance movies a bit as a hobby. It is a hobby. It's not really an investment. And I. I have movie night once a month with friends. I've got a little private Cinema run in, etc. Etc. The quote is from the movie, the cult movie assault on Precinct 13, which not many people will have heard of now, but it's about a convict who's on the way, I think, to death row. And he's been a bus. The bus gets diverted to a police station which is closing down, and. And there's some suspect in there who's been involved in a clash with the gang. The gang come and attack the police station to get him. And of course it ends up with the convict, a girl and a policeman fighting for their lives against all this. And at one point the girl says to him, what I can't understand, she said, is, why you didn't take off, because they sent somebody out to get help. Why didn't you take off down that drain and just leave it? Because then you could have escaped. And he says, there are two things in life a man should never run from, even if it costs him his life. One of them is a man who's helpless and can't run with him. And I like that. I like that approach, basically. And I don't think it's a somewhat more selfless approach, I think, than the one that people might think that you're talking about portraying there. Of course, the quote Ends. People think that the quote which ends there, one of them is a man who's helpless and can't run with him. And the quote ends here. And they say, well, you've only got half the question. And the quote does end there because the girl says to him, what's the other one? And he just looks at her. The tooth of Ruby. Yeah. Big softy. Really?

[William Greene]

Yeah. Well, you mean as. As the great poem said, we contain multitudes. Right? I mean, you can be a softie and also be pretty tough sometimes.

[Terry Smith]

Yeah, yeah, I think. Yeah, I think that's right. And yeah, I would. I would say it's a bit like that. It depends upon the circumstances and the situation and who I'm with and what I'm doing and. And lots of other things. But look, you don't. You don't get out of where I was to where I am without a lot of determination, obviously. Yeah. My classmate who is my best friend in school, who I'm still in touch with, I'm in touch with both him and the guy I sat next to when I was five, which is interesting. And he assures me that out of the sort of the boys in our class, the only two who are at liberty and not dead are me and him.

[William Greene]

Really?

[Terry Smith]

Yeah, he kind of. Because he stayed in London and kept in touch a little more than I did, he sort of says that, you know, the only two guys who were left alive and not in prison.

[William Greene]

Huh. That's amazing. That's amazing. So did you have great role models in those years? I mean, was there a teacher or an athlete or someone, I mean, did. Or people you knew who invested or did well in business? Was there anyone you looked to and you thought, beyond the movies, let me be more like them.

[Terry Smith]

Anyone in business? I mean, I couldn't possibly have started there. I mean, business wasn't something I encountered other than doing various menial jobs until I was in my 20s. I had a good primary school teacher, Mr. Whitehouse. My last year in primary school, he basically, you know, I guess if you said, what did he do, if anything at all, he probably gave me help. Impetus, if you like, to pass 11 + and get to the best grammar school in the area. I remember him fondly, fondly. Although he was quite tough sometimes, you know, I mean, this was an era of corporal punishment, you know, I mean, he was quite tough and. And then when I was in secondary school, Dennis Blow, my history teacher, who, bear in mind, nobody in my family had ever been to university. Right. So, you know, getting the grades and going to university was a process, applying for university, which nobody. I couldn't go home and say, what do you think I should do? It wasn't going to work terribly well. And so he kind of helped me with that. And he was a history teacher and he's the guy more than anybody else, kindled my love of history. And I went and did a history degree at the university that he himself had attended. And that was a big help, when I think about it. I could have done other things at other universities and people said, oh, you could have gone, Walt Cambridge, you could have done this. But I'm very happy that I did what I did because I had his sort of help and support in thinking through that process, in doing it, and lots of different things going back to the, you know, determination. My mother. My mother was the kindest person I think I've ever met. As far as I know, she never harmed anybody. She would be mortified if she harmed anybody sort of person who. I mean, obviously we're dealing in a different era in terms of going into shops and buying things. If she came out and the shop had given her too much change, she would be back in there giving it to them. Right. She'd be mortified by the idea. And her kind of, you know, what people would now call moral compass was quite an important thing, I think, as well, in terms of how she treated people. I think my Uncle John, who I mentioned earlier, he was a boxer and sometime villain. He was. He was a good guy.

[William Greene]

What sort of villain?

[Terry Smith]

A villainous villain. You know, I mean, this was the East End of London. The craze ran the East End of London during this period. You know, he was a guy who was involved in operations of that sort.

[William Greene]

Yeah, interesting, Very interesting. And so then to get back to your trajectory of your career, so you had gone to Stratford Grammar School, this very good school, and I think I'm right in saying you won the physics prize. You were obviously a smart kid, you went to the university in Cardiff to study history. I think I'm right in saying you got a first class degree, graduated in 74, and then you went off and got a job at Barclays and you spent a few years. Well, you were there for nine years, right, starting around 1974. And it was not glamorous when you started. I mean, you joined as a graduate trainee and ended up becoming a bank manager. Can you talk about those early years at Barclays and how it sort of shifted you into a different world and different way of thinking about the world again?

[Terry Smith]

We'll talk about mentors a bit probably, but I chose Barclays. I mean I didn't have clue what I wanted to do when I left when I was in university. So I went to all these so called milk round interviews where companies come and I was interviewed by the metal box company, by Unilever, by Marks and Spencers, by Barclays, by NatWest. All these companies and how to make a decision. I made it by on the, you might consider perverse basis of the one that gave me the toughest interview I thought, yeah, I'm going to go with them. Guy called Roger Brocklehurst, I remember him well, gave me the toughest interview. I think I like these guys. So I went and worked for them. It was a training program. They put me through courses on everything you can imagine, law, accounting, et cetera, credit through all that, which is very good. And I always say to people, people ask me for career advice, I say get a job, take all the training courses. Number one, right? I think it was Lucy Kellaway writing in the FT said that the sort of the dot com era, the gig economy and the digital age have done great disservice to some young people who just want to start a business now. Go and get some experience first, right? Go and get some training first, then have a think about all that. So I did all of that and then they. Barclays had nearly gone bust in the 7375 secondary banking crisis and their own management accounting was lamentable. I mean they had none basically they had audited accounts which were produced three months after year end. You could look at them and see the balance sheet and the income statement and cash flow but actually having a budget and monitoring against budget and working out what your exposure was to assets and liabilities and interest rates and nothing. I always said when I discovered this, I said we would never have lent money to a company with our level of management information, right? Anyway, what they did was they grabbed me out of what I was doing in training for commercial banking and sent me off to do an mba. They sent me to Henley to the management college and I did a very peculiar or different kind of mba, one with different. You did three months in classrooms three months in a company three months ago. And I did that across different businesses and learned a lot different things like production engineering and human resources management and all kinds of stuff like that, manpower planning with different organizations. And they hadn't told me this but they were going to form a finance department so they had a guy called John Spencer who'd been with Pete Marwick and they made him head of the department. They made a guy called Derrick Van Der Weyer as the first cfo. Really this guy John Spencer, who I'm still friends with to this day, friendly with to this day, still work together with to this day after nearly 50 years. And a guy from Slater Walker, which had blown up very recently, the Jim Slater acquisition firm. Me and a couple of other boss and said, you're the finance department and what do we do? We wanted to create this management accounting, management information, budgeting, forecasting, planning thing from scratch. And so I got to sit there and do that for the next three or four years. And that was great. And I had a good boss insofar as he was a good mentor and he really liked to go sailing. And. And I got the. One of those deals which I think you do get sometime, which is I did his job when he was away, which meant he could go off for six weeks and go sailing. And so I learned an awful lot. I got an awful lot of early responsibility doing that. So, you know, I was basically the manager straight underneath the cfo, managing the bank's finances, if you like.

[William Greene]

And what do you think you learned by looking under the hood and because obviously, I mean, this has been part of your. You, the key to your success as a stock picker is that you understand the accounts. What did you see by actually being on the inside and looking under the hood?

[Terry Smith]

Loads of things, I mean lots and lots of things that you see. I mean, one of them is cash flows and profits are completely different things. I mean, they are clearly related. Accrual profits or accrual accounting is a way of spreading cash flows across reporting periods. But, you know, you can have plenty of profits and go bust. It's, you know, it's the two things that, not that you know, that you've got to be very careful with business, businesses that require leverage or borrowing in order to function, which banking does right. Because the margins forever in terms of success or failure are very slim at that point. When you're on 20 to 1 leverage or something like that, it doesn't take long to go bust. You know, it really, you can do it quite quickly by taking risk, you know, in that regard. So lots, there are lots of things I've done. But in the course of doing that job in those days, the investor relations industry, which we've now got, where companies have IR offices on didn't exist. There was no such thing. Nobody had one, not even one. So what would happen is these people called brokers analysts would ring up and they would ask for the finance director who didn't like taking their calls. So he put them through to, well, my boss or he wasn't there, so me. So the phone would ring and it would be a bank analyst working at a stockbroking firm in London or New York, whatever, who would start questioning me about the results or the forthcoming year and what was going on and where we were positioned in relation to property lending or less developed country lending or whatever. And I dealt with all these people and that was fine and learned quite a lot from them about how the market viewed us over time. And I had investors who would come in as well from Capital Group and people like that, and they come in to interview and I would tell them about that. And then eventually one of them said to me, you're wasting your time. You know that, don't you? And I said, what do you mean I'm wasting my time? He said, you're going to do very well. I said, yeah, they've told me sort of I'm on the sort of fast track up towards the board, possibly or something like that one day. And he said, he said, I'm absolutely certain. He said, but you really, you're just going to have a career and you're going to be quite an important guy in a bank and then that's going to be that. He said, I think you should come and work in our industry where the rewards are much greater. Obviously, if you fail, then there's not the same sort of parachute that you might get in your job here. He said, but I don't think you will. And he said, you're far more like, this is a partnership, you'll end up being your own boss. He said, and I think you get it. And I said, oh, okay. So I quit the bank and went off and became a bank analyst, much to the shock of everybody involved, who increased the managerial Turnover by literally 100%. People don't quit and go off. I said, well, no, I'm going to be a bank analyst. And I went and I joined a stockbroking firm and I became a bank analyst.

[William Greene]

So you went off and you became an analyst, I think, first at a company called W. Greenwell & Co. And then you ended up at Barclays, which was where you were until the late 80s. And there's a famous story told about your time there, I think about a week after you joined as a banking analyst that sort of cemented your reputation as someone who would speak your mind even when it annoyed the hell out of people in positions of power. Tell us what happened.

[Terry Smith]

It wasn't actually a week after I joined. I mean I joined sometime in the summer of 1986, just before big Bang in London. And then I wrote a piece on the bank SEC piece of research in the run up to Christmas and left it for publication. These are the days when you left it in the publication department, ran it out and mailed it to people. And I went off for a holiday, I can't remember where I went. And so I said I'm going away over Christmas New Year and I left my, my number two in charge of everything. I've got this research. Anyway, he went out for a lunch in the days when people did go for a lunch with the FT banking correspondent and gave him a copy. And of course on the first working day of New Year there was absolutely no news anywhere in the financial world. So the front page article of the Financial Times says BZW says Sell Barclays. And of course, I mean everybody went completely crazy about this. That wasn't allowed. People didn't put out some recommendations generally anyway you're doing on the company that. And I said, well yeah. And through gritted teeth the management of Barclays said, yes, this is absolutely wonderful. It proves the independence of our investment banking subsidiary. And the boss said, I think you're going to have to leave because you've got no career here now. I said, and so I left and that was that was that, you know, and I guess, you know, I've kind of not for the first time I reclaimed the moral high ground a notch too high for people's comfort zone. I've got to say, looking at what happened subsequently with Barclays, I was right because this was 86 and by the turn of the 80s into the 90s they ended up cutting the dividend because of the size of their property losses. I was talking about their inability to lend without incurring higher than average bad debts was basically the thesis I was putting forward.

[William Greene]

So then there was an even more dramatic reprise of a similar story where you end up at UBS, Phillips and Drew. So in 1990 became head of UK company research there. And for people who don't remember this firm, it was a pretty prominent investment bank and stockbroker and asset manager in the uk. And I think Phillips and Drew had been founded in like the 1880s and then acquired by UBS. And so you come in at an interesting time, right, where there are all these companies like Poly Peck and British and Commonwealth that were going bankruptcy while seeming to be in good health. And you weighed into this with your usual delicacy and gracefulness and tact and do what? Tell us what happened.

[Terry Smith]

I probably did show rather more tact than you're giving me credit for. So I, together with the guy who's transport analyst, I worked with him on it, I said, why don't we write a piece of research about why this is happening, why we've got companies which are reporting record profits and going bust six weeks later. Big companies, right? And so we wrote a research paper, 20, 30 pages long, which looked at 12 methods by which companies cook the books, right, that they managed to report profits that didn't exist or profits without cash flows or got liabilities out of budget. And we wrote that and it was, for what it's worth, voted the best piece of research published in London that year by the sort of Reuters. You need to back up a bit. Why was I hired by ubs? They'd been involved in a thing called the Blue Arrow Affair shortly before they hired me. Blue Arrow was a UK shell company run by a man called Tony Berry, who owned Spurs, I think for a while, the football club. And he used that to bid for a company, a much, much bigger company, because this was a shell company called Manpower Temporary Services company based in employment, Service company based in Milwaukee, Wisconsin. And it was a huge acquisition and they did a 750 million pound convertible, which sounds quite a lot of money, but try and think back to 1989 in terms of the size of that deal. It was done by the lead banks were Barclays and that way, so BZW and so and NatWest. And the issue was a complete flop because the deal was a complete lemon. And instead of admitting that they were stuck with the £750 million, they put it on their market making book, which was exempt from disclosure. Now this was regarded when it became apparent as a bit of a foul by two people. One was the institutions because a few of them had bought these bonds, not very many, but they thought the whole issue was solved because they published newspaper sort of adverts saying successful issue triumph. And they felt a bit of grief. So they stopped dealing people like UBS over it and the regulatories and sort of police authorities who went and arrested the CEO, the head of research, the head of trading and the head of sales. So the headhunter rang me up and said, because I'd been a bank analyst for a number of years, successfully seven years, I think I've been a bank analyst, I'd like to do something more. I'd like to do something looking at the whole market because wider scope of things rather than doing banks forever. I think I know quite a bit about banks, like do something new. And so he rang me out the blue and said, look, UBS have got a vacancy because of these arrests. They'd like to hire you. And I sort of said, oh, okay, fine, I'll go for that. And I sort of said, well, what do you want out me? And they said, obviously we want to be profitable. We want you to reclaim the moral high ground with the institutions who you've got this. It comes back to the bzw. You've got this reputation for telling things how they are. And we'd like you to use that to rebuild our reputation institutions. So I said, sure. So I published this piece of research and that was all very well done and so on. Then I got a phone call from somebody at Random House, the publisher, and said, we think that we could sell a book. If you could write a book, could you write a book based on. I said, yeah. So I went to the UBS management and said, I've had this approach. I think it might be a good idea because you're trying to do this more high grade stuff. And they said, yeah, good. I said, I think this will be sort of another sort of, you know, feather and our cap to doing that. What do you think? I said, yeah, if you want. So I said, do you want the book to be UBS's book or Terry Smith's book? I said, terry Smith's book. I said, fine, okay. So I wrote the book. And of course, the thing is, other people have wrote written other books on creative accounting in the past one, the first one by any means. But if you look back to some of those, they use company A buys company B and I actually use real companies. Right. And when we got towards publication, the publisher said, you quoted annual reports in here. I said, yes. He said, I think you need to write to all the companies and tell them that you're using that in case they wish to claim copyright. I said, it's a public document. And he said, write to the company. So I said, okay, fine. So I wrote a letter to all the companies saying, I'm Terry Smith, I'm publishing a book on accounting. I'm going to quote from your 1988 annual report. I hope that's okay. Let me know if it's not. Of course, having seen who I was. And so a couple of the companies realized what was about to happen. And the next thing I know is I Get called in by the chairman of UBS who says, we're going to stop this book, aren't we? I said, I don't think we can do that. And there was a sort of. I don't think you've understood what I just said. I'm telling you to stop the book, right? I said, I think you find the book's mine, not yours, because that's what we agreed, okay? I'm giving you the instruction to you go and tell them. I said, what reason shall I give them? Well, there's going to be a huge row over this, you know. And I said, so I'm going to tell a publisher, note the connection between the word publicity and publisher. The same verb, right? That he's got a book on accounting which he thinks gonna sell about 5,000 copies or something like that, but now there's gonna be a huge part. I said, have you come across a book called spycatcher that Mrs. Thatcher tried to ban? I said, it's mainly about a guy who was in MI5 complaining about his pension. I said, but it sold out. What you tried to start. I said, we're telling you we're gonna fire you and sue you. I said, okay. And so I got fired and sued. The book got published. The publisher regarded this as the funniest thing he'd seen, the best thing he'd seen for a long time. Stop the press long enough to put across the corner the book they tried to ban.

[William Greene]

It's amazing. I mean, you got. You got. You got suspended initially for, quote, unquote, gross misconduct. Then you're fired. They sued you. So as I understand it, you had to settle out of court after about 18 months. But the book was number one in the bestsellers. I mean, it knocked Stephen Hawking off the. You are the Stephen Hawking of the investing world, not just the Steve.

[Terry Smith]

Okay, but. Yes, it did. Yeah. I mean, but it clearly wouldn't have done that then tried them. I mean, you know, But I hope, you know, some people might have read it and regarded it as quite. And the interesting thing is, I think it has stood the test of time in a number of regards. I think that's a more interesting reflector. 40 years over. 40 years later. They're over 30 years later. 30, you know, five years later. We're. It's. There are examples in there which stand the test of time. The one on pension fund accounting, I think, in particular stood the test of time in there. So I think it was an okay book. I don't think we'd have sold hundreds of thousands of copies without them trying to stop it and sue me and things like that.

[William Greene]

And in many ways, it made your reputation as somebody who was candid and had integrity and had the courage to tell it like it is. But also it seems relevant that everything you did was based on a real understanding of the accounts of the finances, which seems, which seems to have been. I mean, it sounds so prosaic, but that's kind of been one of your competitive advantages in an industry where most people don't seem to bother, but they don't know.

[Terry Smith]

I can give you as many examples as you prepare to listen and recall to of where we know that people in the industry don't read the accounts. I mean, we have the accounts for a reason, you know, and there's all the time they look at management slideshows and all kinds of. I'm reading the actual accounts. I mean, there are lots of examples of this. I mean, we have one on IBM. We looked at IBM in 2010 and rejected it wisely. So as it turns out, as a stop. But when we're doing it, we found, I need to go look at numbers. We found a $2 billion error in the cash flow statement for the last year. And so we sort of rang up the IR department, said, look, we're these guys. We're doing this. We're looking at that. We've just got to ask you something about your customers. There's this number in here that we can't make this work. And they said the usual, we'll call you back. And they said, turns out we've been in touch with the finance department. You're absolutely right. The cash flow is out by $2 billion. We said, anybody else rung up? They said, no. And I don't think it's because other people have discovered it but couldn't be bothered. They said, Reddit. It's like, oh, okay then.

[William Greene]

It's very interesting. I mean, so it seems, it seems to me, I mean, just in terms of keeping score for our listeners and giving them end viewers and giving them a sense of some of the morals here. I mean, part of it, obviously, as you said before, is an emphasis on cash flow and due diligence. And part of it, it seems to me one of the great lessons of your career is just focusing on economic reality over reported earnings.

[Terry Smith]

Yes, I think economic reality is if you read what we do at Fundsmith, I would be confident you probably have been preparing for this. We talk about companies with high returns on capital and high gross margins. And great cash conversion and growth and so on. But when we found those, and I mean anyone can find those going through looking on Bloomberg or another data source to find them, you then have to pause and ask yourself a very important question. How do they do that? What's the economic reality? As you say, what product or service are they selling to people that enables them to generate good margins, that enables them to get good returns of capital, enables them to convert profits into cash that keeps competition somewhat at bay? What do they actually do? And I mean, you do get investments in companies, particularly in the modern era where people buy all kinds of stuff without understanding it just on the basis of them mentioning AI. All right, okay. What do they actually do? And it's amazing. I mean, we've for years have maintained this, people have latterly, I think come to believe it a bit that if they actually speak in gobbledygook, it's not a good sign. You know, we need people to tell us, you know, in straightforward, which we try to do in what we do in investment. We try to tell people in straightforward terms what it is we do and what we don't do. Let's take a quick break and hear from today's sponsors.

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[William Greene]

All right, back to the show. There's a big chunk of your career that I'm sort of leaving out here that maybe we'll come back to later where you were running public companies. But since, since you bring up Fundsmith and it's so relevant to our discussion here, let's dig in more to what it is you do here at this firm that you founded back in 2010. And that's become a kind of a really great emblem for what I would call the art of quality investing, which is a phrase you use in the introduction to your book Investing for Growth, where you describe your approach as quality investing. There's a lovely phrase in that introduction where you talk about seeing an ice cream van that has an advertising slogan on the side, which is it's quality that counts. So this is sort of at the, at the heart of what you do. Tell us about the attributes you're looking for when you're trying to identify these high quality companies?

[Terry Smith]

Well, I mean financial terms. We're looking for a high return on capital employed. Let's start with that. Warren Buffett said it's the single most important measure of performance in his 1979 annual report for what it was. And he seems to have done quite well since then. So probably we should listen a bit. And it is, because if you invest with me, you want to know what return you're going to get. If you're going to put your money in the bank, you want to know what return you buy a bond, you want to know what interest rate yield you're going to get. When people invest in companies, they can't ignore that. No, you're buying your portion of their capital. What return do they get on that capital? That's question number one, because there's a great Charlie Munger quote which is over the long term, the performance of your shares, if you hold them for the long term, will start to gravitate towards the return that the company generates. And he's not putting forward a theory here, it's a fact. And so we look at return on capital employed and people look at all kinds of other things, earnings growth and so on. If you're prepared to give me access to capital, either by you sending me more or me retaining your earnings, and you ignore the return on capital employed, I'll generate earnings growth for you at lower and lower returns, which plenty of companies have done over time. See Tesco for details. Right. It's like, oh, it's a disaster. So we look at return on capital employed, we look at gross margins, we look at the difference between sales, revenues and cost of goods sold. What do they mark things up by? Because companies take stuff in. They take in components, ingredients, services, labor, and they put a markup on it. And again, in normal life, you go into a shop, you can imagine them having a markup. Well, all companies have that markup. What is it? And the size of that tells you a lot of things. It tells you about their pricing power, their brand strength, it tells you about the defenses against inflation if the cost of goods goes up. We obviously look at profit margins, but most people do. We look at cash conversion. And what percentage of the profits arrive in cash? Is it 100%, 80%, 120%? There are companies that make more than 100% of profits in cash, usually by the method of paying people more slowly than they get paid. And that's beneficial, fairly obviously, because cash is the only thing in the end, you can pay the dividend with various things. So we look at a raft of financial metrics for these companies every year. We give that to people in terms of our portfolio and how it looks and how it looks against the indices and so on and so forth. And then, as I say, we start looking at things like, well, what do they do? So all looks good. Do they have brands? Do they have control of distribution? Do they have intellectual property? Do they have an installed base of software or equipment that they service and sell spares and so on and upgrades to? How do they do this? We've got to have an understanding. How do they get to those numbers? What drives them to get to those numbers? And then we look at things like the management, and not in the sense of are they good manager or bad manager. Traditionally, what most people mean by that is they have a meeting with them and how did they come across? I've met people who can present brilliantly, but bad managers and people who can't present to save their lives, who are very good managers. No, no, no, no. Let's get to the nitty gritty of talking to these people and ask them all the usual questions. What's happening here and what's happening? What's happening that product and in this region, what we really want to know is every year you have this company that produces this return, these profits and cash flows arrive. Right. How do you decide whether to give it back in a dividend? Buy back shares, invest in the business or buy things. Right. Those are your four basic choices. Two robust subsets of one, which is giving money back. How do you decide between those? And we're looking for people who've got a grasp of how that works and what they do, which is honest and that matches something like the way that we think. So they go. Well, actually, I mean, I've met managers, I've done projects for managers in public companies over years where they say my stock's undervalued. Now you're busy acquiring things. Yes, yes. Buying lots of things. Why don't you buy your own stock? Why would I do that? I'd shrink. But surely the company you know best is not the companies you're acquiring, it's the one you already got. You must know that pretty well. Yeah. And you're telling me you think it's undervalued? By the way, I've checked and I think you're right. Why don't you buy those?

[William Greene]

No, no.

[Terry Smith]

You're looking for people who've got an honest and intelligible approach to that as well. So great financials, how do they do it? People who are honest and straightforward and intelligent in their application of this. That's it.

[William Greene]

When you are interviewing management and you're trying to figure out whether they're rational in the way that they allocate capital, what do you find helps in terms of your meeting style? Like, is it better to be charming? Is it better to be combative? What actually works for you when you're trying to figure out whether these guys are rational in the way they think about allocation of capital?

[Terry Smith]

Usually it's to try and start with going down the route of trying to get them to talk about how they view it without giving them too many clues, as it were. Something like, how do you decide your priorities now? Don't say anything beyond. Don't say, oh, you could do this or you could do that, you could measure that. No, no, don't give them a roadmap. Just leave it as. Obviously, you want to point them down the route of talking about this, but you want to point them down the route of talking about it with as few signposts as possible to see whether they've actually got a framework, you know, and sometimes they haven't got a framework. I mean, combative. It may surprise. We're not usually all that combative. I mean, we are with people who we think, in the end are trying to tube us or. Or just not listening to what we're trying to tell them, particularly if we own quite a lot of their shares. We will become competitive like we did with Unilever. In the end, it's kind of like, guys, we will become competitive because we've only shares. For a long time, you've completely ignored us. You're ignoring us now and we don't think you should. And you're treating other people who arrive in the last five minutes better than us. So we'd really like you to focus. And we will become competitive. They say, oh, we've got an active investor and we've invited him on the board. And it's like, great, you know, but I don't want to go on the board. I would turn it down if they ask me. Not that it's ever particularly likely, but. Why are you doing that? Right, why? I'm trying to get them to the point. And we. Look, we can get you managements who will give you. I don't think you want it, probably, but we can get people, management who will give us a reference who say, Fundsmith turned up. They did all this in Talking about our business, they bought a big stake. Then we had an activist who said, we've got to cut costs and we've got to split the business. We've got to do this. And not only did they vote against that, but they talked to the proxy voting agency and said, I think these people are wrong. What they're going to do is injure this business. I mean, we will actually stand alongside them and fight for the business if we think that someone's doing something wrong in that regard, far from being competitive, sometimes we're their best friend.

[William Greene]

One of the things that's very striking about your portfolio is that obviously you have a lot of these very well established self financing businesses with these high returns on equity and durable competitive advantages. Very much Buffett style companies, but a lot of them are really old. I remember you once saying that the average company in your portfolio was founded in 1883. I don't know if that's still true.

[Terry Smith]

Can you? It's about 100 years now. It's 19, 20 something, I think.

[William Greene]

Yeah, that's extraordinary. Can you explain that? Because we're in an era where so many people are just obsessed with the new technology. Right. And AI this and you know, biotech and drones or whatever it is. And here are you focusing very heavily on hundred year old companies. What's going on here? Because it's not that you're ignorant about technology.

[Terry Smith]

No, no. But mostly winners keep on winning. It's kind of the way the world is. The Stern Business School in New York produces a table. I think they produce it annually and it's good or bad companies. And what they have is companies by sector and they analyze thousands of companies so they have the sectors. So there's consumer staples and consumer discretionary and pharmaceuticals and healthcare and mining and minerals, banking. All these sectors, hundreds and hundreds of companies each one. And they do a very simple calculation of whether a company creates or destroys value for the year that they're looking at. But they've got the data over many and what they look at is the return on capital employed. You know, the Buffett thing that he focused on in 79 that we focus on less A guess at the weighted average cost of capital. People get their knickers in a terrible twist about whether it's a guess. Right. The exact number doesn't matter. And so they take off a weight, average cost of capital and come. Is it taking in money, a weight, average cost capital making a positive spread in which case it's creating value or is it making a negative spread in which case it's a machine for this strain value. And then they show you the sectors. Let me tell you, almost every year they do it, you go, all right, so the good companies, the ones creating value, are they consumer staples, consumer discretionary, health care, information technology. And then what's all the bad stuff? Oh, it's banks, real estate, insurance, heavy engineering and manufacturing, mining and minerals, oil, gas and transport. In particular, airlines are all bad now. Every dog has its day. There will be a year somewhere in the cycle where mining is good or airlines are okay, of course there is. But good things don't become bad and bad things don't become good. So that's the first point on the whole. We're not suddenly going to find all the good companies have become bad companies. All the bad companies. It persists. And the reason it persists is because of competitive advantages in those sectors. There are certain competitive advantages that those sectors and the leading companies within it enjoy. It's what Buffett calls the moat, the defensive mechanism. How do they keep those sharp elbows that keep you out? Right, because we can all look at Coca Cola and see it's got good returns. But how are we going to get in there? And we've got to get past PepsiCo and Dr. Pepper first before we even get a crack at them. They've got this means of defending themselves. There's no doubt that we are in the era where there's been change and we can sort of look around us and go, well, in the time that I've been in business, we've seen change in terms of computing and the Internet and mobile telephony and, you know, and social networks. And maybe we're seeing something now in AI, maybe, maybe not. I don't know. And it is a period of change and there's no doubt that you've got to be alive to it. And I think we are alive to it. Not everything that we've got was founded in 1920. Now we've got Meta and we've got Microsoft. We've got some stuff that's more recent. But before we alight upon the idea that there's never been more change in this, bear in mind I did a history degree and you need to think back to earlier periods in history. You're sure that this is the most change we've ever seen, because if you were involved in the communications business across the last sort of two centuries, you would have started in the telegraph business, where they put up wires, typically alongside railway lines, and you sent Morse code. That's how you communicated, right? Dot, dash, dot, dash. And then somebody came up with a means of having a microphone so you could have the voice. So we attached a microphone to the wires. Now we could talk to each other. And then somebody invented radio. And after we'd had radio in place for a while, two things evolved from that. One was we could talk to each other without being connected by a wire. Ah, that's different, isn't it? So, you know, ships at sea and people who are traveling and could communicate, and knowing that you could communicate to the many you could broadcast, that's a bit different, isn't it? Then along came somebody who said, never mind that, I've got this thing. You can look at each other while you're communicating. You can have television, you can have either video or you can have broadcast television. Then along came the Internet. So if you're involved in this, there's been a hell of a lot of change already, hasn't there, along the way? So recency bias is something I think, that a lot of people suffer from. It's tempting to think that we've got more change now than we've ever had before. I'm not utterly convinced.

[William Greene]

There's so much to unpack here and I wanted to highlight a few things for our listeners before we move on. So one thing that's very distinctive about what you do, which is very much in tune with Charlie Munger, right? I wrote a chapter in my book about Munger and just not being a fool, avoiding standard stupidities. A lot of what you do is just avoiding certain things, right? So certain sectors you're avoiding, right?

[Terry Smith]

Don't do stupid. Munger is great, I think, because he does have this idea that if you invest in good stuff, you'll be all right. Roughly speaking, you could take our entire investment philosophy and boil it down like that. If you've got good stuff, you'll be all right. That's it. That's it. You might not be the best fund, or you might not outperform everybody in the world, but you'll be all right. Good stuff. Sorry, I interrupted you in the middle of talking about manga.

[William Greene]

No, it's such an important insight and the ability to sort of make it very simple, right? Just buy good stuff. I mean, I remember you saying at one point, you don't need to own the absolute best stocks. You need to own a lot of pretty good, you know, really good companies that are resilient and durable and then avoid the crap. And. And so tell us how you. How you figure out what bad companies look like. Like. Like when you're looking at the financial statements and you're looking for warning signs, because a lot of what you're doing is A, getting rid of lousy sectors and B, getting rid of lousy companies.

[Terry Smith]

I mean, an awful lot of it comes down to just knowing. It's like there aren't good airlines. I mean, people say, what about Rhino? Every rule has an exception somewhere out there, but on the whole, there aren't any. And if you look at the last 20 years of data, it's lost something like 5% versus its cost of capital on average every year. It's a machine for destroying value. That's just what the statistics tell you. So that's what analyzing the statements will tell you, either in aggregate or individually. Then you go, I wonder why they are a bad industry. So let's think for a moment. Every single major factor involved in those companies is outside their control. This is another thing to look for. You're looking for companies which have certain things they can control and work on the things they control. They don't worry about the things they can't control. They work on the things they can control. Airlines can't control the frequency with which you fly. The load factors vary, Right. They can't control atmospheric conditions. Things happen to stop them flying from volcanic dust clouds and things like that. They can't control their main input costs, which are fuel, dollar price, staff largely unionized and so on, and the cost of airplanes. Basically, they are buying airplanes from two suppliers. Right. And then you get onto this, you know, hopefully. This is a rhetorical question. Is an industry a good industry or a better industry? If there are fewer, from an investment standpoint, if there are few participants or many participants. Well, the answer surely is few participants, right? I mean, ideally, one would be great, but, you know, if we've got to have it, a duopoly is, is okay. You know, These are a MasterCard, Coke and Pepsi. So on. Last time I checked, and I'm sure I'm out of date before anybody sort of brings up or writes under your podcast, he's an idiot. But the last time I checked, and I haven't bothered checking for a long time, there were 3,000 airlines in the world. Then bear in mind this outlaws 3000 airlines. Quite a large number of the owners and operators aren't even trying to make money. They're national flag carriers. They're owned and operated by governments using your money. They don't care. They really don't care. Or they're owned by entrepreneurs who really like their names on the side of planes. So when you look at sectors, you say, well, I've got the financial statistics. And it's the opposite what we do. Okay, so the statistics look good. How do they make that? How do they make that? This is. They're really terrible. Why? Well, we can look at all the reasons why. We can look at those terrible sectors and look why. So, you know, if you look at mining and minerals or oil and gas or transport, including airlines and banking and investment banking and insurance and real estate, it's dire. They're just dire sectors. You said you need to begin. You almost need to begin the discussion about individual companies somebody's telling you about. You almost need to begin to think about it. Go think back to the Stern Business school. And it's good versus bad business. Trickier is when you get into a sector which is commonly populated by quite good companies, but you get businesses in there which are not good. And that does happen sometimes. Just like you occasionally get sectors where they're bad sectors. But there's a good one. Let me give you a couple of examples out of there. If we looked at. In consumer staples, the sector that is generally good, and we looked at Kimberly Clark, the company that makes toilet tissue and kitchen towel and tissues and so on, it's not a great business, I'm afraid. The, you know, the business of making paper towels isn't something where there's a great deal of brand loyalty. You know, I don't know how many people go down the supermarket and feel they've got to buy scotch, so they've got to buy clinic. They just want a paper towel. They're really not concerned about it as much as they would be if they put this into their body. If it were to have food and drink and medicine and so on. It's not got the same kind of price string and, you know, it's in the consumer state, but it's not great, is it? And then you mustn't get hooked up on sector descriptions. Sometimes people will say, well, you don't. Do you invest in chemical companies? No. Terrible. But you owned a company called Sigma Aldrich. It was taken over. We did own it. Oh, it wasn't really a chemical company. What it was was a company. Yeah, it literally made chemicals, but it made little pots of chemicals which it supplied to biochemists doing experiments and tests. And so they were trained as biochemists to use its catalog. It's online catalog. So when they've got an experiment or test to do tomorrow or day after, they Go onto the catalog and order their ingredients and the little pots turn up with all the stuff. That's what they supply. And what they're really is in the fulfillment business, they're supplying stuff to help you do. They're supplying the stuff that we do. You don't really work out what the bulk cost of the container of chemicals is. You just want to know that it's going to be there waiting in your laboratory the morning when you come in. And then of course, the final frontier is they have a certain amount they supply which is corrosive or poisonous or radioactive, in other words, difficult. And that gives them an edge as well in terms of the ability to safely supply ingredients like that. And so it literally had chemical on the tin. But it wasn't really. It was actually a company which had trained scientists to use its ingredients in experiments and it's average supply. It wasn't, you know, it's not like a bulk chemical company supplying thousands of tons of phosphate or something. Their average pot cost 400 bucks last time I looked. And that. So it says it's chemical, but it's not really. So you got to be careful about those. The ones that cross over are in a sector that's good but are bad or in a sector that's bad, but there's the odd good one. You have to be careful.

[William Greene]

So when I look at your list of top 10 holdings in your flagship fund and I see things like Meta and Microsoft and Novo Nordisk and Stryker and which I think you've owned since the inception of the fund 14 years ago, or L'Oreal or Automatic Data Processing, Visa, Philip Morris, Waters and Alphabet. Can you take a couple of those that kind of illustrate what you're looking for in a business that sort of embody what you love?

[Terry Smith]

Yeah, yeah, let's take a couple of words. And Microsoft, it's the world's leading supplier of computer operating systems. Your computer probably works on it. My computer definitely works on it. The vast majority of business computing is done using its operating systems. If you go back to when we bought it, that was its leading business, Windows and it had the servers and tools professional business. It had a change of management, which we were hoping for shortly after we bought it. And its new management took it into other things which were linked into here. So, you know, it's now advised with Amazon Web Services to being one leader in the provision of cloud computing services. So, you know, using distributed computing rather than having the computing sitting here on our desktop, using the cloud to back up their information and Process it and do it on a common platform is something which is. They've basically been one of the two leaders in since that thing. They're also leading in gaming, although they screwed up the mobile telephony thing and handed that to Apple. Basically that was before we bought it. And they have actually made a comeback in business computing in terms of mobile devices with the Microsoft Surface and so on and so forth and you know, we'll see where they go in AI but all of this is built into a company which has regularly produced high growth in revenues and, and high, high returns on capital. I'll tell you what they are while we're talking. Give me a second. I just log on to my system and.

[William Greene]

But also, but also what's relevant, Terry, is you bought it during a period where it was out of favor. So. So I mean you often talk about this issue of valuation with quality companies. There's a very interesting thing, a chart that you have in the introduction to your, your book Investing for Growth where you talk about how you would actually have been justified paying a 281 p. E for L'Oreal back in 1973 or 126 for Colgate or 63 for Coca Cola. So you're willing to pay a reasonably high price for high quality. But then there are things like Microsoft where actually you bought it when it was really undervalued. Can you also talk about how you think about this issue of valuation when it comes to high quality growth companies? Because it's very, it's very thorny, particularly at the moment with a lot of the magnificent seven.

[Terry Smith]

Yeah, for a really good company we are very bad at. One of the things we're very bad at is estimating the impact of compound returns as human beings. When you look at the difference between a 10% and 12 and a half percent compound return, the difference over 20 or 30 years isn't 25%. People don't realize actually it quadruples the capital value, that differential. Wow. And we're very bad at that, you know, unless you sit down and compute it yourself. And so people don't figure that out I think very well. Which means that commonly things which are able to make persistent high returns and growth do not get full valuation. L'Oreal is a great case in point with that particular calculation. It's astonishing. But if you look at that table, L'Oreal, you could have paid 100 for Pepsi, 100 times P for Pepsi in that. But look, once as much as we acknowledge that, and we do acknowledge that markets, whilst they're not completely perfect, aren't completely imperfect either. They generally, on average, they price good companies better than bad companies. So we're going to have to pay a higher price for our good companies than the average people. Keep coming. Oh, it's a bit. Yeah, well, it's going to be because it's a better company. But once in a while some form of madness overtakes them and. And they offer you something which they really shouldn't. Right. It's kind of like, how does it happen? So we started buying Microsoft when it was 25 bucks a share. It's 420 something today. Right. And it's been in our top performance eight years running. This shouldn't happen with a company this size. It was trading on a p of about 8 when we bought it because Steve Ballmer, I don't know Mr. Belmont, I don't really want to be critical of him, but it hadn't been a happy period when he was there and they'd missed out on the whole mobile telephony thing. Then they bought Nokia and that had been pretty disastrous. And they bought Skype, which had been pretty disastrous, which is ironic given that Teams is now such a success. And so there we were. And when we think looking at things like that, so we look at something like this. This is a company with returns on Capital around 30%. Right. And revenue growth now has been coasting about 20% for a long period of time. This shouldn't happen if we think we've found one of these and we have found them. We found it in IDEX Infection Equipment, we found it in Microsoft, we found it in Domino's Pizza back in the day. We sit down and think, are we missing something here? And what we tend to do as a sort of check on sanity as much as anything else is go and look at what the detractors are saying. What are the detractors saying? Right. What are they saying is the reason? And I, I remember an awful lot of the Microsoft stuff, roughly speaking, just said, well, it's not Apple, is it? Well, no, it's not, is it? We figured that out all on our own. Very famously, the, in my view, the. The Financial Times Lex column and I do know which journalist wrote it at the time, but obviously they haven't got a byline on it, unfortunately. Said when it was $26 a share, nobody should own it at this price. And they were right, but not in the way that they meant it. And it's like sometimes when people are just absolutely mad about things about, you shouldn't own this. You do get this opportunity where a large, very good business gets offered to you at a price, where you just shouldn't get. Meta was another one. After the Cambridge Analytica thing, Meta really was a gimme in terms of. I mean, it's gone up 500% or something like that since that point where we owned it. And you, you know, we received a cacophony of. Of invective from people about how we shouldn't own it. I mean, I mentioned in the. I quote my previous annual letter in this year's annual letter saying, I. I'm almost thinking of having a fund that just buys the one share everybody tells me not to own because they're working off emotion and anecdote. Right. You know, people were saying, nobody's using Facebook anymore. I mean, I remember saying, nobody's using Facebook anymore. Oh, right, okay. Where do you live? Well, Tunbridge Wells. I said, oh, how about in Jakarta? Are kids using it in Jakarta at all? Well, how would I know? I said, well, I think that's kind of more important, don't you, than Tunbridge Wells. So your kids are not using it anymore? What are they using? Instagram? I said, you do know they own that, too. People. The plural of anecdote isn't data. Just deal with the facts. There's an old TV series from the 50s called Dragnet, and the detective, whose name I can't remember, would always be interviewing a suspect, a witness to something that had just occurred, a murder or a robbery or something like that. And they'd be gabbling and they'd say, the facts, man, just the facts.

[William Greene]

There was a very nice thing, and I think it was in Investing for Growth, your book, which collected your letters from the first 10 years at the fund, where you quoted the Simon Garfunkel song the Boxer, where you said, a.

[Terry Smith]

Man, here's what he wants to hear, disregards the rest. Yeah, I mean, look, you can get an awful. I'm quite serious now. You can get an awful lot of stuff from the. From the movies and from song lyrics, because people spend quite a lot of time sometimes on. On movies and on film lyrics. Yeah, and on lyrics. And so sometimes they've got a bit more meaning than just somebody. Simon and Garfunkel playing a nice tune. I mean, one that we quote all the time is. Is the. The movie all the President's Men about the Watergate affair, which has got so many quotes out anyway. And you know the bit where Deep Throat, who's the FBI Deputy director knows, but he's giving information to Woodward, paid by Robert Redford, and he meets him in the car park. One of his critical piece of advices is, follow the money. Yeah, money. If you want to know what's going on, just follow the money. Right? And there's lots of examples of things like that. You know, we play to ourselves clips when we're explaining things day and day out. There's the bit in Casablanca where the gendarme goes to close down Rick's Cafe. He blows his whistle and he says, this place is closed down. I'm shocked, shocked to hear there's been gambling here. And one of the waiting staff comes by and goes, you're winning, sir. Whenever we read one of these things about, yes, apparently somebody has been bribing people to do business in Nigeria. We always play the Casablanca game, right?

[William Greene]

I remember Howard Marks quoting to me Clint Eastwood in Magnum Force saying, a man's got to know his limitations.

[Terry Smith]

I quote that one too, all the time. A good man knows his limitations when he's told by the chief of police he's being asked to deliver the ransom to the bad guy. And he says, we don't want any gunplay from you, Callahan. He said, I was a cop for 20 years and I never ran horse with my weapon. He says, that's good. A wise man knows his limitations. It's great quote. The movie is littered with great quotes that you can learn something from, in my view.

[William Greene]

So this idea of how people hear what they want and disregard the rest is really important. And you've operated in a. In a team for a long time, right. You've had Julian Robbins, I think you've worked with for 38 years. And he's your head of research and he helped you co found the firm. And you sometimes talk to him as your dedicated, your designated successor. If you retire at the age of 145 and young Mr. Robbins, as you would know, then. Yeah. Tell me how it helps to have a partner like that, because I see this a lot, right. With. I mean, look, Howard Marks talked to me about Bruce Karsh. Joel Greenblatt talked to me about Rob Goldstein. I've interviewed Charlie a lot, Right. Who obviously was the abominable no man for Warren. Talk about how it helps in terms of just dealing with your own blind spots and potential biases and the like to have partners.

[Terry Smith]

Yeah. I think that Julian is very intelligent. He's also got a first in history, by the way, and very honest. And he's different to me. And amongst the Differences are that he sometimes sees things in terms of the subtleties of what's going on that I miss. And he's got a very, very good way of pointing them out to me without pissing me off. Basically. He can get me to understand something without getting into a fight over it. And that's quite important that he just says, no, I wouldn't buy that because of. And have you thought about this in terms of. And he's almost got a way of saying, like buying L'Oreal. He'll go, well, I think if you take the P E ratio, roughly look at it in a mirror and add your car license plate, it's okay. And really he's just duping me, right? I mean, and somehow he manages to get my. He might have a point about looking at it that way. And I go and buy it and really I realized, no, he just talked me into that, didn't he? He realized that if I hadn't been talked into it, I would always have been sitting there going, no, it's a bit too expensive. And then we never rode. So he just found a clever way of bloody spoofing me into it, didn't he? You know, and he did. And he's got a great inquiring mind. He. He actually really likes the stock market. And, and he likes. He's lived in America for, I don't know, 30 years now. And, and he's got a wealth of knowledge about America and, and the, and the stock market that he brings to bear in a way that I simply can't. As much as I deal with Wall street and I've worked on Wall street and I'll never have that length and depth of knowledge that he's got.

[William Greene]

You know, you have a very interesting sort of emphasis on the US in what purports to be a global fund. Right. I mean, when I checked the other day, I mean, I think it was 74% in the U.S. and obviously, you know, there are these issues over where a company is domiciled and all the like. You know, France is about 9% sales.

[Terry Smith]

In the US we had a company that was us and in that number, that zero in sales in the US.

[William Greene]

But it's clear that the US is a massive hunting ground for you. I mean, with all these companies like Microsoft and Meta. When you think about this issue of what makes the US special and whether this is just a sort of permanent, if anything is permanent, advantage, or whether it's just another kind of pendulum swing and sooner or later the pendulum will swing back to emerging markets or whatever else. What do you think? I mean, you used to have an emerging markets fund and then you closed it at a certain point. Is the US just the persistent winner?

[Terry Smith]

We're right by the way. We've continued since and we were right. Look, the US is the biggest economy in the world. Let's just start with that, shall we? Secondly, it has the most active capital market in the world. So when we're talking about where companies are listed, increasingly, as you'll see much of the chagrin of people in London, companies are listing in America which are not in America. So I mean, given that it's the biggest economy and given that it's got the most active capital market, I'd almost say if you're doing what we're doing, why haven't you got more companies in America than it was? How does this work then? Right, because if you are a company thinking of listing, if I were thinking of listing, why would I think about doing it in London? The greatest depth of market, the biggest liquidity, the most investor attraction is in New York, isn't it? You know, and then you think about how companies become big and very profitable companies. One of the things that helps American companies is that they get the opportunity to build their strength in the biggest market in the world before they move out and take on the world. So you know, whether it's in technology or healthcare or consumer and so on, they sit there and they become the dominant player. Then. Then when they reach out into the wider world it's very difficult for people to compete with them. You know, when Coca Cola and PepsiCo arrive in the UK, do you really think that Brit going to give them a run for their money? So that's in their own market. How about once we get to an adjacent market so in Europe, how's Britvit going to do there against Coca Cola? They're like a boxer who's pumped up in the gym, who's been fighting. He's been in the cronk gym in Chicago fighting the best heavyweights in the world in sparring and then he turns out and he's finding a hometown fighter somewhere in another country. Like I wonder how this is going to go. So you've just got to bear in mind it's the biggest economy with the biggest capital market and the companies, the Coca Cola's and the Microsofts and the strikers and so on have had the ability to build a fantastic base there before they move out into the wider world and take on the local competition. Then you get onto Other factors as well. When you look at the world at large, Europe, the great saying is America innovates. Europe, China, China replicates. China or Japan replicate and Europe regulates. I mean some of the stuff that's going on in Europe, like the Digital Markets act, they may as well put up a sign here saying high tech not welcome. I would say. And it's kind of sad if you see what's driven the market in recent times because look at the heights of technology in terms of the companies and I know I am billion other people going, well that's a bit worrying in terms of the size of their domination of retransport. What's the biggest UK technology company?

[William Greene]

God knows. There's nothing really famous, is there?

[Terry Smith]

Well, I'm talking about list in the uk, Sage, an account which by the way is a good business. I've got nothing against Sage, please don't take it as that being it's a very good business in fact, but that's it. An accounting software company based in Newcastle is the UK's biggest indigenous software technology company.

[William Greene]

And I'm embarrassed to say I've never even heard of it. So that's. I mean I'm based in New York and I've never heard of it.

[Terry Smith]

It's funny you should say that. We happen to know that when they were looking for a chief executive and by the way, this is meant to be in any way a criticism of the currency, but I think he's a good guy but he's an internal appointment. The reason he's internal appointment, much as anything else, is they went out to headhunters to try and get a CEO. And when we start, if you were looking for a headhunter for a software firm, you'd start in Silicon Valley pretty much, wouldn't you? So they got headhunter there and said go around, see if you can find any coos or number twos or whatever, we'd like to step up. And the response you've just had is the response they got from everybody. Never heard of it. Go on. I don't think that Europe is about to overtake the United States in any of the areas that we've identified as being good businesses. No, I can't see any. China is difficult because you don't truly own the business. You are actually in partnership with the Chinese government for good or ill, particularly in the high tech businesses. And Japan, at least until very recently, businesses weren't run for the benefit of shareholders, they were run for the benefit of the employees. And wider Japan, as it were, returns on capital and things like we're discussing, we're like, okay, so that's why we haven't got very much. It's not that we don't like them. We actually have a bit of a soft spot for European companies in the industries that we like, which are run by families and have a very long term perspective. So if you have a look in our portfolio, things like L'Oreal, LVMH, Atlas, Copco, we do like them, but they're rarities. Sorry, I interrupted you there. Go ahead.

[William Greene]

No, I was just wondering because it's interesting that this is a discussion between two Englishmen who are not living in England. So that tells us something about probably.

[Terry Smith]

Not a coincidence that is it, right.

[William Greene]

I mean, and both of us, I think love England and love being there. But there is a dynamism when you move out, certainly when you move to New York. But when you think about the future of the British economy, when I go back, I sometimes feel like, I mean, I only really go to London and I'm no doubt gonna annoy lots of people here, but I feel like it's almost become a kind of playground, at least in, in the areas I go to which are not that representative. It's become a playground for the foreign rich. Right. It's not really dynamic as an economy. It's more a really wonderful place for other people to come and spend.

[Terry Smith]

It's true of London I think, and I'm a Londoner, so I feel strongly about London. I think it's the greatest city in the world probably, but I'm obviously not exactly objective in that opinion. And it's sad, I think that what you describe is at least partly true. Well, that really explains the British economy and where it stands for I think also what the British economy has been good at in terms of innovation. And it's got a great record of innovation in, in healthcare, it's got great drugs and, and other areas. It's got it in technology in a number of regards. Arm in terms of, you know, low power chips for, for mobile telephony, they, they've dominated that over time. It's got it in, in, in a number of brands as well that it's, it's over time that it's developed which would be very good. But it's, I think that the problems that it exhibits are in the end, I think there is in my view an anti entrepreneurial, anti kind of capitalist, whatever you want to call it, spirit abroad in the UK and it's been problematic, I think for a Very long time. I don't think, I think one of the biggest differences with America and like you, I love New York. You know, I had an apartment in New York for some time and spent a lot of time there is I think on the whole, and I realize this is a generalization, Americans wish to emulate success, Britons wish to destroy it or criticize it. And that's my take on it. And I, I'm afraid, you know, I don't think that's helpful really. You know, we've got to, got to learn to, to appreciate people who are successful and applaud it and, and wish to emulate them and multiply it, not to not, not bring them down in some way. So. And the other thing about the UK is I think you're probably right about London. But once you go outside London, the thing that becomes evident to me is a number of things. One of them is it's been somewhat hollowed out. I mean the industries which we used to rely on for manufacturing have by and large gone. But going back to what I was saying earlier about progress, that's not new. If you take the textile industry originated in the north of England, Industrial Revolution, then it migrated to America in the Northeast after the Civil War and then it migrated to places like Hong Kong and then it's migrated from places like Hong Kong to places like Mauritius and then it's become a middle income country. It's gone to places like Ethiopia and Cambodia and Madagascar and it keeps moving and you have to move on yourself. It's no good saying, well, I think we'll start. I'm not, I'm not lamenting the absence of the, of the textile industry from the dark satanic mills in northern England. You have to move to new industries, but you do need to move to new industries. You don't need to have half the population employed by the public sector, which it is. That's not going to be helpful. Right. Because they aren't actually going to create anything whatsoever. Here's a statistic for you. The poorest state in America is Mississippi. And the median income in Mississippi, and I can give you an exact figure, but not on this call, but is about US$44,000. Yeah. That's the same as the median income of the uk. What went wrong? Because something's definitely gone wrong. I mean, think about. Because I think one of the things that strikes a lot of people when they travel around America outside of the, the main conurbations is how poor America is once you get out into the, out of the boonies. Well, yeah, but the UK is pretty all over. You know, outside of those enclaves of London and a few other major cities, the UK is as bad as not just America, but the poorest state in America. I'm not, I'm not being party political in terms of my views on this. I'm, you know, my view is if they I don't vote in elections in the uk, I'm not on the electoral register. But if they had an election, they had a draw, they could bring me and I'd let them know which way I would have voted because that's my view on them, essentially. But both sides of the divide in the UK seem to me to have a rather large responsibility for this lamentable state of affairs. Let's take a quick break and hear from today's sponsors.

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[William Greene]

All right, back to the show. There's certainly a tremendous dynamism in the US That I think I definitely remember when, during the financial crisis when obviously the US kind of triggered a lot of the world's problems and everyone was sort of gleefully saying, well, the US Is finished. And now things and, and if you lived here, you just had this sense, it's so dynamic and the flow of capital to good ideas is so quick. Speaking of which.

[Terry Smith]

But the willingness to deal with things when they go wrong, I quoted in my letter, I said we had Unilever, where we had a battle that lasted many years. I mean you could say through two CEOs to try and get the place straightened out. In comparison with Nike, the chief executive screwed up the bricks and mortar. He's gone. That's it. People are all terrible. I don't think it is terrible. One of my mantras about running a business is I don't think you should ever be allowed to fire people unless you've been fired yourself. Right. Because you need to know what this feels like. And if you're going to sit in a room and you're going to actually fire people, you need to be able to talk to them from a position of empathy, I think, in my view. So I'm not in favor of just going like a chainsaw at people, but I am in favor of dynamism. And dynamism only comes that you're describing in part from grasping not just money, going for new ideas, but also how to deal with problems. The dynamism of changing where people are living, what jobs they're doing, who they work for is. The US Is in another league, I think.

[William Greene]

I think you're unusual also in that you've not only been a very successful stock picker, but you were actually a very successful CEO. I mean, you've been a CEO of two public brokerage companies, one of which I think you built into having about 3,000 employees, and the other you floated. And there were lots of mergers and demergers, the like. And this is back in the 1990s and 2000s. And it reminded me when I was reading about your past as a CEO of the quote from Buffett, where he famously said, I'm a better investor because I'm a businessman and a better businessman because I'm an investor. And so I was wondering if you could talk a little bit about what you learned as a CEO that's helped you as an investor.

[Terry Smith]

Yeah, I mean, look, one of them is that change requires time quite often, notwithstanding me saying acting quickly is good, because if you act quickly, you've still got change to implement. You might change the person. We've got change and. And quite often money and effort and lots of other things. I've got a very good friend of mine who's got a steel business in. In the uk and he said when he was a quoted company, which he's not anymore, he went private and that was it. He said the analysts ringing up asking him about how to change things reminded him in the forays. But it's funny where producer, they think that I've got these two buttons on my office wall, a red one and a green one. When I come in the morning, I press the green one, which is labeled make money. And then when I put my coat on the go overnight, I think, oh, must remember the press the old red button. He said, it's a bit more complex. We've got to design products, we've got to get orders, we've Got to build mold, right? And I think unless you've actually done that, it's difficult to understand. I mean, it's like people who sometimes come out of running a fund and then try and build a fund management business. And I said, well, it's like when I was head of research at ubs, people used to come to me because one of our analysts was a very heavy guy. Been a hammer thrower at college and put on a lot of weight and when he sat on the toilet seats, he used to break them because you know, they stand on these little blocks, they're up there. This guy, if he wasn't kidding and, and people would go and say, I just cut my ass on the toilet. They just, you know, he's a bit. And I'd have to say like it's, could you just sit down a little bit more carefully? Because I've got people keep coming. It's like, you know, the way I would put it is the day job isn't glamorous when it comes to managing businesses. Quite a lot of the day job isn't sort of striking a pose like Rodan's the Thinker and having great strategic thoughts, right? It's actually about execution, implementation. And a lot of execution, implementation does involve dealing with toilet seats and the like. It just does.

[William Greene]

And it's not that different with your investing, right? With your investing. You've talked about how so much of it that yeah, you have these grand theories and principles and stuff that are kind of timeless. But then there's the blocking and tackling day to day where you're listening to conference calls and you're doing modeling of, you know, free cash flow.

[Terry Smith]

I say to every new recruit that we've had with some success but not universal, I say before they begin, I say, I use the exact phrase, the day job is not glamorous. What we do is not sitting here having great thoughts on investment. I said we don't sometimes have one for a couple of years or more at a time. You know, the number of Microsoft's and idexes and things that we pull out, that is relatively rare. And if you've got one, we'd love to hear about it, but we don't. You know, when you've got three in the first week, we're going to get a bit suspicious. The reality is it's about modeling and collecting data and listening to calls and writing up notes, looking so that we've got a record that we can read back through and read what's gone on historically and that's really the vast majority, the vast majority of what we do.

[William Greene]

And you told me right before we started recording about a sign that you had in the office. Can you tell us about that? Because in a way, it embodies this mindset of kind of dogged incremental progress and not screwing up.

[Terry Smith]

I put up the five Ps, so five uppercase Ps in a frame. And the five P stands for preparation prevents piss poor performance. Don't turn up for something without having prepared. Don't go to a company meeting and you haven't read the last results. And the note that you wrote before, you know, and it originated from a time when I was in broking and I went on a trip to Scotland when I was at ubs, instead of research with the CEO and a salesman, the salesman, I'd come from another broking firm and I'd looked at our Scottish fire figures and they were terrible. And the salesman said we were number one or top three or something in Scotland. We clearly weren't. And so we decided we'd resolve this by going to Scotland. Why not? And we were there having a meeting with the general accident as there was in Perth. And they were lovely guys, I knew them, but, you know, they were lovely guys but with that nice, steely, you know, sort of bit in the middle that you get with the Scots, which is good. And. And they were having a conversation about what they thought about the service and they said, well, what do we think about the service? How much did we pay you last year in commission as a broker? Kind of looked at the salesman and he said, I don't know. I said, you don't know? They said, well, we paid you £4 million or something like that, all right, this is how much we pay you the year before.5 million. So they said what they were telling us was they were giving us. They don't mind sitting in meetings like this or filling in surveys. They were voting with their wallet, right? Anyway, I came out the meeting and I said to the CEO, I would fire that guy. I said, going to a meeting with that, with you in the room, never mind me in the room, and you don't have the basic information on the client to hand is just a no, no. I mean, that tells you right off the bat what we're doing is here. And it's like, you know, there is no excuse for that. There's no excuse for turning up to interview a company, be interviewed by an investor. You know, if I'm being interviewed by an investor, if you were you know, coming on, say, Terry, I want to, you know, interview you about my holding in for. And you go, well, how much. Do you know how much I've got invested in funds with. No, I haven't actually got a clue, William, how much have you got? It would be a bad start, wouldn't it? When did I invest? I don't know actually. I've got data on this. But if I hadn't taken the trouble. Have you made money or have you lost money with me? How much money have you made? Have you been putting money in or taking money out? The idea of turning up without doing all this work is just preposterous in my view.

[William Greene]

I sort of wonder if when I look back at your youth, where you came from, this poor background and then you, this working class kid going to university college in Cardiff and then you get your mba, but it's not from Harvard or Wharton, right. It's from Henley School of Management. And I'm wondering if there's something about having been an outsider and having to fight for everything that you've done that's been really key to your success. I wonder if there's something very central to your success that you've had to kind of scrap and be tenacious and work harder and you were always sort of this super competitive outsider. Does that resonate with you?

[Terry Smith]

Yeah, I think that's pretty accurate, actually. I think that's a large part of this. I've never been part of a. Whatever the establishment is. I mean, I suspect we've got a new establishment now that's replaced some of the old establishment in time. I've never been part of that. I've never wanted to be part of it either, actually. It's never, never struck me that I particularly wanted to join any club or, or anything like that, literal or metaphorical in that regard. And yeah, I have always felt that I was a bit of an outsider and, and I had to work for things and I think it's probably a good thing on the whole to be in that situation. And I had a conversation with somebody who were having a dinner and at the dinner with someone's son who was at Eton and when we were, the parents were leaving and he said to me, I've got five son, I'd send him to eat. And I said, would you? I wouldn't. He said, why? He said, it's, you know, where everybody runs, the world goes. I said, I just don't see this as a great positive. I think, you know, I would rather that he went to A very ordinary school and found out how the world really works. You know, my friend, the. The steel man who. I'm telling you about his. It's a family business. He's a scion of family that's owned it for several generations. And he refused to go to public school and put himself into grammar school. And I think it's to his credit, but also to his benefit, because I think, you know, when you're walking through a foundry and talking to people, you might be able to understand a little more what their issues are and what they're doing, if you actually have been alongside them from time to time.

[William Greene]

You know, it's such an interesting issue. You know, I. I went to Eton and I went to Oxford, but I'm a Jewish kid with, you know, from a family that fled from Russia and Ukraine and Poland. And so I remember going to a friend's house and for an outsider.

[Terry Smith]

Eaten.

[William Greene]

Yeah, exactly. I mean, Bruce. Bruce Greenwald once said to me, oh, yeah, the Jew from Eaton. I mean, there were 10 of us.

[Terry Smith]

Yeah. I'm surprised there were that many.

[William Greene]

I think there were a few who were pretending not to be. I mean, I think there were some who concealed that they were Jews. And so I think being an outsider. I mean, for me, being an outsider and an insider somewhere between the two. So I'm comfortable interviewing anyone or talking to anyone, because I was at school with people like Boris Johnson and David Cameron, so I know they were nothing really that special.

[Terry Smith]

Right.

[William Greene]

You're not that intimidated because you use my Casablanca.

[Terry Smith]

I'm shocked, shocked to hear that they were very.

[William Greene]

I mean, Boris. Boris. I remember when I was a little boy. I mean, I was 13, and he was the head boy and he was clearly incredibly charismatic and a big personality. But the idea that these sort of entitled, very bright Etonians who knew how to write Greek verse should be making big, impactful decisions about the future of the country just because they'd gone to Eton and Oxford. I mean, it was kind of laughable if you knew them, because I knew what a fool I was. And I, you know, I mean, I came top in English in my class. I mean, I was. I was as smart. I was as smart as a lot of those kids. And I know that I'm a.

[Terry Smith]

But the. I think the ideal place, if you can get to it, and I don't think many do, is to be able to get along with and communicate people with people, whatever, pretty much whatever their background. And if you're gonna. I think then you've got to. About the Right place. You know, if you can be actor, Buckingham palace with Boris sitting alongside you having lunch. And I have been at Buckingham palace having lunch and at the same time you can go to the boxing gym with the, with the young black kids, then I think you've reached a good place, is my view. And I feel sometimes I'm fortunate in that regard that I can do both those things and not feel particularly out of place in either one.

[William Greene]

You know, it's interesting to me that one of your clients early on was Sir John Templeton and you've talked in the past about going off to the, the Bahamas, to life at Key to see him and Mark Koloeska, his chief investment officer. And I write in my book about Sir John because I went off and interviewed him in the Bahamas and spent a day with him 25, 26 years ago. And in some ways you seem to have kind of recreated his life where you've gone off to Mauritius and you're sort of away from the madding crowd thinking for yourself. Can you talk about in some way whether a. I'm right in thinking that Templeton somehow influenced you, maybe in the same way that that movie early on influenced you and you thought, oh, there's another way to do this. And also how it's kind of been an advantage to you to set yourself up in this very independent, non tribal way far, far away from Wall street and the city of London.

[Terry Smith]

I actually emulate Templeton in more ways than you might think because he, as you probably know, used to walk in the sea every day. I go for a swim out to the reef and back whenever I can, which is, you know, two or three times a week at least. And my colleagues say, oh, that's interesting. Doing what? And I do, weirdly, if there's nothing else going on when I'm doing, I do think about him. It's strange, isn't it? Just doing an actor is similar to what he did in, in the Bahamas. But yeah, it definitely didn't influence me to see somebody like that at work. And I always remember very early on when he talked about how to react or not to events, he said, you know, I mean, obviously we're talking way free Internet. He said, you know, the papers alive arrive a day later. I get the Wall Street Journal the day after it's published. So by the time there's, there's a problem, it's too late to panic. And he was making an important point in a trivial way about that. You know, the events we often write up in our daily news Write ups, we write to each other and we look back over periods of time, sometimes only a few weeks, sometimes a few months and so on. And so. So if somebody had gone to sleep on that day and woken up on today and we've had all these events in the middle that happened where, you know, terrible great things have happened in terms of elections or wars or pandemics and so on, since the market is at the same level, if they didn't look at any of the intervening events, I wonder what they would conclude. Nothing's happened. So was anything that happened terribly important then? Because mostly the answer is no. No, it's not. And I think he and Buffett, although I've never met Buffett and so on, from the way that he's explained it, it is valuable. And there have been other people. I think they're not the only people who've done the, you know, I don't want to be in the, in the swim. I talk to people who I know in the industry who operate from London or New York. I mean, I always say a lot of These guys need GPS to get outside at West 1 or SW1. I mean, I don't know how you do it, right. And, and I say to them, why are you there? And they go, well, I like to stay in touch with the companies. I say, you're an investor in Procter and Gamma. I said, yes, so am. I say, they're in Cincinnati, right? And the reality is scratching and they like to be able to go and talk to other people doing what they're doing, whether they're brokers or other managers. And they like to be able to meet them for lunch and meet them for drinks and pick up and they like to compare notes on what they're all doing. And the reality is they don't really want to stand out from the pack too much, which is fine. I mean, that's, there's the old John Maynard Keynes quote. The worst thing you can have from your career is to, is to differ from the norm. Even if you're successful, it's still an asthma to people and that they mainly don't want to get that far out from the norm. And if you're trying to invest for the real long term, being in that is unhelpful, really unhelpful.

[William Greene]

How do you actually structure your lifestyle and your ecosystem there so that, that you're able to operate in this very long term, patient, independent spirited way and sort of resist even the pressure to think about short term results and stuff in an increasingly short Term world.

[Terry Smith]

We don't speak to any brokers, not one. We don't take any research from brokers, we don't speak to them. We do it ourselves. So we've got why? Well, boxers are paid to fight, so they like to have fights. Lawyers are paid to have disputes, so they like to have disputes. And prelog brokers are paid on transactions. Guess what they like to do. We were brokers, I was a broker, right? Julian was a broker. We've done this job, we know what's involved, right? We don't speak to any of them, we don't take any research from them. I get a small tsunami of stuff that comes through asking whether people can give me a service and the answer is no, no, no, no, no, no, no. So we don't take any of that. We're completely cut off from that. The fact that I'm in a different time zone helps as well. I mean for the first four hours of the day I don't have anyone outside Mauritius. My car, I've got a dozen colleagues here who are awake. So I've got quite a large part of the day where I can mull over what I've read and what I've taken in the previous day and think if there's anything that I need to do about it or say about it or ask about it without any incoming whatsoever from people, you know. And so that, that really does sort of. And also with regard to Wall street, you know, I'm going to switch off looking at things after I've been speaking to you. I'll go on and have a look but I'll switch off. And I unless there's something really, really big somewhere, you know, Microsoft goes busk, give me a call. But you know, outside of that, don't bother. And so the remoteness does help. The other thing about Mauritius in particular is I think people talk about the world and living in another part of it can be quite important I think. You know, I'm living in an island that's about 800 km off the coast of Africa which has got a majority Indian population. And you can tell almost everything you need to know about Mauritius from the national holiday system. There are two days a year for Christians, two days a year for Hindus, two days a year for Ergos, two days a year for Tamils, two days a year for Muslims, two days a year for the Chinese, plus National Day and the abolition of slavery. In other words, it's a. People talk about diverse societies. It's a diverse society, you know, people in the street, if they don't know who you are, will speak to you in French, first of all, if you're white and if you're black, in Creole. Right. Those are the commoner languages here and they're pretty good connecting flights into China and India and we're in the same time zone as Dubai. And gradually, by various means, a different perspective on the world begins to enter your consciousness. I think if you live somewhere else.

[William Greene]

So you've set yourself up in a very free and independent way. I mean, it's been a long journey from, I mean literally a long journey. You're like 10,000 kilometers away from London. But I mean, in a way the fact that you weren't part of the, part of the in crowd, that you weren't sort of growing up, you know, going to par schools and then going to work in Mayfair at a hedge fund and stuff, has enabled you to kind of chart your own course in a very unusual way.

[Terry Smith]

Yeah, I think it has, yeah. Yeah, absolutely Right. And look, let's not rule out other things. Luck as well, or you need luck. Right. But yeah, I also, I had some mentors along the way. You know, I mentioned a couple of them and probably two or three, four mentors along the way. I think when people ask me about careers and what to do and they're all, you know, they want to set up the latest fintech, I always say get a job with an organization that will provide you with training. Right. Take everything that they offer and if you can, find a mentor, somebody who will teach you how this works and in doing so, give you experience that you otherwise won't get. You know, and sometimes it's quite painful. I mean, being mentored is not always a positive experience. You have difficult ones as well. Well, I always remember when I was working in branch banking and we used to have to balance the accounts. The branch itself has a balance sheet for its operations in terms of loans and deposits and everything like that, and capital that we're operating on, that's supply. And you used to have to balance those and all the individual accounts there, the ledgers that went into it. And I remember not being able to balance one of the ledgers. And when I was a graduate training and the manager's assistant took it off me and said, yeah, okay. Went into his office and came back an hour later and went, I've balanced it and I didn't go to university. You do need people from time to time to tell you you should be doing better than this. It's not all people think the Whole world of positive reinforcement. Once in a while, somebody needs to tell you, you got it wrong.

[William Greene]

Yeah, it's an interesting balance, right? Because in some ways, when I look at your life, I think, yeah, you're this tough, sort of indomitable guy. And in some ways there is a, you know, I mean, you're obviously a very likable and charming guy and Greg terrorist. And you've had people who've worked for you or with you for a very long time, for decades. But at the same time, you're clearly an intense and tough and slightly combative, scrappy guy. And I'm wondering how that works in the rest of life, out of business and investing. Because I look at so many of the great investors. I mean, this is one of the things I often quote on this show. Charlie Munger said to me that what struck him when he read my book was just how many of them ended up divorced or separated. And I wonder, like, when you. When you look back on your life and obviously you, you know, you got divorced, you've had contentious relationships in the life, in your life, how do you turn off the intensity that makes you very successful in work so that then you can come back into dealing with a wife or a girlfriend or kids or whatever and actually not have that same mentality kind of overrun everything?

[Terry Smith]

I don't think if I've got a problem in that regard, I don't think my problem is approaching the remainder of my life with the same approach that I approach business. I think I am able to see the two things quite separately and approach them differently. I think what is difficult, however, is when you get into situations which are very intense, no matter how much you think, well, no, this is home life and I'm gonna cook dinner or bath the baby or whatever you're going to do, you may not still be able to get that out of your head. So, you know, whether or not you can engage properly, sleep properly is. Is not something that you can just do by thinking about it. You know, it does stay with you sometimes, and I think that can be problematic. You know, it's not. Not whether you are. You. You're treating everybody like they're in work and you want to see their. Their numbers and you want to, you know, get them to engage in ppp. That's not it. I don't think it's as simple as that. It's just as simple as if you've had an intense time, it can be difficult to switch it off in you. And therefore, whatever it is you're Doing, you may not perform very well in relation to it, to the simplest level of sleeping, for example, or something like that. You've got something running through your mind. It may keep running through your mind and, you know, you may not be very comfortable to be with at that time. And that's probably the other thing is, I think, think if you do do things like running your own business and you do do, you know, run businesses, including your own business, and you do it intensely and successfully and all that kind of thing, one of the things that people who are with you have to buy into or not is you will do whatever it takes. And some people can't buy that. They, they want to be the, the center of your world. And you say, well, you can't always be there. I've got this thing over here that I do. And maybe you've got things that you do or maybe you haven't. I don't, but there are times where I go, no, I'm going to go and do that now. And they go, well, that's not very good because I really like to go and do this. You go and do it, I'll pay, you go do it. But I'm going over here to do this right now. I feel I've got to do it because it's required. And some people find that quite difficult to accept.

[William Greene]

Where do you think that ferocity and intensity of drive and focus comes from for you? Is it just competitive? Is it kind of a bit like being a, being a fighter, being a boxer or. I mean, where does it come from for you?

[Terry Smith]

I think it comes from a balance of things. I mean, one is growing up in very bad circumstances. You know, I think, well, you could say, well, there's lots of people who are up in very bad circumstances and not like, yeah, but how many of them escape, as it were? And I think, I think it mainly comes from that, you know, if you, you know, you're in very poor circumstances, in, you know, bad weather conditions and living in a terrible place, and it's quite violent and one thing, another, it probably does breed within you a determination that's otherwise difficult to encapsulate with people. You know, very difficult to encapsulate with people. And I think that's it. You know, it's, you know, when I went to see the, the kids in Mauritius who we set up the boxing gym for, and it was, you know, the girl that they got me involved in. They, People know I'm a bit of a sucker for these things. She was, she won some Fights and got a, a few trophies and so on. But am, I was a prostitute, right. I mean, she was living in a shack and, and so on. And they know that I'm like that. But anyway, I went to see her and I went to see the club and I saw the circumstances, and they said, oh, it's terrible, isn't it? I said, yeah, I'm gonna help. Yeah, you know, I'm gonna help. I said, let me tell you something. I said, if you're looking for world champions, they come out of gyms like that. They don't come out of air conditioned gyms, right. With drinking fountains. Right. They come out of gyms where, you know, basically, you know, there's buckets that people spit into and that's where they come from. Right. Real grit down there that forms some kind of iron in the sun, I think. And it does.

[William Greene]

Yeah. How do you think about this whole issue of giving back and sharing and lifting up other people? Because I was talking to my mother yesterday and I said to her, she's in London. And I said to her, I'm going to interview this guy. And I told her about you. And she said, I disapprove of him. And I said, why? And she said, you know, he makes too much money, doesn't pay enough tax, doesn't, you know, owns too many flashy cars, a couple of hundred cars. And she's like, why isn't he doing more to solve society's problems? And I said to her, I'll ask him, like, how do you think about that?

[Terry Smith]

First of all, I'd like to say that your mother, obviously criticizing a man's mother is dangerous to her. She doesn't know how, she doesn't know how much tax I pay. With the greatest of respect, no.

[William Greene]

I'll introduce you to my mother. You'll find she's about as formidable as you are.

[Terry Smith]

Great. Yeah, I, I, we recruited somebody a while back who told me the story about his mother. And I said, I, I want to hire your mother.

[William Greene]

Yeah, Yeah.

[Terry Smith]

I think she sounds like a perfect employee for us. Let's get it. And, and so I, it's funny you should ask that because it will at least maybe in part answer your mother's question, which is to say that I believe that philanthropy or giving back or whatever you do, there are a number of things that I, I'm very strongly guided on by. It should be private and it should be with your own money. I am anti, to the point of disparagement with the people who go in for Glitzy events, you know, absolute return for kids kind of thing. And we'll have a big event and we'll invite the Prime Minister and we'll all bid, you know, a million pounds for a pair of socks or whatever the hell it is, and we'll give all the money to give. No, the reality of that is, first of all, you're doing it because it makes you look good and you feel good doing it. And the second thing about it is you're quite often in those circles, the number of people who come and go, well, I've got this charity and I want this and you could take part and do that for me. I go, so. So what's going to happen here is I'm going to give you the money and then you're going to go up front it up and do all this. And so not. There's a certain degree to which I have to have people like that, because I'm not going to run anything because I'd be exceedingly bad at it. Right. So, yeah, causing it. But it's kind of like, guys, what you're really saying is, can I pay for you to go and get credit? That's in some cases, a lot of people who raise money for charity, I think, first of all, they don't keep to my private rule and secondly, they don't keep to the it should be your own money rule. I try by and large to keep to both rules. And so again, going back to your mother, she doesn't know what tax I pay and she doesn't know what I do with my money, but. But I do give what I would personally regard as very significant sums of money to a wide range of things, not just boxing gyms for kids, but a lot of other things as well.

[William Greene]

How do you think of the parameters? Like, because I'm assuming that there's something about helping to give people opportunity that resonates for you as someone who managed to get out of. Like, how do you think about a good way to help people?

[Terry Smith]

Well, that was another point. I was coming into private with your own money and in practical ways, wherever possible, that affects them in the way that you've just touched upon, which is opportunity and ability to grasp it. So I have a new wife, I'm pleased to say, and she has a stepson, I have a stepson as a result, and we've got him into school in the UK and we. I said, look, what do you want to do here? He can stay in government school and basically be trained in the underclass. Here to be a gas pump attendant or a gardener or a security man or we could send him to the UK if he passes admission, obviously, and so on. And we send him to the uk. That's good. And he seems to be prospering, which is good. So what I've now moved on to is a scheme to take two Creole children per annum from Mauritius into the school so that once we've got it full, we will have at least two children in every year in that school. Now, you know, I'm sure you're aware of the school, haven't been to eaten the price of schooling in the uk by the time we take the fees, the new vat, the uniform, the equipment and the flights into account, we're getting into some reasonable dough there, basically. But the thing I really like about it is it will be of practical help to lift some of those group of children out of their background, to give them an opportunity. And this is the really important part, I think, think some of them, I hope, will think of coming back to Mauritius to change the community in general by their, by the fact that they have the ability to hold down important roles in government or the private sector and, and so on. And that's, that's the sort of thing that really I, I like, enjoy that a lot because I can see the practical consequences of doing. Now, I don't want them to name the Terry Smith wing after me.

[William Greene]

Yeah, yeah.

[Terry Smith]

I don't think part of the story at all. In fact, in fact, in terms of getting these things to work quite often does require some sort of input from the government. Exactly. Get schools to respond here and do that sort of thing. I say the guy, I say to the Mrs. You can put your name on it, you can say this great initiative by me. You're a politician, you love this. Right? Put your name on it. Right. I don't want my name on it. So your mother's never going to be, almost never going to be reading about me doing this. She might read, she might read that the, the president of the Labour Party of Mauritius has, has come up with this wonderful scheme to introduce Creole children into UK public schools.

[William Greene]

Yeah, but it's, it's good to have a mother who holds us all to account. Amount. She'll listen to my episode and she'll say, yeah, I didn't like that one as much, you know, or that guy was great or what, you know. So having exacting parents is helpful.

[Terry Smith]

Your mother, apart from her lack of knowledge of my personal affairs, which is understandable, but she should Perhaps try and change some before. So it is. I think she's veering a little close to that UK dislike of success that I was talking about.

[William Greene]

That's a. It's an interesting question. Yeah, I, I mean, tell me about, you know, obviously having grown up without money and then over the years you become very wealthy and, you know, you bought a couple of hundred beautiful cars and the like and a yacht and stuff, and a lot of the very. I mean, I wrote about this in the epilogue of my book, Richer, Wiser, Happier, where I talk to a lot of people who've won the, you know, hit the jackpot financially. And my sense is that, you know, as I would put it, the toys and baubles are kind of nice, but they only go so far. And that in some ways the real gift of the money, me, is that it, say, say again, worse than that. In what sense?

[Terry Smith]

Well, the toys and the baubles actually get in the way of pleasure quite often. You know, owning things of that sort mainly is a headache, you know, so if you've got a boat, you end up having a crew and then the crew, you know, somebody quits, somebody has sex with somebody else, somebody's found out doing something here, they run it into the quayside at the top. And so, you know, really, I've got to say, the amount of real pleasure that one gets from doing those kind of things is not high. My view. Right. So what I mean, like if you take the car collection, for example, I think buying expensive and fast cars and I've got some expensive, fast cars, I have no doubt about that. But I've got a very wide range of cars. My earliest cars from 1903 and, and I've got. I've got a section of cars which are failures. I deliberately collect failures. And so, you know, and the reason for that is I think that they tell us things. If you, if you. Why do we have. Oh, I say, why do we have post mortems on human beings? Well, isn't. Just because doctors like messing around with cadavers. It's because if we die in, in suspicious circumstances or difficult to determine, they might want to know why, just in case there's a new illness or foul play and something needs to be done about it. And, and I'd like the idea of looking at cars. You look at other things if you wanted, but I like cars that are failures, are seeing what, if anything, we can learn, we learn out of these things because it might be useful to learn something from time to time about how other people have screwed up in history.

[William Greene]

Has it informed your skepticism about Tesla? Because you're, I mean, it's interesting when you think of the Magnificent seven, right? I mean, you own a bunch of them, but you've said that Tesla and Nvidia wouldn't get through your quality parameters and the Tesla probably never will. And I hadn't really made the connection that here you are a car expert and is there some connection between your car collection, the failures and your skepticism about Tesla?

[Terry Smith]

Remember my stern business school, you know, good company, bad company thing. Automobile companies are all bad without, without, without any kind of exception. Every, every single one of them. Toyota, Ford, BMW, Mercedes, the whole lot, right? They destroy value. If you really like them, you can go and buy them all on a P of 4 if you want. And there's Tesla on 99 times, right? It's a bad business. Why is it a bad business? It's very capital intensive. You have to build factories, right? Fairly honest and models, course development costs, a lot of time and money. And then here's a problem. If, if I'm invested in consumer staples and you buy some toothpaste or cat litter or whatever you buy, when you run out, you have to go buy some more, right? And so that keeps even in a, even in a, in a downturn, you might eke it out, might squeeze the tube a bit better, might go buy some cheaper cat litter and a number two brand or I don't know. So that's a little bit problematic, but it's not big problematic. Whereas if you've got a car and you feel a bit out up in a downturn, just keep the car, don't have to change your car. I always quote Mr. Mahadan, who is my taxi driver here in Mauritius, who is an exemplar of this. He drove me around in his Toyota Axio for 360,000 kilometers. The poor chap died and now his son's driving it. Toyota haven't made a bean off that car in 20 years, right? And it's still going strong, I can tell you. I see it on the roads, floating around with his son driving it. It's a really bad business because what that means is that it's hugely cyclical, unlike toothpaste and cat litter. When the demand stops, it just stops, right? And so it's huge capital involved, big development costs and demand, which goes up and down enormously. And then you can get onto the other subjects involved, which is. So that's car companies and Tesla's a car company, which is, Are batteries the future of electric vehicle transport. I mean, I don't know the answer, but there's certainly some reasons to be skeptical about it, in terms of range, in terms of use, of depletion of resources, in terms of disposal, et cetera, et cetera. The hydrogen fuel cell as an alternative, if there was any infrastructure. So put it all together. And I just think I'm a big sort of admirer of many of Mr. Musk's achievements. In a lot of respects, that man's got energy and balls, there's no doubt about that. But I'm not sure cars is the way forward. I mean, if cars are the way forward, why don't you just go and round up all the other ones and buy them?

[William Greene]

It's interesting. I mean, the fact that you've been collecting cars that date back to 1903 and the fact that, that you got a first in history all those years ago in Cardiff really informs your sense of wanting to own companies that endure, owning sectors that tend to persevere and be valuable through good times and bad. There's some interesting through line there in your life.

[Terry Smith]

Well, the 1903 is an Oldsmobile curved dash, just to let you know, it's not got a steering wheel, it's got a tiller that you steer it with. And it was the first mass production car. The Model T Ford was not the first mass production car. The Oldsmobile curve dash was the first mass production car. And, yeah, and there's. There's history involved in that. There's history involved in the Model T Ford. The Model G Ford is a fantastic story of an industrialist and what he achieved. I think I've got one. And I think it's the stories behind the cars, in my view, are more important than mostly the cars themselves. I'm interested in the stories, you know, I'm interested in the Ford GT40 from 1966 from Ford V Ferrari. And I've got one and I like it. I can remember that those episodes when I was a child of how Ford worked out, went on Sunday sell on Monday and tried to buy Ferrari, and not only did they not get Ferrari, but he sold out the Fiat and dissed Henry Ford. And upsetting Henry Ford was a bad thing to have done, really, because he hadn't built a car that beat them. And in fact, Enzo Ferrari managed to cause the development of at least two cars by upsetting at least two, by upsetting people. The full GT40 being one and the Lamborghini being another. Mr. Lamborghini made tractors. He still does make tractors. They make tractors. And he bought a Ferrari which didn't work, like they quite often didn't work then, and took it back to. To Ferrari at Marinello and said, you know, this is wrong with the clutch, that's wrong with the gearbox and so on. And apparently Amzo Ferrari said, what do you do for a living? He said, I make tractors. And he was like. And Lamborghini was so upset, he went and hired a team of six young automotive engineers and designers, the oldest of whom, I think was 26, and built the Lamborghini Miura and demolished Ferrari's road cars. Ferrari caused nearly as many good cars to be built by annoying people as he did by actually making cars.

[William Greene]

Yeah, you also have things like the 1968 Ford Mustang, right, which was the car that Steve McQueen drove in Bullitt. And you have, I think, the aston Martin in DB5 that James Bond drove in Goldfinger. So you're living out the movies.

[Terry Smith]

Yeah, well, yeah, look. Yeah, I like. I like movie cars. I think if you said, what are you trying to do with the car collection? I mean, it's about trying. There's a guy who's got a museum in Naples in Florida, called the Rebs Institute, and he's got a book called the Archaeological Automobile. And his thesis is that the car is the single most important object with which human beings interacted in the 20th century. It's not a bad thesis. And I think he's certainly got a point. And I think there's an awful lot of human development history in cars through the multifold and industrialization and all those sort of things. The rise of Japan, the movies, TV shows, Morse's Jaguar, the saints, Volvo. Their part in our consciousness is enormous, I think, and they evoke quite a lot with people, quite a lot of it, particularly of a certain age group. I think you find people talking emotivism, museum. I've talked to a lot of people in motor museums about cars, is they'll say they'll find families walking around and somebody will be in tears. And I say, is there a problem? I go, my father had one of those, you know, I remember as a child, it evokes emotion in them. And so I'm a believer in the stories, you know, I mean, the one I like on the Model G Ford is Henry Ford with the Model G Ford put it on the production line. And in so doing, he cut the production time of a car from 12 hours to 93 minutes. And in doing so, he obviously cut the cost of production very significantly. Then he did the really clever bit he cut the price. What most people would have done faced with that is just made more profit. He cut the price. In so doing, he took the car from being a placing of the money classes into something where he invented the middle class in cars, the middle class market in cars. Cars then were sold to doctors and bank managers and lawyers and dentists. He invented the middle market by doing that. It's just a fantastic story I think, for a man who, going back to how people are viewed, a man who many would review as a sort of.

[William Greene]

Robber baron industrialist Nick Sleep and Keith Zakaria, who you may have come across are from Nomad, who I wrote about a lot in my book Talk a lot about just seeing that scale economies shared model that they saw in Ford and then they saw it in Costco and then they saw it in Amazon. So it comes up again and again this ability to resist pocketing as much money as you can.

[Terry Smith]

Yeah, I agree, I agree.

[William Greene]

Is there anything you take from your history as a collector that you can actually apply to investing? I assume it's somewhat different art, but there's something in terms of the pursuit of quality that runs through both.

[Terry Smith]

There's also the fact that most things will come around. Every time I've ever thought of buying something and I've thought, you know what, what I'll give in. I'll buy a Lamborghini Diablo in black because the red one is never going to come up. Guess what happens one minute after you bought the black one. Oops, there you go. There's that. Also don't trust auctions. You know, I, I, I know from cars I've, I've been involved in auction that people at auction put other people logged on to bid and let them bid against their car to get the price up. And so you don't trust what. It's the same with dealing with markets. Do not trust what you see on the screen. In sheer price action as equaling reality. There could be a lot of reasons why that price is moving or somebody's dealing. I've seen more than one example. I think there's one coming up this weekend at Kissimmee in Florida where there's a very important car for sale, where if I were bidding on it and I'm not, I would look at that and say, I wonder if there's anybody else there who is in fact the vendor. Because once the bidding starts and it's clear that somebody's come into buying it, the vendor might use somebody to put in competing bids automatically if he gets stuck with his own car? Well, yes and no, because if he gets stuck with his own car, they'll just ring you up later if you were the highest bid and say, that guy didn't come through with the money. Do you want to be good for your bid?

[William Greene]

Before I let you go, Terry, because you've been incredibly generous with your time, I just wanted to ask you one final thing, which is actually about Sir Keith park, who's this hero of yours who. Who's Air Chief Marshal, and one of the really tangible marks that you've left in the world is that there's now a statue of him in Trafalgar Square in the heart of London that was unveiled in 2010 because you led this campaign to get him honored. Tell us just a little bit about him and why his story resonated so deeply for you.

[Terry Smith]

He's a New Zealander and he came from New Zealand in World War I with the Anzac Corps, who fought at Gallipoli, which of course was utterly disastrous and most people would have gone home then I guess he didn't. He volunteered for the British army and fought in the Somme. He was invalided out from the Somme after being blown off an artillery horse by a shell, and it was just unfit for the army. So he volunteered for the newly formed Royal Flying Corps, where he flew Bristol fighters and was credited with 18 kills. Quite good guy. He then transferred from the RFC to the newly formed RAF and had won the trust of Hugh Dowding, who was the head of Fighter Command, who had a theory on how to combat German air power. The Germans had about 2,800 planes in the Luftwaffe. The RAF had about 650 fighter planes, so they were heavily outnumbered. And Dowding realized that what they needed to do was not try and win the battle. There were lots of people, as you can imagine, at that time, particularly Leigh Mallory, the guy who ran the group in Cambridge, who were, let's give Gerry a bloody nose. We don't need to win the battle, we just need to not lose. This is a bit like companies, you know, we don't need to own the best company, we just don't want to own any bad ones. So he would feed the fighters in. In penny packets, if you like. And it became a standing joke with the Luftwaffe pilots, as it were. So gallows humor, the bomber pilots who as a battle ground on would say, oh, here they come again, those last 10 Spitfires gone, because they've been told they've wiped out their. And they had. So they would always have some fighter planes in the Sky. Because Operation Sea lion, the invasion order for the invasion of Britain. The first requirement was air supremacy, because they were terrified of the road crossing the English Channel with the Royal Navy at large. So they had to be able to neutralize the Royal Navy from the air. They couldn't do that without air supremacy. And he was going to deny them air supremacy. Now he needed a trusted associate who would implement that strategy, and that was Park. And park did it to the letter. And people of war gamed Park's decisions over that summer, from June through to October roughly, he made daily decisions about deployment and they never managed to significantly improve on his decisions in terms of trying to do it. He, under intense pressure every day did that. And of course, he was himself a fighter pilot. He'd been in World War I as a fighter pilot and he flew his Hawker Hurricane, ok, one registration around the airfields from day to day, at the end of the day finding out what had happened, what was happening in tactics, what morale was like, what the damage was, etc, so he had that. Anyway, he won the battle in one of those wonderful pieces that only the Brits could do. Lee Mallory then interceded with Churchill to say that Dowding and Park weren't aggressive enough. And so after they'd won the frigging battle and got Dowding fired and park sent off to training command, Right. Anyway, he was sitting in training Command when they realized they had a bit of a problem with Malta. Malta was the key island for trying to stop the Africa Corps being reinforced from, from mainland Italy and was in the way and it was being bombed to hell and back. And so they put park in there to man the air defense, smiling. Albert Kesselring, who ran the Luftwaffe, must have thought he was a very unlucky chap because he managed to lose to park twice because park then beat him in bloody mortar as well. And he was a fighter on his way there. He was being thrown in by a Bristol Beaufighter and they spotted a German warship on their way into Malta and Park insisted, insisted that they press an attack. They were nearly shot down. He was a fighter, he would fight, but. And he understood the men. There were lots of good photographs of him having Christmas lunch with the men and all that sort of thing. He would fly around the airfields and so on. Anyway, again, in typical British style and in something I much admire in his regards, he left at the end of the war, went off to Asia for the end of the war in command, went back to New Zealand, was mayor of Auckland briefly, and then just disappeared into obscurity and was gone. And there was a book by Stephen Bungay, the historian who actually fun enough was a historian who worked in lawyers and insurance, Returned to History, which I thought was the best book on the battle, the Most Dangerous Enemy. And in it he has this wonderful phrase, he says something that's really caught me. And he said Hart was like a wizard in an Arthurian tale. He traveled literally halfway around the world to defend a country which wasn't even his own country. And then having successfully done so, he just disappeared. And he said there is no memorial to him anywhere in the world, neither in England nor a museum. He said, there's a Keith Park Crescent at Biggie Hill Aerodrome. It and I, my father was in the RF and I was a keen flyer. When I was young, I used to fly gliders and planes and helicopters qualified to fly. And I guess being a historian reading Bungay and with that background, I thought I'm gonna do something about it. And so I got the planning permission and I got the statue fabricated and I put up the memorial to him and got the park family involved. Fortunately, the park family supplied some very good members. His great great nephew was a movie guy and his great great niece turned up and pulled the call to unveil it. The, the surviving Battle of Britain pilots all took part in the the campaign and turned up for the events Trump, because getting a statue put up in central London of a white straight war hero is not exactly what you call easy in this day and age.

[William Greene]

Yeah, that's so interesting. So in some ways part of. I mean, obviously there's this extraordinary heroism and his historic role is really important. I mean there was, there was a wonderful quote from one of the vice marshals saying he was the only man who could have lost the war in a day or even in an afternoon. So I mean, his role in actually defending Britain was hugely important. But there's also the aspect of him just being an unsung hero and him being an outsider. And I can see why that would resonate for you as well.

[Terry Smith]

Yeah, it was. I think so. Yeah, I think absolutely. So it's interesting because when I was doing the. You can't memorize sunlight without. So I went to New Zealand. I met the family. We were very nice extended family. So this one I'm planning to do. Do you approve? And so on. And so we, they were all very supportive. They, you know, lobbied parliament in New Zealand. We've got every party in New Zealand to sign a letter going to the mayor of London saying that they wanted this to happen. That was all very good. And we got to the. The unveiling and invited as many of the family to come as could. And we got his great, great NER about the Britain plate. But I said in the build up to it, I, it was interesting. I said, what do you think about inviting the German ceremony? Because I said, in some respects, in a spirit of reconciliation, maybe we should, but I think you should tell me what you want to do. And they said, uncle Keith never forgave them. He. Every day he had to make these decisions to send young men to their deaths. Never left him. Right. The, the. And that comes back to you saying about him being an unsung and an outsider and hero. Yes, all those things. And he made good tactical decisions every day, which worked and under extreme pressure over long periods of time. And every time he knew that he took those decisions, he knew he was sending guys who were 20 years of age, many of them under trained, out to die. And he knew that. And he did it because that was what his job was. But it didn't mean that he did it feeling very cheerful about it sometimes, I imagine.

[William Greene]

Yeah. Such a rich and interesting story. Thanks so much for sharing that with us and thanks for being so generous with your time and your insights. I just really enjoyed spending the last few days deeply immersing myself in the mind of Terry Smith. So thank you. It's been a great pleasure getting to speak with you.

[Terry Smith]

One story to go with. It's about a car, and I think it's a car that exemplifies if you were trying to get a link between cars and investment. There's a video on YouTube which you can look up called How One Man Made the Perfect Car. I commend it to you. And are you familiar with the McLaren F1?

[William Greene]

I mean, somewhat. I know that you have one.

[Terry Smith]

Okay. What happened was Gordon Murray, who was the man behind the wild success of McLaren under Ayrton Senna and so on, literally decided one day, actually at Geneva Airport, I think, with Ron Dennis and so on, they'd never made a road car before. They're going to make a road car. And he decided that the basis for making it was they were going to make the best road car that ever had been built, and I would suggest ever will be built, given the way that things have moved on since then. And I think he achieved it. He made a car car, which is extraordinary. I mean, it's an. I've got a 1995 example. It does 243 miles per hour. This is a, this is a 30 year old car, right? Okay. It's extraordinary. And if you watch that, one of the things you'll find striking is he made a very fast car. It's also a very safe car because it's carbon fiber monocoque and so on, but. And it's actually a practical car. It's got three seats and it's got luggage. You can even get. It comes with a golf bag, you can get your golf clubs in it. I don't play golf. But he never took any interest in how fast it was going to go. And if you remember my owner's manual, one of the things I mention in there is obliquity. Not aiming for the, the, the sort of objective I say. I've been fortunate to meet an awful lot of very rich people. I can't think of one of them who got very rich trying to make money. They tried to make things and services. They tried to do things better than other people. They had an idea or an impetus to do things better than other people. And I think Henry Ford didn't want to make money. He wanted to make cars and he wanted to make them better than other people made cars. And that's what got him to where he went. And I think that that McLaren F1 is a perfect example of obliterate. It's a fantastically fast car. And when you think that that was 30 years ago making that thing. And by all accounts Corbet Murray never once ask them to do any kind of calculation about how fast the car would go. It went fast as a result of how he designed and built it, not as an aim.

[William Greene]

So in a way, I guess to round this off, it all goes back to the slogan on the ice cream truck. It's quality that counts.

[Terry Smith]

I think it does. I think it is. And look, my view of that car is there will never be another car like it in the history of cars. I mean the idea that you have this thing that does 243 miles an hour, it has no power brakes, it has no power steering, steering, it has no anti lock brakes, it has no four wheel drive. The only thing that that car has is you and the car, that's it. Which is how Rowan Atkinson's car, Ralph Lauren's car, Elon Musk's car and Bernard Preshrider's car all got crashed. The car is more capable than the person sitting in the seat most of the time. Huh.

[William Greene]

Really interesting. It's been such a delight chatting with you.

[Terry Smith]

Goes back to the Magnum Force quote.

[William Greene]

Yeah, you could sit in that car.

[Terry Smith]

And drive it but you should be aware of something.

[William Greene]

Yeah, the man's got to know his limitations.

[Terry Smith]

I hope that is what you wanted or something like what you wanted.

[William Greene]

Oh, it's been a great pleasure and one of these days I'll make it out to Mauritius and hopefully I'll actually see what it's like there.

[Terry Smith]

Come without letting us know. We make you very welcome and tell your mother that my check is going off in 16 days time and she would be shocked, shocked. Rather like Inspector Renault in Gas Blanca at the number on it.

[William Greene]

It excellent.

[Terry Smith]

I certainly am.

[William Greene]

She'll be very happy to hear it. Terry, lovely meeting you. A real pleasure. All right, take care. All right folks, thanks so much for listening to this conversation with the remarkable Terry Smith. If you'd like to learn more from Terry, you may want to check out the website of his investment firm, which you can find at www.funsmith.co.uk. he's also written a couple of books, including an anthology of his writings from 2010 to 2020. It's titled Investing for Growth and it's subtitled how to Make Money by Only Buying the Best Companies in the World. I'll be back very soon with some more terrific guests, including the return of two of my all time favourites, author Pico Ayer and hedge fund manager Christopher Begg. In the meantime, please feel free to follow me on xilliamgreen72 or connect with me on LinkedIn. And as always, do let me know how you're enjoying the podcast. It's always a pleasure to hear from you. Until next time, take good care and stay well.

[Terry Smith]

Thank you for listening to tip. Make sure to follow Richer, wiser, happier on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is.

[William Greene]

For entertainment purposes only.

[Terry Smith]

Before making any decision, consult a problem professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.