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

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.

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)

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)

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)

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)

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)

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)

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)

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)

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)

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)

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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