Great recap. What I like about Smith’s lens is how it bridges growth and dividends — high ROCE businesses compound, but that same efficiency also funds durable payouts. Quality drives both.
I love Smith's mantra: buy quality, don't overpay; do nothing.
The "don't overpay" is, I feel, the most important - don't wait for a bargain, quality rarely comes cheap. But equally, don't pay any price - quality companies can be susceptible to hype and you can pay too much and then not see capital gains as the hype fades and multiples compress. Know what you are willing to pay and stick to it.
Much as I love Smith, I do think his shareholders deserve a better explanation for under-performance over the last few years than just "because we don't own NVDA." NVDA isn't the only reason the S&P index has gone up, and actually, some of the European indices are / were wiping the floor with America earlier this year.
His decision to drop Diageo when he did looks inspired in hindsight, although he held on to Brown Forman, a position he has since exited (along with PepsiCo). It's been a rough few years, but his track record is still excellent.
Excellent and very thoughtful points, my friend. There’s not much I can add.
I personally agree with the concerns about the recent underperformance. Of course, every fund goes through periods like this, but some things deserve a clearer explanation.
If not owning NVIDIA has been the main reason for underperformance over the past 3-4 years, then maybe he should have owned NVIDIA, don’t you think?
Rule 1 “Warren Buffett delivered the famous line, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," in his 1989 letter to Berkshire Hathaway shareholders. “
At this point, we’re still talking about the old Buffett - the one who followed Graham’s philosophy to the letter. His targets evolved a bit after that.
Always a good reminder. I think there are two added benefits to owning great businesses: (1) when markets get choppy, which is inevitable, it is easier to weather the storm knowing you own a great business, and (2) in those periods when the stock is down, often these businesses will repurchase shares with the cash generated, so in some ways I root for lower prices! This being said, the challenge with this approach is and always has been that these businesses often trade at significant premiums to the market on a multiple basis (usually 33% to 100% higher) and so there is significant risk of having paid too much if growth slows or the moat starts eroding.
I completely agree with your last point, my friend. You can’t arrive at the party too late. There still needs to be a process of moat recognition by the market for this strategy to work - and maybe it only worked so well for a certain period of time. That might not be the case going forward.
Great post. I wonder about ignoring the macro though. There are so many macro forces that drive the economy today. How does the value investor think about gold and bitcoin?
Warren Buffett, the greatest value investor of all time, has publicly addressed both assets during Berkshire meetings:
1. Bitcoin: it may have some value, but it’s not a cash-generating asset. Therefore, it doesn’t belong in the group of investable assets. “It only has value if someone is willing to pay more for it than I did.”
2. Gold: it can be seen as a store of value, but Buffett prefers to invest in companies that benefit from its price appreciation, such as gold miners and other players in the supply chain, rather than the metal itself.
Does the value investor think there is value in bitcoin? Does the value investor think there is value in gold, even as a hedge? If so, the value investor would presumably choose to buy. If not, the value investor would presumably choose not to buy. Do you have to consider the macro or can you assess each investment on its own merits?
Great recap. What I like about Smith’s lens is how it bridges growth and dividends — high ROCE businesses compound, but that same efficiency also funds durable payouts. Quality drives both.
Exaclty, Phaetrix!!
I love Smith's mantra: buy quality, don't overpay; do nothing.
The "don't overpay" is, I feel, the most important - don't wait for a bargain, quality rarely comes cheap. But equally, don't pay any price - quality companies can be susceptible to hype and you can pay too much and then not see capital gains as the hype fades and multiples compress. Know what you are willing to pay and stick to it.
Much as I love Smith, I do think his shareholders deserve a better explanation for under-performance over the last few years than just "because we don't own NVDA." NVDA isn't the only reason the S&P index has gone up, and actually, some of the European indices are / were wiping the floor with America earlier this year.
His decision to drop Diageo when he did looks inspired in hindsight, although he held on to Brown Forman, a position he has since exited (along with PepsiCo). It's been a rough few years, but his track record is still excellent.
Excellent and very thoughtful points, my friend. There’s not much I can add.
I personally agree with the concerns about the recent underperformance. Of course, every fund goes through periods like this, but some things deserve a clearer explanation.
If not owning NVIDIA has been the main reason for underperformance over the past 3-4 years, then maybe he should have owned NVIDIA, don’t you think?
Rule 1 “Warren Buffett delivered the famous line, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," in his 1989 letter to Berkshire Hathaway shareholders. “
Perfect, Martin!
At this point, we’re still talking about the old Buffett - the one who followed Graham’s philosophy to the letter. His targets evolved a bit after that.
Always a good reminder. I think there are two added benefits to owning great businesses: (1) when markets get choppy, which is inevitable, it is easier to weather the storm knowing you own a great business, and (2) in those periods when the stock is down, often these businesses will repurchase shares with the cash generated, so in some ways I root for lower prices! This being said, the challenge with this approach is and always has been that these businesses often trade at significant premiums to the market on a multiple basis (usually 33% to 100% higher) and so there is significant risk of having paid too much if growth slows or the moat starts eroding.
I completely agree with your last point, my friend. You can’t arrive at the party too late. There still needs to be a process of moat recognition by the market for this strategy to work - and maybe it only worked so well for a certain period of time. That might not be the case going forward.
That’s the beauty of the market!!!
Great post. I wonder about ignoring the macro though. There are so many macro forces that drive the economy today. How does the value investor think about gold and bitcoin?
Warren Buffett, the greatest value investor of all time, has publicly addressed both assets during Berkshire meetings:
1. Bitcoin: it may have some value, but it’s not a cash-generating asset. Therefore, it doesn’t belong in the group of investable assets. “It only has value if someone is willing to pay more for it than I did.”
2. Gold: it can be seen as a store of value, but Buffett prefers to invest in companies that benefit from its price appreciation, such as gold miners and other players in the supply chain, rather than the metal itself.
Does the value investor think there is value in bitcoin? Does the value investor think there is value in gold, even as a hedge? If so, the value investor would presumably choose to buy. If not, the value investor would presumably choose not to buy. Do you have to consider the macro or can you assess each investment on its own merits?