1. Great businesses rarely go bad overnight

Despite its popularity, Fundsmith Equity’s recent performance hasn’t been particularly great. Based on its most recent factsheet, Terry Smith’s flagship fund fell 13.2% in the first two months of the year. That’s a lot worse than its benchmark (the MSCI World Index) which fell ‘just’ 6.8%.

Does this concern me? Not really. As a committed Fool, I’m far more interested in returns over the long term. Here, Fundsmith has excelled. It’s returned 482% from inception (2010) to the end of February.

Smith continues to attribute these gains to owning the right companies. To drive the point home, he reflected this week that he and colleagues were ‘business-pickers’ rather than stockpickers.

The reason for this, Smith said, is that “returns are persistent“. Great companies — those that have barriers to entry — tend to stay great, even if they cost more to acquire. Therefore, he sees little point in getting involved in the rotation to lower-quality ‘value’ stocks we’ve seen in 2022 so far.

As a quality growth investor myself, I can’t help but agree.

2. Buy the dip

At a human level, the current situation in Ukraine is clearly appalling. Seen purely from an investment perspective, however, Terry Smith believes we should look at the situation “historically“. Smith used the annual meeting to point out that the past shows that buying shares during times of military conflict usually pays off.

As evidence, Smith picked out a number of examples, including the Gulf War. In August 1990, the S&P 500 hit a low not long afterward before recovering strongly. The same thing happened earlier in the century during the Six Day War in 1967 and also during the Korean War. In Smith’s words, “The sweep of history suggests to us that buying on the cannon is the right thing [to do]“. 

There are exceptions, of course. Smith’s noted the similarities between the Ukraine/Russia conflict and the Yom Kippur war in the 1970s. The latter happened at a time of inflation and soaring oil prices. Stocks went down and continued falling. Clearly, no one knows if that may happen again. However, I’ll certainly bear it in mind. 

Speaking of rising costs…

3. Own stocks that have pricing power

Inflation in the UK hit its highest level in 30 years back in February. That’s enough to rattle the most sanguine of investors. For Terry Smith, however, there’s a way of tackling rising prices. It involves owning businesses that have high gross margins.

Gross margin is simply the difference between how much it costs to make something compared to how much it gets sold for. So, if a product costs 50p to produce and it’s sold for £1, the gross margin is 50%. 

As Smith succinctly puts it, gross margin is “the single biggest defence” against inflation. It won’t come as a surprise then that the Fundsmith portfolio owns companies with higher than average gross margins.

Knowing this, I’m satisfied that Terry Smith is probably doing a good job of protecting my capital. I have no issue remaining invested.  

The post 3 takeaways from Fundsmith’s annual shareholders meeting appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here are three take-home messages I’ve spotlighted from his latest letter to shareholders. 

Running winners

The real Warren Buffett once quipped that his ideal holding period was ‘forever‘. While Smith hasn’t gone this far, he has frequently made it very clear that part of Fundsmith’s strategy is not to trade very often and run its winning picks.

He made this point again last month:” Someone once said that no one ever got poor by taking profits. This may be true but I doubt they got very rich by this approach either.“

As an illustration of his commitment to not jumping in and out of stocks on a whim, Smith still holds seven companies that were originally bought when the fund kicked off in 2010. That might not seem like many. However, his fund is highly-concentrated, only holding between 20 and 30 shares at any one time.

A quick check reveals that I’m a lot worse at running profits than Smith. Positively, I am getting better, having held Somero Enterprises, IG Group and Greggs for a few years now. I’ve no intention of selling up either!

Buy quality

Buffett famously bought into very cheap stocks early in his career and made a killing. That said, his investment strategy would later change to buying only the highest-quality companies he could find. These had some kind of ‘moat’, or competitive advantage, over rivals. This may take the form of a very strong brand or enormous marketing budget or control over distribution. Think Coca-Cola. 

Smith adopts a similar approach, name-checking Buffett in January’s letter. In his view, “the biggest problem with any investment in low-quality businesses is that on the whole, the return characteristics of businesses persist.” 

This is why Fundsmith’s leader vehemently refuses to temporarily invest in stocks that may benefit the most from the post-pandemic recovery in economic activity. So no IAG or easyJet for Smith.

Having owned one, two or seven real stinkers in my time, I’m now a fully signed-up member of ‘Team Quality’. In addition to my stake in Fundsmith Equity, I’ve been topping up my holding of Smithson — the small/mid-cap-focused investment trust that also adopts Smith’s strategy.  

Don’t obsess over price

Having highlighted the importance of buying good businesses, Smith then turns his attention to the issue of valuation. In his view, “highly rated does not equate to expensive any more than lowly rated equates to cheap.“

For me, this has links to Buffett’s suggestion that it is better to buy a great company at a reasonable price than the other way around. 

Not obsessing over the price I’m required to pay for a stock has taken me years of practice. I’ve lost count of the number of times I’ve waited for the prices of great stocks to ‘correct’ only for this to never happen. More often than not, a top growth company’s valuation has remained fairly constant while its share price has soared. 

However, I do think that I’m steadily getting better at it. In fact, there’s one FTSE 100 stock that I’d be very happy to buy right now, despite still being very highly rated. 

The post I’m listening to ‘Britain’s Warren Buffett’ and buying these stocks appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Fundsmith Equity, Smithson Investment Trust, Greggs, IG Group and Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Fundsmith portfolio manager Terry Smith is often called ‘Britain’s Warren Buffett’ and it’s not hard to see why. Since Smith launched his fund back in 2010, he’s turned £10,000 of investor money into more than £60,000.

Here I’m going to examine Smith’s current portfolio and discuss where he’s investing in 2022. Let’s take a look at where this top money manager is putting capital to work right now.

Where ‘Britain’s Warren Buffett’ is invested in 2022

Fundsmith’s latest factsheet reveals Smith is currently invested in three main areas:

• Technology and Communication Services

• Healthcare

• Consumer Staples and Consumer Discretionary

Combined, these areas of the market represented about 98% of the Fundsmith portfolio at the end of January.

Let’s now look at some of the stocks he has invested in within these sectors. 

Technology and Communication Services

Within Technology and Communication Services, two of Smith’s largest holdings are BigTech companies Microsoft and Meta Platforms (Facebook). At the end of January, these two were in his top 10 holdings. But these aren’t the only BigTech stocks Smith owns. Last year, he bought Amazon and he’s just bought Alphabet (Google) for his portfolio. Clearly, Smith is bullish on BigTech.

Smith has exposure to other areas of technology though. He also has exposure to the FinTech market through PayPal and Visa, as well as the software industry through smaller tech companies such as Intuit.

Healthcare

In the healthcare space, Smith has exposure to a diverse mix of companies. One of his largest holdings here is Novo Nordisk, which specialises in diabetes products. Another large holding is Idexx Laboratories, which specialises in pet healthcare. Both of these stocks were also in his top 10 holdings at the end of January.

Other healthcare holdings include Stryker, which makes medical equipment, Coloplast, which specialises in continence care and wound care, and Johnson & Johnson, which is a diversified healthcare company.

Consumer goods

Within the consumer goods space, Smith appears to have taken a ‘barbell’ approach. On one hand, he owns companies that make everyday essentials such as Unilever, McCormick, and Church & Dwight, makers food and cleaning products. On the other hand, he owns a number of companies that make premium/luxury products such as Diageo, LVMH, L’Oréal, and Estée Lauder.

My take on Smith’s holdings

As a Fundsmith investor, I like this mix of investments. I like the fact that Smith has plenty of exposure to the tech sector, given where the world is heading.

I also like the fact that Smith has plenty of exposure to healthcare. With the global population ageing, demand here is likely to rise in the years ahead. Healthcare is also quite defensive. 

Finally, I like the barbell approach to the consumer goods space. Companies like Unilever and Church & Dwight tend to be recession-proof, due to the fact they make everyday essentials. Meanwhile, companies like LVMH and Estée Lauder appear well-placed to benefit from rising wealth across the world.

Overall, I think Smith has a nice mix of investments for 2022. So I’m very comfortable holding the Fundsmith Equity fund in my portfolio right now.

The post Here’s where ‘Britain’s Warren Buffett’ is investing in 2022 appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Alphabet (C shares), Amazon, Diageo, Idexx Laboratories, Visa, PayPal, Intuit, Microsoft, and Unilever and has a position in Fundsmith. The Motley Fool UK has recommended Alphabet (A shares), Amazon, PayPal, Diageo, Idexx Laboratories, Microsoft, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As scary as such drops can be, I’ve been taking the opportunity to load up on a fund whose performance prior to the start of 2022 had been excellent.

Solid gains

Managed by Stephen Yiu, LF Blue Whale Growth returned 20.8% in 2021, according to its most recent fact sheet.  That’s a better return than its benchmark. The IA Global Sector average was 18%. All told, the fund has more than doubled investors’ money in a little over four years.

One reason for this stellar performance is the number of tech-related stocks owned by Blue Whale. These include Microsoft, Adobe and Alphabet. Another relates to just how concentrated the fund is.

Blue Whale’s portfolio is made up of just 27 holdings, almost 73% of which are US-listed firms. You probably don’t need me to tell you any strategy that embraced being overweight in stocks from across the pond paid off handsomely in 2021.

Unfortunately, the first month of 2022 has taken a rather large chunk out of last year’s gains. So the question to ask is whether the current market crash is a great opportunity to buy more. 

New bear market?

On the one hand, the recent rout in tech stocks could continue if the Federal Reserve keeps giving out signs that it’s ready to shift its monetary policy. That’s potentially problematic for Blue Whale’s portfolio, given how concentrated (and potentially more volatile) it is.

Regardless of what the Fed does, it’s possible traders will move more of their money into value stocks hit most by the pandemic anyway. Rising tensions in between Ukraine and Russia, while seemingly not all that relevant to the performance of a US-focused fund, could also push investors to the exit as a cautionary measure.

Is this the dawn of a new bear market? It’s entirely possible.

Back quality

Of course, there are reasons to stay bullish too. One argument is that all this will prove transitory. With so many US stocks now at least in correction territory, the worst could already be over.  And when we get big sell-offs, the recovery can be just as swift. Thanks to inflation, staying in cash is hardly appealing. 

Perhaps the biggest motivation for feeding my money into Blue Whale specifically is its attitude to stock selection. Like rival Fundsmith Equity, Yiu looks for high-quality shares. He also avoids those “at the mercy of cyclical economic gravity“. The fund has a strict approach to valuation too. This means investors don’t need to worry about owning unprofitable story stocks.

Another potential tailwind is Blue Whale’s size. As a relatively young fund with ‘just’ £1bn in assets, Yiu has considerable flexibility in what he is able to buy. I’d be amazed if he hasn’t put some money to work in recent days.

Long-term focus

The reversal in the fund’s fortunes is a reminder of how quickly sentiment can change. So long as I adopt a long-term mentality (not dissimilar to Yiu) while also maintaining a degree of diversification, I’m confident that increasing my investment here will pay off. I’m still backing Blue Whale.

The post 1 fund I’ve been buying during the market crash appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in LF Blue Whale Growth and Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Great start

Don’t mistake me for some kind of stock market masochist. No one actually enjoys seeing the value of the biggest holding in their Self-Invested Personal Pension (SIPP) fall by a double-digit percentage. In fact, Smithson’s decline has the potential to hurt more than most. given that investors like me have been spoiled by performance for the majority of its existence. 

The small- and mid-cap-focused fund was launched back in October 2018. No doubt helped by its link to star money manager Terry Smith (Smithson comes from the Fundsmith stable and adopts the same strategy), investors were queueing up to throw their money in the ring. And up until recently, this confidence has been richly rewarded. 

From inception to the end of 2021, the trust delivered an annualised gain of 24.5%. That compares very favourably to the 13% achieved by its benchmark — the MSCI World SMID Index. It also more than justified the 0.9% annual management charge, in my opinion.

What’s gone wrong?

The recent wobble may be due to a number of things. First, there’s the issue of valuation. As a quality-focused fund, Smithson doesn’t look for cheap stocks.

Like its big brother, Fundsmith Equity, it targets companies with valuable brands and huge market shares that generate consistently high returns on the money they put to work. This includes property website Rightmove, mixer-drinks supplier Fevertree Drinks and Domino’s Pizza Group. Unfortunately, such businesses are rarely without friends and priced accordingly. That’s fine when markets are behaving themselves. Less so when investors are fretting over earlier-than-expected interest rate rises.

The fact that almost half of Smithson’s portfolio comes from the IT sector probably doesn’t help either. By sharp contrast to last year, companies in this space have now fallen out of favour. Thankfully, Smithson makes a point of avoiding the unprofitable fluff whose share prices are now falling faster than Boris Johnson’s approval ratings. Nevertheless, investors seem to be throwing the baby out with the bathwater.

The aforementioned performance of its shares may have also seen a few profit-takers emerge from the shadows. After all, Smithson’s market-cap had grown to £3.5bn by the end of December. That’s already pretty large for a trust that is designed to invest in companies lower down the food chain. In fact, the median size of business in the portfolio is actually £10bn! Moreover, manager Simon Barnard’s investment strategy is still to be comprehensively tested and some people may be getting out while the going’s good.

Loading up for the recovery

While I wouldn’t mind being proven wrong, I certainly don’t expect Smithson’s annualised return to remain at the percentage it stood at in December. As a fuss-free way of accessing high-quality businesses from around the developed world however, it still strikes me as a perfect core holding.

I believe that good businesses tend to outlive bad ones. I also regard myself as a long-term growth investor. As such, it makes sense for me not to panic about Smithson’s sticky patch just yet.

The post Top investment trust Smithson is flagging and I’m buying appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Smithson Investment Trust and Fundsmith Equity. The Motley Fool UK has recommended Dominos Pizza, Fevertree Drinks, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Having delivered an annual return of over 18% since Fundsmith Equity was launched in 2010, Terry Smith is widely regarded as one of the UK’s finest fund managers.  I think I can benefit from his approach, especially if I have a limited amount of cash at my disposal.

Buy quality

£1,000 is a great sum to begin investing. That said, any mistakes I make can have a far more significant impact than if I had a larger amount at my disposal to buy a greater number of stocks. For this reason, I’d be tempted to prioritise parking my cash with established businesses of the sort favoured by Fundsmith’s manager.

First and foremost, Terry Smith looks for quality. For this reason, he steers clear of what may be regarded as ‘value’ stocks. In Smith’s view, the vast majority of lowly-priced companies tend to be cheap for a reason. Instead, he looks for blue-chip companies that will “shoot the lights out” by generating high returns on the money they invest in themselves. They also tend to have a competitive advantage of some kind and are resilient to change. Think tech titan Microsoft and payments firm Paypal.

By adopting this approach, Smith has generated a return of 534% in 11 years according to Fundsmith’s latest factsheet. Put another way, my £1,000 will have turned into a little over £6,000. This shows that I don’t need to take outrageous risks to outperform the market.

No trading

Terry Smith is about as far removed from a trader as you can get, describing Fundsmith’s transaction frequency as a ‘black armband’ day for the brokerage industry. In other words, Smith buys and sells very irregularly. Theoretically, this should mean a better return for holders because Fundsmith pays out less in fees.

Of course, this approach isn’t new. US investing legend Warren Buffett has adopted the same ‘buy and hold’ mentality for decades. Armed with £1,000 to invest, I’d try to do the same.

In addition to not ramping up costs unnecessarily, I’d also consider actively saving money where I can. This could involve taking advantage of regular investment plans offered by brokers. These invest a proportion of my cash at a fixed date every month at a far lower cost than I’d pay for buying on the fly. Depending on the provider, there might not be any fees at all! 

No market timing

A final thing that Terry Smith has taught me is the folly of trying to time the markets. The fact is, nobody knows what will happen in the world next. Anyone waiting for a crash in arguably-overvalued US tech stocks in 2021, for example, will have been disappointed. Bar the odd wobble, their value has only increased.

Smith encourages investors to recognise that, over time, “it’s what the companies do that matters, not what you do“. Accordingly, he urges us to focus more on the potential long-term returns of staying invested in great businesses rather than speculating about the exact moment to buy or sell them.

This is not to say that he doesn’t take advantage of opportunities when they do appear. No investor wants to pay more than they have to. But staying on the sidelines for too long is dangerous, especially if inflation is galloping upwards. It’s better to get started than never start at all.

The post What can Fundsmith’s Terry Smith teach an investor with £1,000? appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers owns shares of Fundsmith Equity. The Motley Fool UK has recommended Microsoft and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I didn’t start investing until my late 20s. What followed was a steep learning curve, albeit helped by following the thoughts and dealings of some of the best money managers in the business. One in particular — Fundsmith Equity‘s Terry Smith — has probably served a bigger role in my education than any other.

Terry Smith on quality

Terry Smith looks for winners. In practice, this means surveying the market for companies that already possess a strong/leading share of their market and can be depended on to protect it. This is why many of the stocks that make up the Fundsmith Equity portfolio have been around for many decades. Past performance might not be a guide to future returns but it can help when looking for resilient businesses that have consistently managed to grow revenue and profit.

These days, I’ve a penchant for smaller companies flying under the radar. That said, I’m still applying a quality criterion like Terry Smith. Aside from the characteristics already mentioned, I’m on the hunt for businesses generating high returns on capital and big margins. This means I now steer clear of capital-intensive businesses like airlines (which Smith labels “machines for losing money“). 

Like Smith, it also means I’m very selective about what makes it into my ISA portfolio these days. Only 29 holdings make up Fundsmith Equity right now. So long as I’ve picked well, operating a concentrated portfolio can turbocharge my returns. Of course, the opposite is also possible! 

Price matters…to a point

‘Buy low, sell high’: that’s the rule that every investor tacitly learns on entering the market.

Terry Smith doesn’t go against the grain here. However, the UK fund manager has frequently pointed out that focusing too much on valuation can prove detrimental to returns. For Smith, a stock’s price is of secondary importance to how good a company is (see above). A cheap stock can always stay cheap while a more expensive stock can go on increasing in value. In other words, contrarians/value hunters don’t always prosper. This is why Smith picked up stocks like Nike and Starbucks in the 2020 market crash rather than buying ‘bargain’ travel stocks. 

As an investor, I’ve come around to the idea that simply trying not to overpay is preferable to buying what’s cheap. This is also why I’m wary of unprofitable, flavour-of-the-month companies such as cybersecurity firm Darktrace even when its prospects look undoubtedly solid. So long as I’m paying a not unreasonable price, I know the risk/reward should theoretically be (more) in my favour.

No gimmicks

A final thing I like about Smith is his no-nonsense approach. He picks stocks that he expects to generate a better return for holders than the market. He doesn’t short (bet against) any companies. Nor does he use derivatives or get involved in any creative financial practices like some managers might.

Most importantly, Smith has taught me that investing is as much about what you don’t do as what you do. In practice, this means buying stocks with the intention of holding for years rather than attempting to ‘time the market’.

Not only is predicting the short-term movement of a share price very difficult, it only guarantees fees. As Smith frequently highlights, Fundsmith has very low turnover, meaning that investors ultimately get to keep more of the profits made.

The post No savings at 30? Here’s how I’m using Terry Smith’s strategy to build wealth appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Fundsmith’s latest factsheet reveals that, in October, Smith made two key moves for his portfolio. Here’s a look at a stock he sold, and one he bought.

Terry Smith just sold this FTSE 100 stock

The factsheet reveals that last month, Smith sold his position in FTSE 100 stock InterContinental Hotels Group (LSE: IHG). The hospitality giant owns a range of hotel brands including Holiday Inn, Regent, and Kimpton.

I’m not particularly surprised by this move. IHG is a great business with a very profitable business model. However, to my mind, the recent share price gains here and valuation don’t really match the fundamentals.

You see, IHG’s share price has had a huge bounce since its Covid-19 lows and, currently, it’s not that far off its all-time highs. That doesn’t really make a lot of sense, to my mind, given that travel is still well below 2019 levels. In 2019, IHG posted revenue of $4.6bn. However, this year and next, analysts forecast revenue of $1.5bn and $1.8bn respectively.

As for the valuation, IHG currently trades at 57 times this year’s estimated earnings and 28 times next year’s forecast earnings. These valuations are quite high, given that the travel industry isn’t likely to be firing on all cylinders for several years.

So it looks as if Smith has simply taken advantage of the recent share price rise here. With the stock not far off it’s all-time highs, I imagine he sees better opportunities.

If I owned IHG stock in my portfolio and was sitting on a decent gains, I’d consider taking some profits off the table right now as well.

Fundsmith just bought Amazon stock

And the stock Smith bought during October? That was Amazon (NASDAQ: AMZN), a stock he’s had his eye on for a while and bought for his own portfolio a few months ago. Now however, he’s purchased a position for his flagship fund.

This is very much a classic Smith move. We know he likes high-quality businesses that have strong competitive advantages. However, he also likes to buy these companies when they’re experiencing short-term difficulties because this allows him to pick them up cheaper. “You rarely get to purchase high-quality businesses at cheap prices unless there is a ‘glitch’ which provides an opportunity to do so,” wrote Smith in his 2020 annual letter to investors.

Amazon is one of the world’s most dominant companies. And in the years ahead, it’s likely to get much bigger as the e-commerce and cloud computing industries grow. However, right now, it’s experiencing a bit of a glitch in that higher costs are hitting profits in its e-commerce division. And this has hit the share price.

Clearly, Smith is looking beyond these short-term challenges and focusing on the long-term growth story. I think that’s the right move as I don’t expect the higher costs to last forever (automation will help ease costs in the long run).

I’ll point out that I’ve actually been buying Amazon stock for my own portfolio in recent months. I believe the growth potential here is significant.

The post ‘Britain’s Warren Buffett’ just made these two moves appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Amazon and has a position in Fundsmith. The Motley Fool UK has recommended Amazon and InterContinental Hotels Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why buy Amazon stock now?

In many ways, the purchase of Amazon can be seen as an example of Smith sticking to his knitting. His £27bn-cap, highly-concentrated fund is founded on a clear strategy of buying quality stocks trading at reasonable prices, and then doing nothing.

Instead of looking for blue-sky shares, Smith buys established ‘winners’ such as market leaders Microsoft, L’Oréal and Philip Morris.

Investors might argue that Amazon’s dominance of online shopping earns it a place at Smith’s table. I’m not so sure. Actually, he’s never been a fan of its sprawling, barely profitable e-commerce division. That said, he has long admired the US giant’s far-more-lucrative Web Services arm.

And now that the latter brings in more revenue than the former, it would seem Smith is more inclined to get involved.

The celebrated stock-picker clearly regards Amazon as also being reasonably valued for the growth on offer. What we do know for sure is that its performance has not been as stellar as other tech-related mega shares in the past 12 months. A 10% rise since last November is dwarfed by Alphabet‘s 77% climb. Tesla is now up 200% over the same time period. 

Threat of regulation

The addition of Amazon stock to Fundsmith’s portfolio should not be taken as an indication that the company is now a slam-dunk investment. In fact, I can think of a few reasons why this is actually a brave call by Smith.

One thing that Amazon and other tech titans are wary of is the potential for increased regulation. Recent headlines surrounding Facebook (now Meta Platforms) have only served to fan the flames that the US tech giants wield far too much power. There’s also a possibility that galloping inflation could push consumers and clients to tighten their belts for a while. 

Another thing worth pondering is Fundsmith Equity’s sector split. Amazon isn’t currently a top 10 holding. Even so, Smith’s purchase now means that technology shares take up almost 29% of the portfolio.

Potentially even more concerning is the fact that almost three-quarters of holdings are based across the pond. According to the often-cited ‘Shiller ratio’, US stocks have only been more expensive on one occasion in history. This was just prior to the dotcom crash at the turn of the millenium.

I’ve gradually learned to expect corrections and crashes as an inevitable drawback of growing my wealth. This is the Foolish way, after all. That said, I’m not sure I’d be dramatically increasing my US exposure right now, even if Smith is no fan of market timing himself. 

Great track record

It remains to be seen whether Amazon stock will do the business for Fundsmith Equity holders like me. However, it’s hard to criticise Smith’s track record to date. Since launching 11 years ago, the fund has delivered annualised gains of 18.3%.

Regardless of whether I agree with his every selection, that sort of performance makes paying up for Smith’s skills and experience worth the risk, in my opinion. I’m happy to continue holding.

The post Terry Smith finally buys Amazon stock for Fundsmith Equity! Here’s why appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Paul Summers owns shares in Fundmsith Equity.The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., Microsoft, and Tesla. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Becoming better at anything usually involves needing to reflect on our errors. Stock picking (and holding) is no different. Here are three investing mistakes that have held me back over the years and how I’ve tried to overcome them. 

Mistake #1: Having too little/too much patience

Unless I’m queueing for petrol, I like to think of myself as a patient soul. However, there have been times over my investing journey where I’ve been unable to sit on my hands. This has usually involved snatching at profits ( FTSE 100 stock Halma springs to mind) or selling on a bit of temporary bad news (step forward online casino operator 888). Just to muddy the waters somewhat, I’ve also been too patient at times and waited for a recovery that never arrives. Sometimes it’s better to get out, stay out, and take the loss.

There’s no perfect solution here. However, simply getting into the habit of reflecting on exactly why I’m wanting to act/not act is a start. Keeping a journal and revisiting my reasons for buying a particular stock also helps. Has a company’s strategy changed? Is this now a better business? If yes, why sell?

Mistake #2: It’s all about the price

The ‘buy low, sell high’ mantra persists because it’s patently good advice. However, investing mistakes arise when I tend to put too much weight into categorising something as ‘cheap’ or ‘expensive’. An expensive stock becomes a bargain if the underlying business grows massively. A cheap share can become cheaper if the underlying business is failing.

Now, let’s not get silly here. I’m not suggesting a stock trading on a P/E of 20 is somehow cheaper than one trading on a P/E of 10. My point is simply to look beyond this basic metric and ask whether the price is fair relative to what I’d be getting for it.

Does the company consistently deliver great returns on capital? Is it unfairly valued compared to sub-standard rivals? Does it have the finances to withstand a stock market crash? If so, I’ve likely found a good business worth paying more for. 

Owners of Fundsmith Equity will know that Terry Smith always puts quality ahead of price when picking stocks. To date, this has enhanced rather than impeded his returns.

Mistake#3: Listening to the noise

It’s remarkably easy to assume that the more information I gather about a stock, the greater the edge I have over my peers.

This tactic isn’t necessarily irrational. Finding a promising company that’s flying under many investors’ radars can sometimes generate incredible returns. Think Argo Blockchain from December 2020 to Feburary 2021. 

That said, any information-grabbing exercise must always consider the quality of the source. Back in the day, for example, I’d pay attention to forums and social media sites like Twitter. There would be the odd useful nugget among the dross, but the signal-to-noise trade-off was invariably poor. 

These days, my approach is far more focused and reflects my limited time. My first port of call is always the London Stock Exchange’s news page. I’ll also listen to podcasts or audiobooks from/about proven investors (William Green’s ‘Richer, Wiser, Happier’ is highly recommended).

Again, this won’t guarantee great returns. Even the best are still susceptible to investing mistakes. Nevertheless, standing on the shoulders of identifiable giants rather than unverifiable online personas sounds far less risky.

The post 3 costly investing mistakes to avoid appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has recommended Halma. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.