Terry Smith: Focus On Fundamentals, Forget Macro

In his latest Fundsmith semi-annual letter, Terry Smith reminds investors to focus on fundamentals and forget macro. Here’s an excerpt from the letter:

Smith: To sum up, conditions are tougher and our companies are mostly having to cope with slower revenue growth and/or higher input costs.

However, that’s what happens from time to time so we are mostly sanguine about it. We have a few more worries as a result but not a wholesale concern about what is happening.

Turning from company fundamentals to the macro environment, what level of interest rates will be required to tame inflation? We don’t know. Will there be a recession? Of course, but we have no idea when.

What will happen in Ukraine? We haven’t a clue. Will China take action over Taiwan and how will the United States respond? We have no view. Even if we had we are not sure how markets would react.

The information available is never enough to guarantee the next outcome — a point that becomes clear quickly whether you are parsing central-bank minutes or playing hands on a poker app. We have long preferred to get the process right and let compounding take care of the rest, rather than stake performance on the direction of events we cannot influence.

Fortunately, it continues to be the case that we do not invest on the basis of our predictions about macroeconomics and geopolitics.

Whilst we await the outcome of these economic and geopolitical conundrums we will seek to continue to do what we set out to do.

Which is to assemble a portfolio of high-quality companies and hold onto them so that their inherent ability to compound in value will determine how we perform over the long term.

You can read the entire letter here:

Fundsmith Semi-Annual Letter 2023