Investing for Growth: How to Make Money by Only Buying the Best Companies in the World

by Terry Smith

The fact, as Warren Buffett has acknowledged, is that growth is a component of valuation. Growth can enhance or diminish the value of a company – growing a business with inadequate returns is simply sending good money after bad. But when a company has superior returns on capital employed, and a source of growth which enables it to reinvest a substantial portion of those returns, the result is compound growth in its value and share price over time.

‘No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.’

whilst we seek companies which have superior financial performance, that should be an outcome of their operations – not their primary objective. We are seeking companies that offer a superior product and/or service to customers which enables them to generate these impressive financial returns and prevent competition from eroding them.

The only way to focus your fund manager on performance without gifting him or her most of your returns is to ensure he or she invests a major portion of their net worth alongside you in the fund and on exactly the same terms.

One of the most important facts that is continually overlooked is share buybacks only create value if the shares repurchased are trading below intrinsic value and there is no better use for the cash which would generate a higher return.