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Never mind Bitcoin. I’d get rich and retire early by following Terry Smith

Paul Summers
Big Bitcoin logo.

Bitcoin is still grabbing the headlines and it’s not hard to see why. If you’d purchased the cryptocurrency at the start of the year, you’d be looking at a gain of around 175% today. No wonder social media is chock full of financial gurus recommending it as the easiest way to grow rich. It’s now even regarded by some as a safe haven in troubled times.  

The issue with this is these people cherry-pick time periods. If you’d purchased Bitcoin at the height of the bubble in December 2017, you’d still be sitting on a 50% loss, underlining just how volatile the price of this ‘asset’ really is. 

Nor have other concerns been resolved. Digital wallets are still being raided by hackers and banks continue to shun the cryptocurrency. Unlike stocks that pay dividends, there’s also no compensation for holders waiting for a recovery in the price.

Call me old-fashioned but I still think those buying solid businesses for the long term stand the best chance of growing rich. Fund manager Terry Smith would surely agree.

Winning strategy

Smith runs the near-£20bn Fundsmith Equity Fund. Its popularity lies in the fact it’s achieved an average annualised return of 19.5% since inception back in 2010 (or 380% overall). This may pale in comparison to the returns generated by Bitcoin for those who bought pre-2017, but it’s been achieved with infinitely less risk.

The strategy behind the fund is simple enough. Buy great companies, don’t overpay and do nothing. That’s a philosophy all of us can understand, even if it’s harder to implement in reality.

Rather than hold anything speculative, Smith buys proven winners. He’s not averse to paying up for quality, which he defines as a business that generates high returns on capital employed, is very likely to continue growing, has an economic ‘moat’, is resilient to change, and makes money from lots of small transactions. Think Paypal, Facebook and Unilever. Don’t think Bitcoin.

It’s also worth mentioning that Fundsmith’s Smithson Investment Trust, which adopts the same philosophy as the main fund but has holdings in small(er) businesses with market values of between £500m and £15bn, has done very well since its launch last October. Its share price was up almost 26% since inception at the end of August, compared to the 9.4% achieved by its benchmark.

A word of warning

Is Smith infallible? Of course not. He gets things wrong as we all do. And while I don’t expect to him fall from grace in the same way that Neil Woodford has (partly due to his insistence on backing companies that have ‘already won’), the latter’s tumultuous 2019 is still evidence that those who have entrusted their money with the former shouldn’t get too carried away in their admiration, especially as Fundsmith Equity hasn’t been tested in a severe downturn yet.  

Moreover, Fundsmith’s track record isn’t entirely blemish-free. Its Emerging Equities Trust has underperformed its benchmark since its launch in 2014, suggesting its strategy may be better suited to Western economies.

Nevertheless, I maintain that anyone looking to retire early would benefit from hearing Smith’s wisdom. So skip the Bitcoin boasters on YouTube this weekend and search for one of his speeches instead. You’ll probably learn a lot more about growing your money than you would on anything related to the cryptocurrency.

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Paul Summers owns shares in Smithson Investment Trust. 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.

Motley Fool UK 2019