Any time a famed value investor starts blaming market mechanics and the passive bid, my ears perk up. I'm always curious to know if it's the market that's wrong or if the Terry Smith's of the world are off their game.
A couple of weeks ago, I looked at [David Einhorn](https://www.reddit.com/r/ValueInvesting/comments/1w82kwm/david_einhorn_greenlight_post_mortem/), who has been very vocal about the passive bid hurting value investing. This is a continuation of that series.
Unlike David Einhorn, who churned in and out of positions and often left gains on the table, Terry Smith seems to exist on the other end of the spectrum. He takes a 'hold forever' mantra, but it often culminates in holding positions through very high valuations and often round-tripping on performance. Case in point, Fundsmith held Paypal since 2018, rode it up 300% during the covid mania and back down the other side, eventually exiting for a loss.
In the same breath, I found that he wouldn't really be considered a classical value investor to begin with - Terry often initiates positions above 50x earnings. So it makes sense that he doesn't really know when to exit. ***There are tons of charts in the article showing his position moves overlaid on various fundamental metrics.***
He actually did pretty well post-GFC & pre-covid. It's been his performance since covid that's hurt him. This was due to getting caught up in the athleisure and luxury goods market weakness - holding Nike, Estee Lauder (another round-trip), L'Oreal, etc. Honestly, I think these were more bad outcomes on what could have otherwise been decent process. The rest of the weakness mostly came from holding previous winners that needed to catch up to valuations.
So while David Einhorn churned too much, Terry Smith might have been too caught up in the 'buy great business and own forever' ideology - only to get shaken out near bottoms.
And it seems like he's taken note. Mr. Smith recently dropped a shareholder letter indicating that he's going to begin incorporating price and fundamentals momentum into his strategy. I think this could be a good move, but I think he'd do better to actually take into account valuations. Holding Paypal at 120x price to operating income was just never going to work. But for the same reasons, I personally never would have bought or held PayPal through 50x earnings...so who am I to judge?
Who should I do next? Any prolific investors that have publicly floundered in recent memory that you'd like to see a postmortem on?
