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Terry Smith is a fund manager known as the British Warren Buffett. I replaced half of the portfolio of the fund that I had been managing for 15 years. It was a very unusual choice for a large-scale value investment fund. You can find the reason in the semi-annual letter he sent to investors in July 2026.
With a return of -2.9% in the first half, the MSCI World Index rose 11.2% during the same period, and you could have received 1.8% interest just by holding cash . The problem was that this did not apply only to the first half of this year . We have fallen behind the market every year for the past five years .
It started by acknowledging the fund's poor performance . Smith put forward three principles when the fund was launched in 2010 . Buy a good company. Don't buy it at a high price. And do nothing . These are also principles commonly advocated by value investors who adhere to a long-term perspective .
However, he mentioned that the third bridge requires the most changes in this Xi'an. It meant that they were experiencing difficulties severe enough to require revising their principles. Today, I will discuss the fundamental differences between institutional and individual investors through the semi-annual draft of this renowned value investment firm .
In Xi'an, the first thing he did was the market. Active funds accounted for 80% of the stock market volume in the 1990s. But right now it's only 10% . As the hands moving stock prices have shifted, the influence of active funds that prioritize corporate fundamentals has diminished . Now, what determines the price is the money flowing into the passive fund and the mechanical weighting adjustments made within the passive fund .
In the past, high prices were driven by human greed, but now, on top of that, the structural characteristic of passive investing has been added: the need to buy more of expensive stocks to match the price increase. In this process, a company's fundamentals are not considered at all. On the other hand, there is an example that shows how arbitrary passive, or indices, are.
SpaceX went public in June of this year . NASDAQ changed its regulations to quickly incorporate the company . Originally, it could only be included after three months had passed since listing, but they just removed that clause. The requirement that the circulating shares must be at least 10% has also been removed.
It is because SpaceX fell short . Regarding the extreme stock price volatility unrelated to fundamentals, Smith said the following: I do not know of a fundamental investment methodology that can predict or capture such movements . If you read this far, you can see a one-dimensional and superficial answer .
The market is being swept up in larger relationships, and old ways do not work. Therefore, the principle needs to be revised. It also looks as if they have declared surrender after five years of stagnation . However, the insights we can gain from this letter are on the next page . First of all, passive slim is not something that has happened for the first time this year.
The same goes for stock price fluctuations driven by momentum and the artificial intelligence craze . Terry Smith was clearly aware of these issues while the Smith Fund was struggling . However, we have never changed our principles during that time. In a market where stock prices fluctuate by 33% a day, the buy-and-hold strategy can only be used by those who are not exposed to capital outflows .
However, we are exposed. The market can remain non-conformist for longer than we can endure. Historically speaking, the people who ultimately held their ground and survived in the market were value investors. Buffett is living proof of that. However, the point is that even if value investing proves to be correct, it is meaningless if the fund has already closed down due to customer attrition .
The fundamental purpose of this summons is not criticism or regret directed at the market, but rather a discourse regarding the position of the fund manager under investigation . Fund Smith is an open-ended fund. It is a structure where investors can withdraw their money whenever they want. And I was actually taking it out.
One page later, he mentions Buffett. Unlike typical open-ended funds, Burke Heatherwein was closer in form to a closed-ended fund . It pointed out that part of Buffett's great achievements came from there . Berkshire shareholders can also sell Berkshire stock. However, that money does not leave the company.
It is just the money of the person who bought the stock being transferred . The capital in Buffett's hands remains the same. However, most active funds, including Fund Smith, are different. If the investor leaves, that amount of capital disappears. And you must sell stocks equivalent to the lost capital .
Even when you don't want to sell . The problem that faced Terry Smith was not his identity as a value investor. It was an extremely realistic and structural problem that one is bound to face as a fund manager. Traces of that deliberation can be found in the booklet where the reasons for stock trading are written.
This is a company that was spun off from Magnum Ice Cream Universe . The reason for the sale is that the company is too small and lacks liquidity at the time of a significant stake . We didn't sell it because the company was bad, but because of the size of the fund. Mastercard acquired Fundsmith even though it already owned Visa.
If you have confidence in the payment industry and the top companies in the industry are all good companies, then this is a perfectly feasible judgment. However, Smith adds a week at the end. European public funds have regulations prohibiting them from holding more than a certain percentage of a single stock.
Fund Smith sold 13 stocks and bought 12 stocks in the first half of the year alone, including the two companies . The cost of buying and selling alone is 11.4 million pounds, which is approximately 22 billion won. Of course, the basis for most of the judgments was the company's fundamentals. However, even setting aside structural issues like those involving Magnum, MyScream, or Mastercard, Fund Smith appears to have moved its watch on companies a bit further .
This judgment stems from the inherent nature of open-ended funds, as mentioned earlier. Even if you want to wait for a company that needs time, customers will not wait. In fact, Fund Smith's assets under management, which had reached 29 billion pounds as of 2021, have now fallen to 12.3 billion pounds .
Given that the actual rate of return was not negative despite the relative performance, it seems clear that there was a large-scale outflow of customer funds . The important thing is that there is not a single one of these judgments by Terismes that individual investors need to consider . This does not apply to Magnum individuals who could not hold the company because its market capitalization was too small compared to their funds under management .
The same goes for Mastercard. If you decide that the visa is better, you can buy more visas . If there isn't anything in particular you want to buy, it's fine to just keep the cash. However, funds have to buy stocks when customer funds come in, and sell stocks when customer funds go out . And generally, customer funds come in when performance is good and go out when performance is bad .
In other words, the Smith Fund must buy more of the companies it holds when they are expensive and sell when they are cheap . The individual possesses everything that Treesmith does not have. The freedom to buy small companies , the freedom to buy in bulk, the freedom to buy at the price you want, and the freedom to sell at the time you want .
None of the adverse conditions that forced world-class investors to revise their principles apply to individual investors . However, there is one characteristic to this various freedom given to you. The point is that freedom does not judge. Freedom does not know whether it is a good decision or a bad decision.
I just allow it. It allows the best judgment and equally allows the worst judgment. Recently, we frequently see news regarding individual investors who have suffered losses due to leverage . However, institutional investors use leverage much more . The reason we rarely see news about leverage losses by institutions is that they are not given the same freedom as individual investors .
For an institution to use leverage, it must pass through the legal limits of derivative products, contracts disclosed in the prospectus, and the company's internal risk department. You also have to get approval from a boss who has been through a lot . Individual investors collapse not because they lack information or skills.
It is because they hold the greatest authority without any braking mechanism. For those who cannot properly utilize freedom, freedom is not a privilege. Xunzi ’s exhortation to learn includes the following saying. Moksu-seung, meaning that applying a chalk line to wood strengthens it, is a phrase that emphasizes the necessity of constraints and standards in a free situation .
The more independent an individual investor is, the more they ultimately need standards to restrain themselves. However, the ink line that individual investors apply to themselves is the very ink line that torments institutional investors so much. Institutional investment is based on a strict relative evaluation.
The problem is not simply that the fund's return is low, but that it is low when compared to the index. Customers do not leave because the fund loses money . I am leaving because I cannot earn as much as others . The biggest leash for institutional investors, including Terrence Smith, is relative valuation.
And no individual investor is obligated to be evaluated relatively . We end up bringing that food without fail, even though no one asked us to . Setting your own standards to outperform the KOSPI is not necessarily a bad thing. You can also approach it lightly, with the mindset of using it as a reference to see where you are.
However, there is a major problem with the element of standards for individuals. The fact that it changes to Suzy immediately. And the point is that the current highest level always becomes the standard. Stocks that have doubled this year . Themes mentioned by YouTubers, someone's rate of return heard at drinking parties.
Individual relative evaluation is an unwinnable game. This is because no matter how much I earn, somewhere in the market there is bound to be a stock that is a better fit than mine . There is a footnote below Fundysmith's performance table . This fund is not managed based on any benchmark, and the comparisons above are provided for reference only .
In other words, it means that they will conduct an absolute evaluation . However, Fund Smith and all other funds cannot keep this promise . It is because the customer applies that standard . In the world, the only people who can actually protect this footnote are individual investors. Footnotes are the least important places in a document .
It is a place where trivial things that are too minor to include in the main text are dropped. However, the most important sentence in this document was there. It was the story that the entire document ultimately failed to protect that one week . The entire large-scale portfolio replacement also occurred because that single sentence collapsed .
Why did value investors choose momentum? It was not because of a lack of skill or wavering judgment. It is because I was in a position where I could not keep that footnote . Terrismins probably wanted to uphold that sentence and invest according to his principles and beliefs . However, the space for institutional investors was so limited that even that important sentence had to be packed into a tiny section .
And if an individual investor sends a letter to themselves, no footnote is necessary. Since there is only one reader, there is no reason to write it in small letters. However, there is one saying that physicist Richard Pye left behind . The first principle is not to deceive yourself. And oneself is the easiest person to deceive. That has been Investor Meditation. It is.
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