Not owning the “greatest stock out there” is better than owning the worst stock, according to Fundsmith boss Terry Smith.
Speaking to David Baxter at Investors’ Chronicle, Smith spoke about the firm’s choice not to hold star stock Nvidia, which he said does not have enough predictability.
He said: “We are unlikely in my view to fail if we don’t own the greatest stock out there but we are likely to fail if we start owning the worst stocks out there.”
He added outside of the Magnificent Seven, Fundsmith also do not invest in Amazon and very little in Apple.
He told the podcast: “One of the things we are seeking, when we invest, is a high degree of predictability.
“Things that produce very fantastic results and are up a couple of hundred per cent for the last year are tremendous, but are they predictable?
"Before [Nvidia boss] Jensen Huang got up in May last year and said what he said about the demand for their chips and AI I don't think too many people thought this was going to happen."
However, Fundsmith does invest in companies which are beneficiaries of the current trend to AI, including Microsoft and Alphabet.
He said he likes companies which are supplying to the end consumer, rather than to those further up the supply chain.
“There is only one thing more dangerous than being close to the consumer, and that is not being close to the consumer,” he added.
He suggested that Nvidia is closer to one of this scale than the other.
Elsewhere in the portfolio, Fundsmith invests in Novo Nordisk which has risen to rose to prominence this year as a result of the success of weight loss drug Wegovy, which is also known as Ozempic when sold for treating diabetes.
Smith said they have owned the stock for six years. He added: “We purchased Novo because we thought it had an unusual, possibly even unique, attitude to drug discovery.
"It is a company, and we have a soft spot for companies like this, that is controlled by a foundation which represents the founding members of the companies. And it has a long term view.”
He said as well as its “radical” approach to drug discovery it also had an unusual approach to accounting, in that it was straight-forward. He said he wouldn’t write off the potential for the company to develop other drugs.
“We bought it because of those unusual features, not for weight loss drugs per se,” he added.
The original article, written by David Baxter, can be found on Investors Chronicle.
