Can “good companies” be run by fools?

Can "good companies" be run by fools?

I am an unabashed fan of Terry Smith, ex-CEO of city dealers Tullet Prebon and founder of the hugely successful Fundsmith investment firm*.

As well as the fact that he’s straight-talking and a keen cyclist – both admirable traits, we can surely agree – he also avoids the clichés, common to the world of investment, about “seeking out value” (i.e. we do the same as everyone else). Instead, he talks about buying “good companies”, for which he has a clear set of criteria. Some of these are counter-intuitive, and yet eminently logical.

His point here is really about resilience – good companies have a momentum of their own. For this reason he places great emphasis on a company’s defensive qualities – “is it hard to compete with?” This can come in many forms – a dominant market position, a powerful brand, a dependable route to market or a super-efficient supply chain, for example. Although Fundsmith only invests in large-cap companies, many of the principles they espouse are useful yardsticks for a company of any size, especially if you’re seeking investment or building towards a sale.  

“Good companies can be run by fools”, he says (before adding pithily), “and sooner or later they generally are.

If you’re asking yourself whether you’re running a “good company”, here are five starter questions:

  • Do you know what market are you in, and what position you occupy in that market?
  • Is your proposition to that market clear and distinctive?
  • Do you have a simple, repeatable process for bringing leads to your business?
  • Are you good at executing things?
  • Do you have robust performance indicators in place?

If you can answer positively to most of these questions, then you’re probably on the way to being “hard to compete with”. This is not the same as saying that you don’t have competitors, nor does it mean that you’re immune from disruption. But you do look like a company in control of your destiny, and that is always going to be attractive to potential investors in, or buyers of, your business.

Who knows, one day you might even get a call from Terry Smith.

*Declaration of interest: Terry Smith manages quite a lot of my money.