The Domino's Dividend

Back in 2010, when Smith first launched the Fundsmith Equity Fund, Domino's was far from the darling of Wall Street. The company had been struggling with image problems, lackluster sales, and fierce competition in the fast-food industry. Many investors saw Domino's as a tired brand in a saturated market. But Smith saw something different – he saw potential.

Smith's approach to Domino's wasn't based on a hunch or a short-term trend. Instead, it was rooted in a deep analysis of the company's fundamentals and its potential for long-term growth. He spent months studying Domino's business model, its financials, and its competitive position in the market.

What Smith discovered was a company in the midst of a remarkable turnaround. Domino's had recently overhauled its pizza recipe, addressing long-standing complaints about taste. More importantly, the company was investing heavily in technology, developing a robust online ordering system and mobile app long before most of its competitors.

But Smith's analysis went beyond just the product and technology. He looked at Domino's franchise model, which allowed for rapid expansion with minimal capital investment from the parent company. He studied the economics of pizza delivery, realizing that Domino's efficient operations and economies of scale gave it a significant competitive advantage.

Armed with this comprehensive understanding, Smith made Domino's one of the core holdings in the Fundsmith Equity Fund. And then, he did something that goes against the grain of most modern investment strategies – he waited.

Year after year, as other investors jumped in and out of stocks based on quarterly earnings reports or market rumors, Smith held steady with his Domino's position. He understood that the company's true value wouldn't be realized overnight, but would compound over time as its growth strategies played out.

This patience paid off handsomely. Over the next decade, Domino's stock price soared, becoming one of the best-performing shares in the Fundsmith portfolio. By 2020, Smith's initial investment had returned over 600%, far outpacing the broader market.

But here's the key – Smith's success with Domino's wasn't just about picking a winning stock. It was about having the conviction to hold onto that stock for the long term, allowing the power of compounding to work its magic. This is where the wisdom of his quote really shines through.

Think of it this way: Investing in a great company is like planting a tree. In the early years, growth might seem slow and unimpressive. But as the tree establishes strong roots and a sturdy trunk, its growth accelerates. Given enough time, that small sapling can grow into a mighty oak, providing shade and bearing fruit for generations.

On the flip side, investing in the wrong company is like trying to grow a tree in poor soil. No matter how much time and effort you put in, the tree will struggle to thrive. In fact, the longer you wait, hoping for improvement, the more resources you waste.

Smith's approach with Domino's also highlights another crucial aspect of his investment philosophy – the importance of understanding a company's competitive advantage. He saw that Domino's wasn't just selling pizza; it was building a technology-driven delivery platform that would be difficult for competitors to replicate.

This focus on competitive advantage is what allows Smith to be patient. He knows that a truly great company doesn't just perform well for a quarter or a year – it builds on its strengths over time, widening its moat and compounding its advantages.

Smith's Domino's investment also demonstrates the power of ignoring short-term market noise. During his holding period, there were undoubtedly times when Domino's stock price fluctuated or when skeptics questioned its growth potential. But Smith's deep understanding of the company's fundamentals gave him the confidence to stay the course.

In the end, Smith's success with Domino's is a powerful illustration of his investment philosophy. By carefully selecting a high-quality company and giving it time to grow, he turned what many saw as a mundane pizza chain into one of the most lucrative investments of the decade.

Ask yourself: Am I investing in truly great companies that will benefit from the passage of time? Or am I holding onto businesses that time will work against? The answer to that question might just be the key to your long-term investment success.

After all, as Smith's Domino's investment proves, when it comes to great companies, time isn't just a friend – it's your most powerful ally in the quest for investment returns. And that, perhaps, is the most valuable lesson we can learn from Terry Smith's patient approach to investing.