Terry Smith

How a deceptively simple strategy — buy good companies, don't overpay, do nothing — produces durable results through disciplined inactivity.

Who He Is

Terry Smith is the founder and CEO of Fundsmith, a UK-based investment management company. Since launching the Fundsmith Equity Fund in 2010, he has built one of the most successful fund track records in Britain by following a deceptively simple strategy.

Smith spent decades as a top-rated analyst before managing money. His book "Accounting for Growth" exposed accounting tricks that companies used to inflate earnings, earning him both acclaim and controversy in the City of London.

He is known for plain speaking and skepticism toward financial industry conventions. He avoids complex strategies, frequent trading, and constant activity. His approach is deliberately boring.

Core Investment Philosophy

Smith's approach: buy good companies, don't overpay, do nothing. This apparent simplicity conceals rigorous analysis of what makes a company genuinely good.

He focuses exclusively on high-quality businesses with strong competitive positions, high returns on capital, and predictable cash generation. He would rather own a small number of excellent businesses than diversify into mediocrity.

The "do nothing" part is essential. Once he owns a quality business, he holds it for years. Trading costs, taxes, and the difficulty of timing markets all argue for inactivity. Patience allows compounding to work.

He explicitly avoids certain sectors: banks, utilities, cyclical industries, and anything he cannot understand. This exclusion list keeps the portfolio focused on businesses with characteristics he values.

Patterns He Focuses On

• Return on Capital Employed — Smith prioritizes companies that earn high returns on the capital invested in the business. This indicates efficient resource allocation and competitive advantage.
• Cash Generation — Profits must convert to cash. Companies that report earnings but consume cash through working capital or capital expenditure are less attractive than those with strong free cash flow.
• Recurring Revenue — Businesses with repeat customers and subscription-like characteristics provide predictability. Consumer staples, software, and healthcare often exhibit this pattern.
• Pricing Power — Companies that can raise prices without losing customers demonstrate strong market positions. Brands, switching costs, and regulatory barriers create pricing power.
• Low Capital Intensity — Businesses requiring minimal reinvestment to maintain their competitive position generate excess cash for shareholders. Asset-light models are preferable.
• Management Quality — Smith looks for managers who allocate capital wisely, avoid empire-building, and think like owners. Compensation structures reveal true incentives.

Example Companies

Unilever — A consumer goods company with global brands that people buy repeatedly. Strong market positions and pricing power create durable competitive advantage.

Microsoft — Enterprise software with high switching costs and recurring subscription revenue. The cloud transition strengthened an already strong competitive position.

L'Oréal — A beauty company with powerful brands and global distribution. Cosmetics and personal care products generate repeat purchases and resist economic cycles.

Visa — A payment network that benefits from every transaction without taking credit risk. The business model combines growth with exceptional economics.

Limitations and Criticisms

Smith's approach concentrates in a narrow set of sectors. Consumer staples, healthcare, and technology dominate his portfolios. This concentration creates vulnerability if these sectors underperform.

Quality stocks often trade at premium valuations. Smith's companies are well-known and widely followed. Paying high multiples reduces margin of safety and future returns.

The "do nothing" philosophy can lead to holding companies through deteriorating fundamentals. Knowing when to sell remains challenging even for quality-focused investors.

His dismissive attitude toward sectors he avoids may cause him to miss opportunities. Banks and cyclicals occasionally offer exceptional value that quality purists miss.

What Modern Investors Can Learn

• Simplicity works — Complex strategies often underperform simple ones consistently applied. Three rules can be enough.
• Quality matters — Great businesses compound wealth over time. Owning excellent companies is more important than finding cheap ones.
• Activity destroys returns — Trading generates costs and taxes. The best holding period is often forever.
• Know what you will not buy — Exclusion criteria focus attention on what you understand. Not every sector deserves your capital.
• Patience compounds — Time is the friend of quality businesses. Let them do the work.