Terry Smith: Buy Good Companies, Don't Overpay, Do Nothing

Since launching Fundsmith in 2010, Terry Smith has turned a three-line strategy — buy good companies, don't overpay, do nothing — into roughly 15% annualized returns, outpacing most managers who trade a hundred times more than he does.

How Terry Smith built Fundsmith

Terry Smith spent decades in the City of London as an analyst and broker before launching Fundsmith in 2010 at age 57. He was already known for blunt honesty — his 1992 book "Accounting for Growth" exposed creative accounting and reportedly cost him a banking job.

That skepticism became his edge. Smith built Fundsmith on a simple promise: own a small number of exceptional companies, hold them for years, and keep fees and trading to a minimum.

The fund grew into one of the largest of its kind, managing tens of billions of dollars. Smith's pitch was radical in its plainness — he told investors the hardest part of investing is doing nothing, and he built an entire firm around that discipline.

What is the "do nothing" philosophy?

It is the deceptively simple idea that activity destroys returns. Smith argues that once you own a great business, the optimal move is almost always to sit still and let it compound, rather than trade in and out chasing news.

His three rules fit on an index card: buy good companies, don't overpay, do nothing. The first two get the attention, but Smith insists the third is where most investors fail, churning their portfolios and paying taxes and fees for the privilege.

"Do nothing" does not mean never act. Fundsmith trims and rebalances — it cut positions in Marriott (MAR), Visa (V) and Alphabet (GOOGL) in early 2026 to harvest gains. But it turns over a tiny fraction of its portfolio each year compared with a typical active fund.

The five rules behind every Fundsmith pick

Smith's screen is famously strict. Before a company earns a place, it generally must clear five hurdles that, together, define what he means by "quality."

The thread connecting Visa (V), Microsoft (MSFT), Philip Morris (PM) and Stryker (SYK) is that each earns very high returns on the capital it employs. That single metric — return on capital — sits at the center of everything Smith does.

Why won't Smith buy cheap stocks?

Because he believes a wonderful business at a fair price beats a mediocre one at a bargain. Smith is openly dismissive of classic deep-value investing, arguing that "cheap" companies are often cheap because their economics are deteriorating.

He would rather pay a full multiple for a company compounding at high returns than a low multiple for one slowly losing ground. Over a long holding period, he argues, the quality of the business matters far more than the entry price.

Smith's core insight is that time is the friend of the wonderful business and the enemy of the mediocre one. That is why he tolerates valuations that traditional value investors would reject outright.

Notable holdings and recent moves

Fundsmith's portfolio reads like a list of dominant global franchises. As of early 2026, its largest positions included Marriott (MAR), Stryker (SYK), Waters (WAT), Visa (V) and Alphabet (GOOGL).

Recent activity shows Smith practicing what he preaches. He trimmed winners rather than chasing them, exited names like Nike (NKE) and Intuit (INTU) where the thesis weakened, and added sparingly. Turnover stayed low.

Has the strategy held up in 2026?

Partly — and this is where honesty matters. Fundsmith's quality approach delivered roughly 15% annualized over its life, but it has trailed the broader market in several recent years.

The main reason is the AI boom. Smith owned little of the semiconductor and AI-infrastructure trade that powered the market to new highs, because those names often failed his valuation or predictability tests. Critics argue his framework is too rigid for a market led by rapid technological change.

His defenders counter that style cycles are normal, and that a strategy built for decades should not be judged by a few years. The risk is real either way: concentration in a narrow set of quality names can underperform for uncomfortable stretches.

Lessons for your own portfolio

You do not need billions to borrow Smith's discipline. The first lesson is to define quality before you buy — high returns on capital, pricing power and resilient demand are a strong starting filter.

The second is to respect the "do nothing" rule. Constant trading is a tax on returns, and patience with a great business is an underrated edge. Our super investors library shows how this principle echoes across the best long-term records.

The third is to stay honest about your blind spots. Even a brilliant framework can miss a cycle, as 2026 showed. To study how other legends balance conviction and humility, explore the full investors collection.

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