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

Terry Smith built one of Britain's most-followed funds on a strategy he sums up in three sentences — and then spends most of his time refusing to act on the urge to trade. His largest bets, from Microsoft (MSFT) to Marriott (MAR), are held for years, not quarters.

Who Is Terry Smith?

He is a former forensic accountant who became one of the most successful quality-growth investors of his generation. Terry Smith launched the Fundsmith Equity Fund in 2010 and has run it with the same philosophy ever since.

Before Fundsmith, Smith made his name as a sharp-tongued City of London analyst and author of "Accounting for Growth," a book that exposed the accounting tricks companies use to flatter their numbers. That forensic eye still shapes how he picks stocks.

Smith's edge is not a secret formula — it is the discipline to do less than everyone around him. Where most managers churn their portfolios, he aims to own great businesses and simply let them compound.

What Is the Fundsmith Philosophy?

It is captured in three sentences: buy good companies, don't overpay, try not to do anything. That deceptive simplicity is the entire strategy.

"Buy good companies" means businesses with high returns on capital that can reinvest profits at high rates for years. "Don't overpay" is the valuation discipline that keeps quality from becoming a value trap. "Do nothing" is the behavioral rule that stops investors from trading away their returns.

For readers building this muscle, our guide to fundamental analysis covers how to spot the high-return businesses Smith favors, and the super-investors hub places his approach alongside other greats.

Five Principles That Define His Strategy

Smith's method rests on a handful of repeatable ideas. They are simple to state and brutally hard to follow.

First, prize return on capital above almost everything. A company that earns high returns and reinvests them is a compounding machine. Second, demand a durable moat — brands, networks, switching costs, or hard-to-replicate intangibles.

Third, treat valuation as a discipline, not an afterthought; a wonderful company bought at a foolish price is still a bad investment. Fourth, stay concentrated — own a few dozen businesses you understand deeply rather than hundreds you don't. Fifth, minimize activity, because every trade carries cost, tax, and the risk of a mistake.

The hardest of the five is the last one — sitting still while the market tempts you to tinker is the real test of a quality investor.

In His Own Words

Smith's annual letters are widely read for their wit and clarity. A few lines capture his worldview better than any summary.

"Our investment strategy can be summarised in three sentences: buy good companies, don't overpay, do nothing." On trading, he is blunt that activity is usually the enemy of returns. He also warns that a share which has fallen a long way can always fall further — a reminder that cheapness alone is no protection.

His broader message is that investors overestimate their ability to time markets and underestimate the power of leaving good businesses alone.

Notable Holdings and Positioning

Fundsmith runs a concentrated book of high-quality global businesses. As of early 2026, its US-listed equity holdings totaled roughly $13 billion across about three dozen names, with the top five making up around 38% of the portfolio.

The fund's recent positioning shows Smith's discipline in action. He trimmed several technology giants — including Microsoft (MSFT), Meta (META), and Alphabet (GOOGL) — citing concerns about rising AI-related capital spending eating into returns.

Notice the common thread: brands, networks, switching costs, and high returns on capital. None of these is a cheap, beaten-down turnaround — they are durable compounders, which is exactly the point.

How Has Fundsmith Performed?

Strongly over its life, but with a humbling recent stretch. Since its 2010 launch, the Fundsmith Equity Fund has delivered roughly mid-teens annualized returns, comfortably ahead of global indices over the full period.

In the past few years, however, it has lagged a market driven by a narrow set of megacap winners. Smith has used his letters to defend the strategy rather than abandon it, arguing that quality investing always endures dry spells.

That candor is part of the appeal. He does not pretend the approach wins every year — he argues it wins over the long run, and accepts the periods when it doesn't.

What Can You Learn From Terry Smith?

The biggest lesson is that temperament beats activity. Most investors lose returns not to bad picks but to overtrading, and Smith's "do nothing" rule is a direct antidote.

The second lesson is to focus on business quality — return on capital and durable moats — before worrying about clever entry points. A great company held for a decade forgives a slightly high purchase price; a mediocre one bought cheap rarely does.

But hold the counter-argument too. Quality investing can underperform for years, valuations on great businesses can get stretched, and concentration cuts both ways. Smith's own recent lag is the proof that no single style works in all markets. To see how his framework compares with other legends, explore our investors hub and the investment strategies guide.

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