Terry Smith

His Philosophy And Investment Approach

Terry Smith is one of the most successful fund managers in the UK, often referred to as the "British Warren Buffett". As the founder of Fundsmith, he has built an investment philosophy that is remarkably simple yet incredibly effective: buy high-quality businesses, avoid unnecessary trading, and hold for the long term. His strategy focuses on compounding capital over decades, rather than chasing short-term market trends.

Smith's approach is based on the principle that investing should be simple but not easy—meaning that while his strategy is straightforward, it requires discipline, patience, and a deep understanding of what makes a company truly great.

Key Principles of Terry Smith’s Investment Strategy:

1. The "Buy Good Companies" Approach
   Smith’s investment philosophy revolves around investing only in high-quality businesses with strong financials and durable competitive advantages. He avoids "deep value" investing, instead focusing on companies that:

   • Generate high and stable returns on capital.

   • Have strong brands and pricing power.

   • Require low capital expenditure to maintain profitability.

   • Have a proven history of compounding earnings over time.

2. Don’t Overpay – Valuation Matters
   While Smith focuses on quality over price, he is still mindful of valuation. He believes that even the best company can be a bad investment if bought at an excessive price. However, he is willing to pay a reasonable premium for exceptional businesses, knowing that great companies compound value over time.

3. Do Nothing – Low Turnover Strategy
   One of Smith’s most famous principles is avoiding unnecessary trading. He believes that excessive buying and selling of stocks leads to:

   • Higher transaction costs that reduce returns.

   • Emotional decision-making, which often leads to mistakes.

   • Lost compounding potential, as great businesses should be held for the long term.
     His motto is simple: "Buy good companies. Don’t overpay. Do nothing."

4. Long-Term Holding of Compounders
   Like Warren Buffett, Smith believes in long-term investing. He holds stocks for years, often decades, allowing compounding to work its magic. His fund has one of the lowest turnover rates in the industry, reflecting his belief in letting winners run.

5. Focus on Business Fundamentals, Not Market Noise
   Smith ignores short-term market fluctuations, focusing instead on the fundamental strength of the businesses he owns. He avoids speculation, market timing, and economic forecasts, arguing that trying to predict short-term market movements is a fool’s game.

6. Avoiding Certain Sectors
   Unlike many investors who diversify across all industries, Smith avoids entire sectors that he believes do not create long-term shareholder value, including:

   • Banks: He argues they are highly leveraged and lack predictable earnings.

   • Commodities & Mining: Profits are too dependent on fluctuating prices.

   • Utilities: Often face heavy regulation and limited pricing power.
     Instead, he focuses on consumer goods, healthcare, and technology companies, which offer consistent growth and profitability.

Notable Investments

Terry Smith has built Fundsmith Equity Fund into one of the most consistent outperformers, with major holdings in:

• Microsoft (MSFT): A long-term compounder with strong recurring revenue.

• L’Oréal (OR.PA): A consumer brand powerhouse with pricing power.

• Novo Nordisk (NVO): A leader in diabetes care with a strong competitive moat.

What Makes Terry Smith Unique?

• Simplicity in Investing: He follows an uncomplicated, logical strategy that has outperformed for decades.

• Focus on Quality, Not Cheap Valuations: He buys exceptional businesses rather than chasing undervalued stocks.

• Long-Term Holding Approach: He holds stocks for the long run, avoiding short-term speculation.

• Disciplined Sector Exclusion: He avoids banks, commodities, and regulated industries, focusing only on sectors with predictable earnings growth.

Terry Smith’s investment philosophy has proven that buying great businesses, doing nothing, and letting compounding work is one of the most powerful strategies in investing. His commitment to high-quality companies and long-term thinking has made Fundsmith one of the most successful funds in the world.

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.