Terry Smith’s Investment Philosophy
A fundamentals-first framework built around quality, valuation discipline, and patience.
The Rule of Three
Simple, hard to execute: remove noise, reduce mistakes, let compounding do the work.
Buy Good Companies
Focus on businesses with durable economics, strong returns on capital, and repeatable cash generation.
Don’t Overpay
Great companies can still be bad investments at the wrong price. Valuation discipline protects returns.
Do Nothing
The edge is patience. Reduce turnover, ignore headlines, and let fundamentals compound over time.
Start With Disqualifying Criteria
Instead of searching for “winners,” eliminate the weakest ideas first. Fewer landmines = fewer permanent losses.
Remove the Worst First
Screen out fragile balance sheets, inconsistent earnings, weak cash conversion, and overly cyclical economics.
Lower “Blow-Up” Risk
Disqualifying filters reduce the chance a single holding permanently impairs your capital.
Simplify Decisions
Less complexity, fewer edge cases, and a cleaner “yes/no” process.
Key Metrics to Anchor the Process
Quality + valuation + patience. These two metrics help you quantify “good” and “not overpaying.”
Return on Invested Capital
High ROIC signals strong business economics and effective capital allocation.
Return on Invested Capital = Net Operating Profit After Tax ÷ Invested Capital
Free Cash Flow Yield
Compare FCF yield to what long-term bond yields “should” be (often framed as ~3% above expected inflation).
Free Cash Flow ÷ Market Value of the Company
Maintain a Watchlist
Most great companies are fairly priced most of the time. A watchlist keeps you ready when price meets value.
- Create a watchlist
- Keep it updated
- Use price targets
Play the Long Game
Time is your advantage. Let multi-year fundamentals drive results, not weekly headlines.
Go for Unloved Stocks
When quality fundamentals persist but sentiment is weak, valuation gaps can appear.
Go for Unloved Industries
Cycles create mispricings. Focus on balance-sheet durability and who survives the downturn.
Invest Anti-Cyclically
Add when fear is high and prices detach from fundamentals—only when your thesis and cash flows remain intact.
Educational content only. Not investment advice.