Super Investor #31 in our series is Terry Smith – the legendary investor often called the “UK’s Warren Buffett.” As the founder of Fundsmith Equity Fund, Smith has built a reputation for investing in high-quality businesses with strong returns on capital. His long-term, buy-and-hold approach has delivered impressive results, making him one of the most respected investors in the world today.
Unlike deep-value investors who seek bargains in struggling companies, Smith focuses on businesses that generate high and sustainable returns on capital employed (ROCE), have strong pricing power, and require minimal debt. This approach has led Fundsmith to outperform many market indices over time.
In this article, we’ll explore Terry Smith’s investment philosophy, notable stock picks, and the lessons buy-and-hold investors can learn from his strategy.
Terry Smith Early Life and Background
Education & Influences
Terry Smith was born in 1953 in East London, England. He studied history at University College Cardiff, which might seem like an unusual academic background for a world-class investor. However, his ability to analyze financial statements and historical trends has played a crucial role in his success.
One of Smith’s biggest influences was Warren Buffett, whom he admired for his focus on high-quality businesses and long-term compounding.
Career Beginnings
Smith started his career in finance as an analyst at Barclays Bank, where he gained experience in dissecting corporate accounts. His big break came in 1992 when he published Accounting for Growth, a book that exposed misleading accounting practices used by companies to inflate their earnings.
This book, while making him famous, also got him fired from UBS—a move that ultimately set the stage for his future success.
In 2010, after years in investment banking and asset management, Smith launched Fundsmith Equity Fund, which has since become one of the best-performing funds in the UK.
Terry Smith’s Investment Philosophy & Strategy
Core Principles
Terry Smith’s investment philosophy is incredibly simple yet highly effective:
- Buy high-quality businesses.
- Don’t overpay.
- Do nothing (hold for the long term).
This approach is based on the idea that owning superior businesses for decades will outperform frequent trading or market timing.
Investment Approach
Smith follows a buy-and-hold strategy focused on companies with:
✔ High return on capital employed (ROCE) – Companies that consistently generate strong returns on invested capital tend to outperform over time.
✔ Strong revenue growth – Smith looks for businesses with steady, predictable growth.
✔ Durable competitive advantages – Companies with strong brands, pricing power, and customer loyalty.
✔ Minimal reliance on debt – Businesses that do not require excessive leverage to generate profits.
On the other hand, he avoids:
❌ Cyclical industries – Airlines, oil companies, and commodity businesses that rely on unpredictable price swings.
❌ Highly regulated businesses – Banks and insurance companies, which are vulnerable to policy changes.
❌ Companies requiring heavy capital expenditure – Businesses that must reinvest significant sums just to maintain operations.
Notable Techniques
Smith’s strategy closely resembles Warren Buffett’s “moat investing” approach—he prioritizes companies with strong competitive advantages that can sustain growth for decades.
Unlike deep-value investors who hunt for bargains, Smith is willing to pay a fair price for a great company rather than a cheap price for a mediocre one.
Notable Investments & Track Record of Terry Smith
Key Investments
Fundsmith’s portfolio is concentrated, typically holding 20-30 stocks at a time. Some of its biggest holdings include:
- Microsoft (MSFT) – A dominant technology company with a strong software ecosystem and recurring revenue.
- Novo Nordisk (NVO) – A global leader in diabetes and obesity treatments, benefiting from increasing healthcare demand.
- L’Oréal (OR.PA) – A cosmetics giant with strong brand loyalty and pricing power.
Performance Overview
Since its inception in 2010, Fundsmith Equity Fund has significantly outperformed both the FTSE 100 and S&P 500.
- Annualized return: ~15% per year.
- Benchmark comparison: Outperformed the MSCI World Index over a 10+ year period.
This impressive performance is a testament to Smith’s ability to pick and hold high-quality businesses.
Wins & Losses
Biggest Wins:
✅ Microsoft (MSFT) – A core holding that has delivered massive long-term gains due to its dominance in cloud computing and software.
✅ PayPal (PYPL) – A leader in digital payments with strong growth and network effects.
✅ Estée Lauder (EL) – A high-margin, luxury beauty company that thrives on brand strength.
Challenges & Mistakes:
❌ Struggles in market downturns – Fundsmith’s strategy underperforms when value stocks rally, as seen in 2022.
❌ Concentration risk – Holding a small number of stocks means Fundsmith is vulnerable if a major holding underperforms.
Terry Smith Lessons for Individual Investors
Key Takeaways
🔹 Quality beats cheapness. Instead of chasing low P/E stocks, focus on high-quality businesses with durable advantages.
🔹 Buy and hold works. Smith’s long-term approach proves that patience is a powerful investing tool.
🔹 Fundamentals matter. Look for high ROCE, profit margins, and strong revenue growth.
Common Mistakes to Avoid
🚫 Overtrading – Smith believes frequent trading destroys returns through fees and taxes.
🚫 Chasing hype stocks – Investors should focus on proven, resilient businesses rather than short-term fads.
🚫 Ignoring business quality – A cheap stock isn’t always a good stock; it’s better to pay a fair price for a superior company.
Challenges & Criticism of Terry Smith
Difficulties Faced
- Smith’s strategy can underperform during periods when value stocks outperform growth stocks.
- Some investors worry about his concentrated portfolio, as it increases exposure to individual company risks.
Criticisms
- Critics argue that his approach works well in bull markets but struggles when economic conditions change.
- Some believe his fund’s high valuation multiples make it vulnerable to corrections.
Terry Smith Legacy & Influence
Impact on Investing
Terry Smith has transformed UK investing by advocating for buy-and-hold strategies over active trading.
Influence on Others
His focus on quality investing has inspired a new generation of investors, much like Warren Buffett.
Educational Contributions
Smith’s annual Fundsmith shareholder letters are highly regarded for their investing wisdom, similar to Buffett’s Berkshire Hathaway letters.
Quotes & Wisdom of Terry Smith
“If you buy a high-quality business and hold it long enough, compounding will do the work for you.”
This simple yet powerful idea underscores Smith’s entire investment strategy.
Why Terry Smith’s Investment Philosophy Makes Him a Super Investor
Terry Smith is one of the greatest buy-and-hold investors of our time. His focus on high-quality businesses, strong fundamentals, and long-term investing has made Fundsmith a standout performer.
For individual investors, his strategy reinforces one key lesson: “Invest in quality, and let time do the rest.”
Happy Investing!