Compounders & Quality
Terry Smith
Buy good companies, don't overpay, do nothing - and let high return on capital compound.
Terry Smith is a British fund manager famous for a rule so short you can write it on your hand: buy good companies, dont overpay, do nothing. To him a good company is one that earns a lot of profit on the money put into it, year after year, and turns that profit into real cash in the bank. He looks for light, high-return businesses and then simply holds them, doing as little as possible. His whole method is built on patience and honesty rather than cleverness or speed.
The method
First, find a genuinely good business - one with a high, steady return on capital whose profit shows up as real cash, not just numbers on paper. Second, refuse to overpay: even a wonderful business is a poor buy at a silly-high price. Third, once you own good businesses at a fair price, mostly do nothing - constant trading only adds costs and fear-driven mistakes.
The record
His approach earned a strong reputation over many years by holding a small number of high-quality, high-return businesses and letting them compound with very little trading. But past results are a record, not a promise - even a good method has weaker years, and what worked before may not repeat.
Where they were wrong
The rule is simple to say but hard to keep. Great companies are often loved and therefore expensive, so ‘dont overpay’ is the genuinely hard part, and people twist ‘good company’ to excuse any price. ‘Do nothing’ fails if a business truly declines. High past returns never guarantee future ones, and a return that looks high can be flattered by heavy borrowing or about to be copied away by rivals.
Studies
5- Study 01Buy good companies, dont overpay, do nothingBuy good companies, dont overpay, then do nothing - easy to understand, hard to obey, and powerful for exactly that reason.Read this study →
- Study 02The magic number: return on capitalHunt for the business that turns a small pile of money into a big, steady profit year after year - that is a high return on capital.Read this study →
- Study 03Does the profit become real cash?Follow the profit all the way to the bank - a good business profit shows up as real cash, not just numbers on paper.Read this study →
- Study 04The price you pay still mattersFind the wonderful business first - then refuse to overpay for it, because the price you hand over decides how much it can ever do for you.Read this study →
- Study 05The hardest step: do nothingPlant good businesses at a fair price, then let them grow - sit still by choice, and act only when the business itself, not the price, truly changes.Read this study →
Primary sources
full register →Read Terry Smith in their own words. We reproduce none of it - these are the real things to go to.
Fundsmith Annual Letters & Shareholder Meeting Transcriptsletters
Smith's yearly letters apply his rule - buy good companies, don't overpay, do nothing - to real results, with plain-spoken essays on return on capital, cash conversion, and why he sells almost nothing. - On the official Fundsmith site under fundsmith.co.uk/documents (annual and semi-annual 'Letter to Shareholders' PDFs) and the Annual Shareholder Meeting recordings/transcripts; the site blocks automated fetching, so open it directly in a browser.