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# Lessons from Terry Smith
- URL: https://www.antoinebuteau.com/lessons-from-terry-smith/
- Published: 2026-06-05T21:19:06.000Z
- Updated: 2026-07-18T21:56:01.000Z
- Description: Terry Smith, founder of Fundsmith and author of Accounting for Growth, builds around a stark rule: buy good companies, do not overpay, and do nothing. His analysis favors durable cash flow and rejects macro forecasts and reported-earnings illusions.
- Author: Antoine Buteau
- Tags: Profile, Hedge Funds & Investing Profiles

![Visual summary of operating lessons from Terry Smith.](https://www.antoinebuteau.com/content/images/2026/06/lessons-from-terry-smith-profile-infographic.webp)

## Lessons from Terry Smith

Terry Smith founded Fundsmith in 2010 on a simple premise: buy good companies, don't overpay, and do nothing. Long before that, he was fired from his banking job for exposing widespread corporate financial tricks in his 1992 book, *Accounting for Growth*. His approach relies entirely on identifying durable businesses, ignoring macroeconomic forecasts, and judging companies strictly by cash flow rather than reported earnings.

### Part 1: The Three-Step Philosophy

1. **On strategy:** "Our investment strategy is simple: Buy good companies. Don’t overpay. Do nothing." — [*Source: Fundsmith Factsheet*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
2. **On priority:** "For long-term investors, the 'good' characteristics of a company are more important than the price you pay." — [*Source: Trustnet*](https://www.trustnet.com/?ref=antoinebuteau.com)
3. **On trading activity:** "Once we have established these positions, we just try to get the hell out of the way and let them perform." — [*Source: Morningstar*](https://www.morningstar.co.uk/?ref=antoinebuteau.com)
4. **On simplicity:** "The rules of investment are quite simple. Unfortunately, it is not easy to follow them." — [*Source: Investing for Growth*](https://www.harriman-house.com/investingforgrowth?ref=antoinebuteau.com)
5. **On market timing:** "As the old saying goes, there are only two types of investor: those who can't time the markets, and those who don't know they can't time the markets." — [*Source: The Economic Times*](https://economictimes.indiatimes.com/?ref=antoinebuteau.com)
6. **On patience:** "The most challenging part of an investment strategy is to have the patience of sitting and doing nothing when the investment climate is not conducive for trading." — [*Source: The Economic Times*](https://economictimes.indiatimes.com/?ref=antoinebuteau.com)
7. **On business ownership:** "We seek to buy and hold shares in good companies... we want to hold them forever." — [*Source: Fundsmith Owner's Manual*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
8. **On complex strategies:** "If you need a computer model to tell you if a business is a good investment, it's probably not." — [*Source: Interactive Investor*](https://www.ii.co.uk/?ref=antoinebuteau.com)
9. **On long-term focus:** "Investment is a test of the endurance of investors and the winners are the ones who find a good strategy or fund and stick with it." — [*Source: The Economic Times*](https://economictimes.indiatimes.com/?ref=antoinebuteau.com)
10. **On judging performance:** "To assess an investment strategy or a fund, you need to see its results across a full economic cycle with both bull and bear markets." — [*Source: The Economic Times*](https://economictimes.indiatimes.com/?ref=antoinebuteau.com)

### Part 2: Defining a Good Company

1. **On value creation:** "Good companies create value by consistently earning returns on capital that exceed their cost of capital." — [*Source: Substack*](https://substack.com/?ref=antoinebuteau.com)
2. **On high returns:** "Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns." — [*Source: ShareScope*](https://www.sharescope.co.uk/?ref=antoinebuteau.com)
3. **On mathematical certainty:** "If the business earns 6% on capital over 40 years... you’re not going to make much different than a 6% return. If a business earns 18%... you’ll end up with a fine result." — [*Source: ShareScope*](https://www.sharescope.co.uk/?ref=antoinebuteau.com)
4. **On intangibles:** "The best defenses against competition are intangible assets: brands, patents, licenses, and installed bases of equipment." — [*Source: Fundsmith Owner's Manual*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
5. **On capital destruction:** "Bad companies destroy value by earning returns on capital that are lower than their cost of capital." — [*Source: Substack*](https://substack.com/?ref=antoinebuteau.com)
6. **On predictability:** "Rather than seeking superior portfolio performance by chasing high-risk stocks, investors should seek out 'boring' quality companies, which have predictable returns." — [*Source: Business Insider*](https://www.businessinsider.com/?ref=antoinebuteau.com)
7. **On consumer staples:** "Companies that make everyday, small-ticket, repeat-purchase items are generally far more predictable and resilient than those making large, one-off purchases." — [*Source: Financial Times*](https://www.ft.com/?ref=antoinebuteau.com)
8. **On innovation vs distribution:** "It is much easier to sell a new product through an existing, dominant distribution network than it is to build a new distribution network for a novel product." — [*Source: Fundsmith Annual Letter 2018*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
9. **On gross margins:** "Gross margin is a good protection against inflation... companies with high returns and gross margins require less capital to maintain their operations." — [*Source: Medium*](https://medium.com/?ref=antoinebuteau.com)
10. **On leverage:** "We avoid companies that require significant borrowing to generate their returns. Debt introduces an element of fragility that we do not want." — [*Source: Fundsmith Owner's Manual*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)

### Part 3: Valuation and Price

1. **On the Greater Fool theory:** "You can't play 'greater fool theory', in which you knowingly overpay for the shares, hoping that a greater fool will buy them off you at an even more egregious valuation." — [*Source: Business Insider*](https://www.businessinsider.com/?ref=antoinebuteau.com)
2. **On valuation metrics:** "Price-to-earnings ratios are often misleading because earnings are highly manipulable. We prefer to look at free cash flow yields." — [*Source: Investing for Growth*](https://www.harriman-house.com/investingforgrowth?ref=antoinebuteau.com)
3. **On fair prices:** "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." — [*Source: Trustnet*](https://www.trustnet.com/?ref=antoinebuteau.com)
4. **On overpaying:** "We don't seek to overpay but it's a much less important characteristic than a company being 'good'." — [*Source: Trustnet*](https://www.trustnet.com/?ref=antoinebuteau.com)
5. **On initial yield:** "The dividend yield at the time of purchase is largely irrelevant if the company cannot grow its cash flow over time." — [*Source: Fundsmith Annual Letter 2016*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
6. **On mean reversion:** "Cheap, low-quality companies may revert to the mean, but high-quality companies with durable moats can defy mean reversion for decades." — [*Source: Financial Times*](https://www.ft.com/?ref=antoinebuteau.com)
7. **On deep value investing:** "Buying a bad business because it looks cheap is like picking up a cigar butt off the street for one last puff—it might be free, but it's deeply unpleasant." — [*Source: The Telegraph*](https://www.telegraph.co.uk/?ref=antoinebuteau.com)
8. **On buying opportunities:** "The best time to buy shares in good companies is when they are facing temporary, solvable problems that the market has mistaken for permanent impairment." — [*Source: Interactive Investor*](https://www.ii.co.uk/?ref=antoinebuteau.com)
9. **On growth vs value:** "The distinction between value and growth is false. Growth is simply a component of value—usually a positive one, but sometimes negative if the return on capital is poor." — [*Source: Fundsmith Annual Letter 2019*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
10. **On long-term compounding:** "If you pay an expensive-looking price for a business that earns 18% on capital over 30 years, you will still end up with a very satisfactory result." — [*Source: ShareScope*](https://www.sharescope.co.uk/?ref=antoinebuteau.com)

### Part 4: The Virtues of Inactivity

1. **On the urge to act:** "In investing, doing nothing is often the hardest action to take, but it is frequently the most profitable." — [*Source: Morningstar*](https://www.morningstar.co.uk/?ref=antoinebuteau.com)
2. **On portfolio turnover:** "High portfolio turnover is the enemy of the investor. It incurs transaction costs and taxes, and it usually means the manager has no conviction." — [*Source: Fundsmith Owner's Manual*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
3. **On transaction costs:** "The more you trade, the more you pay the brokers and the taxman, and the less you keep for yourself." — [*Source: The Telegraph*](https://www.telegraph.co.uk/?ref=antoinebuteau.com)
4. **On boredom:** "If you find investing exciting, you are probably doing it wrong. Good investing should be boring." — [*Source: Business Insider*](https://www.businessinsider.com/?ref=antoinebuteau.com)
5. **On rebalancing:** "We do not automatically rebalance the portfolio. Selling your winners to buy more of your losers is like cutting the flowers to water the weeds." — [*Source: Fundsmith Annual Letter 2014*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
6. **On checking stock prices:** "Watching your portfolio daily is a recipe for anxiety and bad decision-making. Check it rarely." — [*Source: Financial Times*](https://www.ft.com/?ref=antoinebuteau.com)
7. **On news flow:** "Most financial news is noise designed to make you act. Ignoring it is a competitive advantage." — [*Source: Investing for Growth*](https://www.harriman-house.com/investingforgrowth?ref=antoinebuteau.com)
8. **On the difficulty of holding:** "Everyone wants to know what to buy and what to sell. Almost no one asks what they should just hold." — [*Source: Interactive Investor*](https://www.ii.co.uk/?ref=antoinebuteau.com)
9. **On compounding:** "To benefit from the magic of compounding, you must first survive, and then you must not interrupt the process unnecessarily." — [*Source: Fundsmith Annual Letter 2020*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)

### Part 5: Accounting and Cash Flow

1. **On accounting rules:** Comparing British and US accounting rules in 1992, he noted: "Better yes, good no." — [*Source: The Guardian*](https://www.theguardian.com/?ref=antoinebuteau.com)
2. **On earnings vs cash:** "Earnings are an opinion, but cash is a fact." — [*Source: Accounting for Growth*](https://www.amazon.co.uk/Accounting-Growth-Stripping-Camouflage-Company/dp/0712675941?ref=antoinebuteau.com)
3. **On paying bills:** "Cash is the only thing you can pay the bills with." — [*Source: The Investors Podcast*](https://www.theinvestorspodcast.com/?ref=antoinebuteau.com)
4. **On creative accounting:** "Many companies struggle with cash flow rather than profitability and, in some cases, use deliberately misleading accounting techniques." — [*Source: MarketScreener*](https://www.marketscreener.com/?ref=antoinebuteau.com)
5. **On cash conversion:** "We seek to buy companies which deliver high returns on capital in cash." — [*Source: The Investors Podcast*](https://www.theinvestorspodcast.com/?ref=antoinebuteau.com)
6. **On share buybacks:** "Share buybacks only create value if the shares are undervalued and there is no better use for the cash which would generate a higher return." — [*Source: Business Insider*](https://www.businessinsider.com/?ref=antoinebuteau.com)
7. **On depreciation:** "Depreciation is a real cost. Anyone who tells you to look at EBITDA is either trying to fool you or fooling themselves." — [*Source: Fundsmith Annual Letter 2017*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
8. **On capital expenditure:** "Companies that have to constantly reinvest heavily just to stand still are poor investments, no matter what their stated earnings are." — [*Source: Investing for Growth*](https://www.harriman-house.com/investingforgrowth?ref=antoinebuteau.com)
9. **On financial camouflage:** "The main purpose of a company's annual report often seems to be to conceal the true economic reality of the business from its owners." — [*Source: Accounting for Growth*](https://www.amazon.co.uk/Accounting-Growth-Stripping-Camouflage-Company/dp/0712675941?ref=antoinebuteau.com)

### Part 6: Inflation and Resilience

1. **On macroeconomic forecasts:** "Macro views and developments have no bearing on our strategy." — [*Source: The Investors Podcast*](https://www.theinvestorspodcast.com/?ref=antoinebuteau.com)
2. **On controlling the controllable:** "I waste little or no time trying to guess what will happen to factors I cannot control or predict and deploy most of my time and effort on things I can control." — [*Source: The Investors Podcast*](https://www.theinvestorspodcast.com/?ref=antoinebuteau.com)
3. **On the nature of inflation:** "Trying to light a bonfire with gasoline... you can go from no fire to a loud 'Whoosh!' and find that you have also set fire to the garden fence." — [*Source: The Investors Podcast*](https://www.theinvestorspodcast.com/?ref=antoinebuteau.com)
4. **On corporate profit:** "The initial impact of inflation is not on consumer prices, but on company profits." — [*Source: The Investors Podcast*](https://www.theinvestorspodcast.com/?ref=antoinebuteau.com)
5. **On pricing power:** "The defining characteristic of a great company is the ability to raise prices without losing customers to competitors." — [*Source: Fundsmith Annual Letter 2022*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
6. **On input costs:** "If you own shares in companies during a period of inflation, it is better to own those with high returns and gross margins." — [*Source: Medium*](https://medium.com/?ref=antoinebuteau.com)
7. **On capital light models:** "In inflationary times, asset-heavy businesses suffer because the cost of replacing their equipment rises. Asset-light businesses are largely insulated." — [*Source: Financial Times*](https://www.ft.com/?ref=antoinebuteau.com)
8. **On interest rates:** "We don't buy banks because they are too highly leveraged and too reliant on forecasting interest rates, which no one can do consistently." — [*Source: Fundsmith Annual Letter 2011*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
9. **On market panics:** "Volatility is not risk. A permanent loss of capital is risk. Volatility is simply the price of admission for long-term equity returns." — [*Source: Trustnet*](https://www.trustnet.com/?ref=antoinebuteau.com)

### Part 7: Indexing and the Fund Industry

1. **On passive investing dynamics:** "Essentially, index investing is nothing more than momentum investing, which means you invest in companies that are performing very well at the time." — [*Source: Interactive Investor*](https://www.ii.co.uk/?ref=antoinebuteau.com)
2. **On market distortions:** "The increasing proportion of equities held by index funds are invested without any regard to the quality or valuation of the shares bought, which produces dangerous distortions." — [*Source: The Motley Fool*](https://www.fool.com/?ref=antoinebuteau.com)
3. **On systemic risk:** "The shift into index funds is laying the foundations of a major investment disaster." — [*Source: The Motley Fool*](https://www.fool.com/?ref=antoinebuteau.com)
4. **On the passive paradox:** "The best equity investment for most investors most of the time is an index fund because of its low cost and outperformance of most active fund managers." — [*Source: The Motley Fool*](https://www.fool.com/?ref=antoinebuteau.com)
5. **On active manager fees:** "The fund management industry is the only industry where you get paid regardless of whether you deliver the service you promised." — [*Source: The Telegraph*](https://www.telegraph.co.uk/?ref=antoinebuteau.com)
6. **On closet indexing:** "If a fund has 100 or more stocks in it, it is a closet index tracker charging active management fees." — [*Source: Fundsmith Owner's Manual*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
7. **On benchmark hugging:** "We do not manage our portfolio with reference to any index weightings. If we don't like a sector, we simply won't own it." — [*Source: Fundsmith Annual Letter 2015*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
8. **On performance fees:** "Performance fees are an asymmetrical option. The manager takes a cut of the upside but doesn't write a cheque to the investors when the fund falls." — [*Source: Investing for Growth*](https://www.harriman-house.com/investingforgrowth?ref=antoinebuteau.com)
9. **On feedback loops:** "Index investing is a self-reinforcing feedback loop which will operate until it doesn't." — [*Source: The Motley Fool*](https://www.fool.com/?ref=antoinebuteau.com)

### Part 8: Technology and Disruption

1. **On the AI boom:** He recently described the AI boom as the largest speculative craze in history, warning about unverified capital expenditure. — [*Source: Financial Times*](https://www.ft.com/?ref=antoinebuteau.com)
2. **On defining tech:** "I don't think people think, 'oh technology'... what drives those companies is not technology, it's employment in payroll, or business in accounting... social media and digital advertising." — [*Source: The Investors Podcast*](https://www.theinvestorspodcast.com/?ref=antoinebuteau.com)
3. **On hyperscalers:** "It is far from clear whether the massive capital expenditure by hyperscalers on AI infrastructure will yield the expected returns on capital." — [*Source: Fundsmith Annual Letter 2024*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
4. **On tech cyclicality:** "Large technology companies have in a sense become victims of their own success... they have become inevitably more cyclical." — [*Source: Trustnet*](https://www.trustnet.com/?ref=antoinebuteau.com)
5. **On tech disruption:** "We generally avoid companies engaged in rapid technological innovation, as the ultimate winners are almost impossible to predict at the outset." — [*Source: Fundsmith Owner's Manual*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
6. **On software as a service:** "The best software businesses are essentially subscription models where the customer is locked in by high switching costs and the mission-critical nature of the product." — [*Source: Fundsmith Annual Letter 2020*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)
7. **On established networks:** "Dominant platforms benefit from powerful network effects, where the value of the service increases for everyone as more users join." — [*Source: Investing for Growth*](https://www.harriman-house.com/investingforgrowth?ref=antoinebuteau.com)
8. **On Meta and Alphabet:** "While classified as tech, their actual business model is simply selling advertising, which makes them highly sensitive to the broader economic cycle." — [*Source: Trustnet*](https://www.trustnet.com/?ref=antoinebuteau.com)
9. **On investing in innovation:** "It is rarely the pioneer who captures the economic value of an innovation; it is usually the company that standardizes and scales it." — [*Source: Fundsmith Annual Letter 2019*](https://www.fundsmith.co.uk/?ref=antoinebuteau.com)