Without doubt, as an investor, Warren Buffett is one of a kind. However, he’s not the only member of the Alpha Circle. Although perhaps not as renown, there’s a handful of savvy stock pickers in the U.S. and Europe whose investments year after year appear to defy the laws of gravity.
Across the pond, Terry Smith stands out as one of them. He’s known as the English Warren Buffett, and for good reason. The investment vehicle he manages, Fundsmith, has generated a cumulative return of 607.3% compared to the 403.4% produced by the benchmark MSCI World Index. In addition, since its inception in November 2010, the Fund has posted a 353% return, while its global peers have managed just 254% on average, according to Fundsmith’s 2024 Annual Letter.
Smith started the Fund with the objective of making investment in the stock market more accessible for retail investors. The Fund offers affordable fees, no market timing nor shadowing of indices, minimal ins and outs, and an investment thesis that all could understand.
How Terry Smith Chooses Stocks: His 12-Point Investing Framework Explained
Fundsmith seeks to “only own shares that will compound in value over the years, investing in a limited number of high quality businesses with a sustainably high return on capital, strong cash generation and assets that are intangible and difficult to replicate”.
Great! But what does that mean?
Here is Terry Smith’s investment thesis as set out in the Fundsmith Equity Fund Owner’s Manual, together with our comments on each point.
1. We aim to buy and hold
Smith prefers extremely low turnover. Once he finds a great business at a fair price, he wants to hold it for many years.
Advantages:
- Reduces trading costs and taxes.
- Allows compounding to work uninterrupted.
- Ensures discipline: forces the investor to focus on business quality, not short-term noise.
2. We aim to invest in high-quality businesses
A “quality business” is one with high returns on capital, durable competitive advantages, pricing power, and strong cash generation.
Advantages:
- High-quality firms compound capital faster.
- More resilient during downturns.
- Lower risk of permanent capital loss.
3. We seek to invest in businesses whose assets are intangible and difficult to replicate
These include well-known brands, e.g., L’Oréal, distribution networks, intellectual property, customer relationships, and software platforms.
Advantages:
- Intangible moats are harder for competitors to copy.
- Tend to scale more easily and with higher margins.
- Produce high return on invested capital (ROIC).
4. We never engage in “Greater Fool Theory”
The “Greater Fool Theory” is buying something solely because someone else will pay more later, e.g., meme stocks.
Advantages:
- Avoids speculative blowups.
- Keeps the portfolio grounded in fundamental value.
- Reduces behavioral risk and FOMO-driven mistakes.
5. We avoid companies that need leverage
Smith dislikes businesses whose returns depend heavily on borrowing or financial engineering.
Advantages:
- Lower bankruptcy and refinancing risk.
- More predictable earnings during recessions or rising-rate environments.
- Higher-quality firms can fund growth organically rather than through debt.
6. The businesses we seek must have growth potential
Smith wants companies that can grow revenues, cash flows, and dividends without excessive capital reinvestment.
Advantages:
- Growth is essential to long-term compounding.
- Reduces reliance on multiple expansion for returns.
- Helps defend against inflation by expanding intrinsic value.
7. We seek to invest in resilient businesses
Resilience means the ability to maintain profits in recessions, crises, and changing market conditions.
Advantages:
- Protects the portfolio during downturns.
- Stable earnings lead to lower volatility and better risk-adjusted returns.
- In a crisis, resilient businesses often gain market share.
8. We only invest when we believe the valuation is attractive
Even a great business is a bad investment if bought at an inflated price. Smith looks for good companies at reasonable valuations, not necessarily cheap ones.
Advantages:
- Improves margins of safety.
- Increases expected future returns.
- Reduces the risk of permanent capital impairment.
9. We do not attempt market timing
Smith does not try to predict macro events, interest rates, recessions, or short-term market movements.
Advantages:
- Avoids one of the biggest causes of underperformance: jumping in and out at the wrong time.
- Keeps process consistent and repeatable.
- Focus stays on bottom-up business analysis.
10. We’re not fixated on benchmarks… other than long-term
He doesn’t try to match or beat an index quarter-by-quarter. The only benchmark that matters is long-term compounding over many years.
Advantages:
- Reduces pressure to chase short-term trends.
- Encourages independent thinking rather than closet indexing.
- Aligns with long-term investor goals, such as retirement and wealth-building.
11. We’re global investors
Smith casts a wide net globally, unconstrained by home bias.
Advantages:
- Access to the world’s best businesses, wherever they are.
- Lower risk: diversification across geographies and currencies.
- Many of the best quality compounders, e.g., LVMH, Nestlé, are not in the UK.
12. We don’t over diversify
Smith believes too much diversification dilutes returns. A concentrated portfolio of about 25–30 high-quality companies is optimal.
Advantages:
- Each position is meaningful to performance.
- Easier to monitor and understand the businesses deeply.
- Allows conviction in the truly exceptional companies.
Summary
Terry Smith’s 12-Point Thesis is essentially:
Buy great companies at sensible prices; hold them forever; avoid noise, debt, speculation, and benchmarks; stay global; stay concentrated and let compounding do the work.
It’s simple, but not easy, and that’s precisely why it works.
Why Microsoft, Meta and Stryker are Terry Smith’s Biggest Bets
Here are Terry Smith’s current three largest investments. Together, they accounted for over 25 % of the Fundsmith LLP portfolio at July 31, 2025, according to a Morningstar Managed Investment Report, published in May 2025. Let’s review those companies to see why they caught Mr. Smith’s eyes.
1. Microsoft Corp (MSFT)
Smith’s largest holding by far is Microsoft. At a 10.23% portfolio weight, Microsoft took top place at July 31, 2025.
Why Microsoft Is Terry Smith’s Largest Holding:
- Microsoft is a large, diversified tech company with strong recurring-earnings. Such characteristics fit Smith’s preference for businesses with sustainable competitive moats and high returns on capital.
- Holding Microsoft provides exposure to current trends, such as the cloud, and enterprise IT, in a company that has global scale and resilience.
Caveats:
- Although large and durable, being a large cap tech stock, valuation risk exists: if Microsoft’s growth slows, the multiple could compress.
- Concentrating heavily in two tech giants, e.g. Meta and Microsoft, does increase correlation risk, since both are big tech.
Implication for Smith’s strategy:
- This supports his “concentrated portfolio of high-quality businesses” approach, rather than many small holdings.
- It shows he is comfortable owning major tech companies as long as they meet his criteria of durability and value.
2. Meta Platforms (META)
The second of Smith’s three big positions is Meta Platforms, which made up about 8.83% of portfolio, at July 31, 2025.
Why Terry Smith Is Betting Big on Meta:
- Smith evidently views Meta as a company with a strong competitive position in its social-media/ads ecosystem, offering durable earnings and high returns on capital.
- The large stake suggests he sees it as a “core” compounder.
Caveats:
- As a big position, Meta must deliver or it will significantly affect overall portfolio performance.
- The social media/advertising business is subject to regulatory risk, platform-shifts, and possibly secular headwinds, such as privacy changes and competition.
Implication for Smith’s strategy:
- The choice aligns with his stated investment philosophy of “buy good companies, don’t overpay, and hold them”. Meta appears to satisfy the “good company” test from Smith’s viewpoint.
- It signals conviction in one’s stock picks. But that’s faith that comes at the price of increased risk because of reduced diversification.
3. Stryker Corporation (SYK)
Stryker Corp. (SYK) is No.3 in terms of portfolio weight for the Fundsmith Equity Account. At July 31, 2025, it registered 6.89% of total portfolio valuation. Regardless, Stryker is one of the fund’s largest healthcare positions. It’s a holding that fits Terry Smith’s preference for high-quality, durable businesses.
Why Stryker Is Fundsmith’s Top Healthcare Investment:
- Stryker operates in medical devices and orthopedics. This is a sector with non-cyclical, essential demand driven by ageing populations and increasing surgical volumes.
- Its products, which include implants, surgical systems, and hospital equipment, have high switching costs, giving Stryker pricing power and a long runway of predictable, recurring revenue.
- The company generates consistently high returns on capital, aligning directly with Smith’s core investment philosophy of owning businesses with strong economics and long compounding potential.
Caveats:
- Medical-device firms face regulatory oversight and long product-approval timelines; innovation failures or product recalls could slow growth.
- Valuation can be elevated for high-quality healthcare names, so future returns partly depend on sustained execution.
- Currency movements and global hospital-spending cycles can create some variability in reported results.
Implication for Smith’s strategy:
- Stryker adds sector diversification, balancing Fundsmith’s large tech holdings with a defensive, high-quality healthcare compounder.
- It exemplifies Smith’s preference for companies with durable moats and resilient earnings, and its mid-single-digit portfolio weight reflects strong conviction without extreme concentration.
How Terry Smith’s Portfolio Reflects His Long-Term Investment Philosophy
- The selection of these three stocks strongly mirrors Smith’s publicly stated investment philosophy: pick companies with durable competitive advantages, high returns on capital, long horizons, and avoid overpaying.
- The heavy weighting (10.23%, 8.83%, 6.89)) demonstrate the strength of Smith’s convictions.
- It also highlights his tolerance for technology exposure (two large tech names) balanced by a more defensive alternative theme (medical technology).
- For a sophisticated audience, the key takeaway is how this mix embodies a “compounder-centric” portfolio: less about trying to time sectors, more about owning great businesses and holding them.
- One caveat: concentration works if those businesses perform; under-performance by any of the major holdings could hurt the portfolio significantly.
What Millennials and Gen Z Can Learn from Terry Smith
If you’re a Millennial or Gen Z investor, you’re growing up in a financial world filled with noise. Look to the left; there’s a TikTok stock guru. Look to the right and there’s meme-coin hysteria. Terry Smith’s approach cuts through all of that market drama. His philosophy, refined over decades, offers three grounded lessons that can genuinely help you build long-term wealth.
1. Buy Good Companies, Not Hype
Smith’s first rule is simple: own businesses that make real money today and are likely to make even more tomorrow.
This means choosing companies with strong brands, loyal customers, high margins, and products people actually rely on, not whatever’s trending on social media this week.
For younger investors, this is a reminder to focus on quality over coolness.
A company with durable competitive advantages, think Apple’s ecosystem, Microsoft’s cloud dominance, or Stryker’s medical technology, will usually beat flashy startups promising the moon. Good companies compound. Hype rarely does.
The lesson: Long-term wealth isn’t built by chasing the hottest ticker. It’s built by owning great businesses that keep winning.
2. Don’t Overpay, Even for Amazing Companies
Smith loves high-quality businesses, but even he won’t buy them at any price. A great company can still be a terrible investment if you pay too much for it.
This matters for Millennials and Gen Z because we live in a culture where urgency is built into everything: “buy now,” “act fast,” “limited time only.” But in investing, that’s exactly the mindset that will hamper returns.
Instead, Smith teaches patience:
Wait for moments when a great business is attractively priced. This might mean a contrarian viewpoint, advancing when others are retreating, as during pullbacks, market fear, or periods of temporary weakness.
The lesson: Don’t pay premium prices for the sake of “FOMO.” Long-term returns come from buying quality at sensible valuations, not aggressively bidding up your favorite brand.
3. Do Nothing; Let Compounding Do the Work
This might be the hardest rule for younger generations. We’ve become accustomed to checking our phones constantly and reacting instantly, which is good in martial arts, but bad in investing. When it comes to investing, constant tinkering is the enemy.
Smith’s philosophy is radical in its simplicity:
Buy good companies. Don’t overpay. Then leave them alone for years.
Why?
Because long-term compounding only works if you give it time… uninterrupted. Every trade, every switch, every attempt to “time the market” chips away at your potential returns.
For Millennials and Gen Z, this is liberating:
You don’t need to babysit your portfolio. You don’t need to be a trading prodigy. You don’t need to predict recessions or elections.
The lesson:
Wealth grows quietly in the background. Your job is to stay the course while time compounds your gains.
In a nutshell
Terry Smith’s approach gives younger investors a blueprint that’s refreshingly low-stress and data-proven:
- Buy good companies, those with real competitive advantages.
- Don’t overpay: wait for sensible entry points.
- Do nothing; hold for the long term and ignore the noise.
It’s not flashy. It won’t go viral.
But it works and that’s exactly why it’s worth following.
