Buy Good, Don't Overpay, Do Nothing

"There are only three things you need to do: buy shares in good companies, don't overpay, and then do nothing. It is the last part that most people find hardest." — Terry Smith

Terry Smith built his fund on an austere mandate: own a small number of exceptional businesses, never sell unless the reason for owning them breaks, and ignore market noise. Three genuine ideas sit underneath the slogan.

1. A simple return estimator. Free-cash-flow yield plus the long-term earnings growth rate gives a rough expected annual return. A business on 25 times free cash flow (a 4% yield) growing earnings at 12% a year suggests around 16% a year. It side-steps complex modelling and gives a single, checkable number — and works best for the predictable, high-quality businesses he favours.
2. A quality screen built to resist manipulation. Smith began as a forensic analyst, and his filters each close a specific accounting loophole: free cash flow above 90% of reported profit (the earnings are real), a high return on capital employed (genuinely productive, not just leveraged), high gross margins (demonstrated pricing power), and little need for external financing (growth funds itself).
3. The discipline of inactivity. Smith quantifies the hidden drag of constant trading — costs, spreads, taxes and behavioural mistakes — and keeps portfolio turnover very low. This is not laziness; it is the deliberate preservation of an advantage that benchmark pressure denies most managers.

Illustrative example: a decade of doing little

Over its first decade, the fund held only a couple of dozen businesses meeting all four quality tests, traded very rarely, and produced strong long-term returns net of fees. The decade illustrated the central claim: for patient holders, the quality premium is real and persistent.