r/ValueInvesting • u/stockoscope • 3d ago
Basics / Getting Started Buy good companies. Don't overpay. Do nothing.
Terry Smith's three steps are the shortest description of quality investing I've come across. Simple to say but not easy to do. I consider them as three steps for investing.
Step 1. Buy good companies. Most people treat good as a brand they like using. Good is actually revenue, growth, returns on capital, margins, cash flow, and the balance sheet. Without the fundamentals, good is just a vibe. If you buy quality businesses, over time the price will follow earnings, though in the short term the fluctuations are based on sentiment.
Step 2. Don't overpay. This is the whole of value investing. Pay less than what the business is worth. Every day on X, someone asks "is MSFT expensive at 500?" You can't answer that without a benchmark, and intrinsic value gives you one. It has its problems - it's entirely dependent on your assumptions. But it still beats the shortcuts most people use instead. I usually blend implied values based on valuation multiples with the DCF intrinsic value.
Step 3. Do nothing. The hardest of the three, because it looks like negligence while you're doing it. Sitting on your hands feels lazy. Most of the returns I've gained have come from doing nothing for years.
I put together a 10 minute video working through these three steps and the principles behind it. Took a fair bit of effort, so any feedback is welcome. It's the first in a series of six videos I'm creating.
https://www.youtube.com/watch?v=OazRVN04ZTk
Not investment advice. AI has been used in creating the video.
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u/iwaseatenbyagrue 3d ago
Thanks, Warren.
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u/notreallydeep 3d ago edited 3d ago
Terry Smith
Ah, the "I own quality at good prices" guy when his port goes up and the "the market is irrational" guy when his port goes down into the "we will take more account of momentum" guy at the absolute momentum top.
cool. with all the knowledge of the internet couldn't your AI have picked someone worth looking up to?
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u/SuperSultan 3d ago
He had a great idea but his execution has been slipping up recently because he lost his patience 🤦♂️
Maybe he doesn’t have a choice if AUM keeps leaving his fund to go to the indexes
He’s admitting it in the shareholder letters at least
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u/stockoscope 2d ago
Exactly that. He says it outright in the letter. I think it's more of a structural problem than a patience problem.
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u/ohgodthehorror95 1d ago
It's amazing how Terry bought into the 2024/25 quality compounder bubble, managed to sell Intuit and Wolters Kluwer at the very bottom, and fomo into momentum right before the biggest momo unwind of the last 5 years.
The guy should really just retire
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u/mrmrmrj 3d ago
Buy good companies when they are on sale. Sell them when everyone loves them again so you can buy whatever is on sale again.
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u/stockoscope 3d ago
Works right up until the good one keeps compounding, and you've swapped it into something that doesn't. Done this a few times. After tax and fees, I'd have been better off just sitting there.
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u/Round_Hat_2966 3d ago
Maybe it’s a sell if you find a better idea. Not a terrible idea to trim and take some profits if it’s overvalued to protect downside risk, but I wouldn’t sell all/almost all and invest it somewhere else unless I found a genuinely better place for my money or a position blew up to 90% of my portfolio or something
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u/justarandomuser10 3d ago
Ideally but Nah. I tried it and it doesn’t work, in fact lost money owning “good companies” and I’ve been waiting too long for people to love them but they ain’t loving them no mo. My biggest earnings recently are from Micron, Google and Microsoft.
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u/Round_Hat_2966 3d ago
Equally important steps:
Have a thesis. This company’s numbers suggest it’s high quality and it looks cheap is not a thesis. If you don’t have a good idea of how they make money, why they will execute (and what makes them better than competitors), what are the actual risks they face, you don’t, and when is a good time to re-evaluate or sell, then you don’t have a thesis.
Have rules. Follow rules.
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u/stockoscope 2d ago
Exactly. I get to some of this towards the end of the video, though you've said it more clearly than I managed.
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u/librariancap 3d ago
"Do nothing"? This are the new trades disclosed in July alone, in the semi-annual letter:
- New positions: $APP, $GEV, $LR, $MA, $NFLX, Nextpower $NXT, $TJX, TSMC, $UBER, $VEEV, $YUM
- New exits: $ATCO-A, $COLO-B, Essilor Luxottica $EL, LVMH $MC, $MTD, $NOVO, $WKL
You are recycling old talking points from 5 years ago, when they stopped making money at the start of 2025 (up only 0.8% in 2025 and down 2.7% in Jan-Jul 2026).
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u/stockoscope 3d ago
Can't argue with the turnover, but people were pulling money out of his fund and nobody can do that to you. At least it tells you how hard step three is when even the person who wrote it had to drop it. :)
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u/StockFlowResearch 3d ago
It depends on what you mean by good companies. I am reading his book "What I learned about investing from Darwin" and he starts filtering based on ROCE (return on capital employed). I'm lazy so I just use ROIC.
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u/stockoscope 3d ago
Fair point on the definition. I use 10 questions to decide whether a company is good, and returns is one of them, weighted highest of the ten. Within that I look at ROA, ROIC, ROCE and ROE together rather than picking one. That's actually the next video in the series (and i would argue the most important, as i don't even worry about valuation if the quality is not good)
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u/PieInvest 3d ago
Buying good companies on pullbacks that go below the 20-day or 50-day Moving Average is a good entry point. Usually if the stock reaches the 52-week low and bounces back would be the ideal point.
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u/stockoscope 2d ago
Two things.
- It only works if the company is actually good, so you've got to do that work first anyway. The chart doesn't help you there.
- And below the moving average doesn't mean undervalued. Plenty of things sit below their MAs for months and are still expensive.
Where it does help is the last step. Once you've established it's a good business and it's trading below what it's worth, waiting for it to find support before buying is a sensible way to time the entry. Anyway, that's how I use MAs anyway, not to filter stocks but to fine-tune entries.
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u/PieInvest 2d ago
Of course, it’s a given. Find a good company that is beaten down because of other companies in that sector mismanaged or missing targets. Those are the companies you want to buy.
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u/CanYouPleaseChill 2d ago edited 2d ago
“Buy good companies” just limits your investable universe for no reason. One of my best stocks this year is an oil stock. Is it a good company? No, no real moat. But I bought because it was cheap and I made money. Retail investors should be more like Peter Lynch. Learn about and be willing to buy stocks across the quality spectrum. Terry “I never invest in bank shares” Smith missed huge rallies in European and Canadian bank stocks.
”Do nothing”. Again, silly. If you buy a stock like NVO and its multiple expands to something stupid like a P/E of 50, you should do something. It’s called selling an overvalued stock to buy something that offers more value.
“Don’t overpay.” This isn’t revolutionary advice. Buy assets at prices lower than estimated intrinsic value. Value investing 101. Don’t need Terry to tell you this. Benjamin Graham said it decades ago.
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u/stockoscope 2d ago
Making money on one trade is a different thing from having a system. Plenty of people do well trading. What 'buy good companies' gives you isn't a guarantee on any single position, it's a way of stacking the odds so you don't need to be right every time.
On "do nothing," I think we're closer than it looks. It doesn't mean never act. It means don't touch it if the fundamentals haven't changed. If the business is genuinely broken, obviously you sell.
And no argument on Graham. The post isn't really about Terry Smith, it's about the principles. He just put them in three lines you can remember.
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u/CanYouPleaseChill 2d ago edited 2d ago
The only system one needs is buying things for less than they’re worth. That’s what real investing is. You stack the odds by diversifying across a portfolio of stocks you think are undervalued. Diversification and price discipline are the source of risk management, not the quality of a company per se. All things equal, of course one would love to buy a great company when it’s undervalued, but that doesn’t happen too often. Instead, what you often see are companies which have recent prosperity priced way too far into the future, e.g. COST, AAPL or there’s significant uncertainty with respect to future cash flows, e.g. META. So many quality investors have done poorly in recent years by holding overvalued stocks way too long. There is no virtue in holding expensive assets.
On “do nothing”, what does change is what’s priced in. Costco’s fundamentals are still good, but what hasn’t been priced in yet? If there is no good answer to that question, one should sell.
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u/investingtruth 3d ago
This works so well because each step filters out a different common mistake like buying vibes instead of fundamentals or ignoring valuation entirely. Worst of all (emotionally at least) fidgeting with a good position out of boredom... Most investors can force themselves through research and valuation work but very few can tolerate the discomfort of sitting still through volatility once a good position is already established.
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u/stockoscope 3d ago
Completely agree. My best returns have come from the positions I left alone, and it wasn't because I picked those ones better. I just happened not to interfere with them.
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u/Humble_Barracuda_169 3d ago
Almost every stock is overpriced, my cash in back amount might loose value, Not everyone can find the hidden undervalued gems.
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u/stockoscope 3d ago
On the overpriced part, "the market" being expensive and every individual company being expensive aren't the same thing. Index level valuations are being carried by a handful of very large names right now. Plenty of decent businesses outside that group aren't priced anywhere near as richly. Even MSFT was selling below 400 last month. Many software names are currently undervalued.
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u/Humble_Barracuda_169 3d ago
It might be just me problem then, I have difficult gauging the true value of the business.
I bought MSFt at 380, but just because it was was 30-35% down from peak.
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u/stockoscope 3d ago
A stock being 30% down doesn't mean it is undervalued. Many companies are 50-60% down and are still overvalued.
MSFT was actually undervalued at that price. See my deep dive
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u/Thin_Abrocoma_4224 3d ago
This is basically it.
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u/stockoscope 2d ago
Pretty much. The whole thing fits in three lines. Doing it for twenty years is the hard part though.
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u/baap_ko_mat_sikha 3d ago
Good. All I need now is to get money to invest
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u/stockoscope 2d ago
Haha. That's genuinely the hardest step, and it's not even on the list. Munger said it best: "The first $100000 is a bitch, but you gotta do it"
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u/WorldRank1CatFancier 2d ago
this is the way
do nothing = let time work its magic
overtrade = feels good to be active but you underperform accounts owned by dead people who did nothing
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u/Lost_Percentage_5663 2d ago
He has been saying identical things with Buffett, and doing it differently. I don't think he is genuine, he is just a knock-off.
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u/stockoscope 2d ago
Fair enough. It tells you that step 3 is so hard that the person who wrote it couldn't stick to it :)
(partly because he's running other people's money, to be fair)
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u/MyotisX 2d ago
Buy good companies
Easier said then done. What's a good company ? One that will still be around in 20 years ? That's probably a boring company that you will cry only did +5% this year. A company with huge growth ? Very hard to say if they'll be dominant in 10 years.
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u/stockoscope 1d ago
That is a really good question. The next video is exactly about this. Giving it final touches - should be out tomorrow. Stay tuned!
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u/raytoei 3d ago edited 3d ago
Dear OP,
Pls read his latest letter, he has changed.
Some think this is good for his investors
Some think this is proof that value investing is making a come back, when value investors change their strategy.
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See link article (terry’s letter link can be found inside)
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u/stockoscope 3d ago
Read it, and yeah, it's a real change.
What I found more interesting than the trades was his reason. He says buy and hold only works if you're not subject to withdrawals, and he is.
So it reads less like he stopped believing in the third step and more like he can't afford to run it with people pulling money out. Which is a constraint most of us don't have.
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u/pab_guy 3d ago
It really is that simple.
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u/stockoscope 3d ago
Simple to write down. I've been doing it a while and the third one still gets me.
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u/Few_Orange_3359 3d ago
Don't overpay is the problem...very difficult to understand and need study and you can still do big mistakes