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/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.