This is a solid, time-tested value investing checklist suitable for long-term investors seeking to build wealth steadily while avoiding big mistakes.

 

This chart outlines Terry Smith's investing philosophy, as summarized by Brian Feroldi. Smith is a well-known value-oriented fund manager (Fundsmith), and his principles emphasize quality, patience, and discipline. Below is a breakdown and analysis of each section:

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1. The Rule of 3

• Buy Good Companies – Focus on quality businesses with durable competitive advantages.

• Don’t Overpay – Even great companies can be bad investments if bought at too high a price.

• Do Nothing – Avoid overtrading; let compounding work over time.

Comment:
This is a distilled version of Warren Buffett’s philosophy: buy wonderful businesses at fair prices and hold them. “Do nothing” is especially important—many investors hurt returns by over-trading.

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2. Disqualifying Features

• Start by eliminating bad companies rather than searching for good ones.

• Reduces the risk of catastrophic losses.

Comment:
This is a practical risk-management tool. By filtering out companies with poor economics, high debt, or dubious governance first, you save time and avoid “value traps.”

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3. High Returns on Capital

• ROIC (Return on Invested Capital) is a key metric for quality.

• Formula:

  $$ROIC=\frac{\text{Net Operating Profit After Tax}}{\text{Invested Capital}}$$

Comment:
ROIC measures how efficiently a company uses its capital. Consistently high ROIC often indicates a moat and competent management. Terry Smith heavily emphasizes this in his stock selection.

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4. Look for High FCF Yields

• Free Cash Flow Yield compares FCF to the company’s market value.

• Formula:

  $$\text{FCF Yield}=\frac{\text{Free Cash Flow}}{\text{Market Value of the Company}}$$

• Compare to “3% over expected inflation” as a hurdle rate.

Comment:
FCF is harder to manipulate than earnings. A high FCF yield can signal undervaluation, but it must be considered alongside business quality—a declining business may have a high but unsustainable yield.

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5. Create a Watchlist

• Track companies that are good but not cheap enough.

• Use price targets to wait for the right entry point.

Comment:
This encourages patience and preparedness. Many investors miss opportunities because they don’t track companies systematically over time.

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6. Exploit Advantages of Being an Individual Investor

• Play the long game – no quarterly performance pressure.

• Buy unloved stocks or industries – contrarian opportunities.

• Invest anti-cyclically – go against market sentiment.

Comment:
This section is crucial. Individual investors can be more flexible and patient than institutions. They can exploit market inefficiencies in neglected areas without size constraints.

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Overall Commentary:

Strengths:

• The framework is simple, disciplined, and focused on quality and value.

• Emphasizes psychological and behavioral edges (patience, contrarianism).

• Uses few but powerful metrics (ROIC, FCF yield).

Potential Limitations:

• Requires deep business analysis and patience—not suitable for short-term traders.

• “Don’t overpay” is subjective; determining intrinsic value is challenging.

• Anti-cyclical investing demands strong conviction and can involve long periods of underperformance.

Verdict:
This is a solid, time-tested value investing checklist suitable for long-term investors seeking to build wealth steadily while avoiding big mistakes. It aligns closely with the philosophies of Buffett, Munger, and other quality-focused investors. The emphasis on eliminating bad ideas and waiting for the right pitch is especially valuable in today’s noisy markets.