How Terry Smith's Focus on Quality Trumped Quantity

Terry Smith's concentrated portfolio strategy serves as a masterclass in the power of quality over quantity in investing.

When Smith launched Fundsmith Equity Fund in 2010, he took an approach that raised eyebrows in the investment community. Instead of spreading investments across hundreds of stocks, as is common in many mutual funds, Smith chose to focus on just a handful of high-quality companies. His portfolio typically holds between 20 and 30 stocks, flying in the face of conventional wisdom about diversification.

Think of Smith's approach like a master chef crafting a tasting menu. While others might offer a buffet with dozens of mediocre dishes, Smith carefully selects a few exquisite offerings, each chosen for its quality and ability to stand on its own merits. His investment philosophy is simple: buy good companies, don't overpay, and do nothing.

By 2023, Fundsmith Equity Fund had grown to over £22 billion in assets under management, with a track record of consistently outperforming its benchmarks. This success came not from owning a wide array of stocks, but from owning a select few of what Smith considers the best companies in the world.

In a world where investors are often encouraged to spread their bets far and wide, Fisher and Smith advocate for a more focused approach. It's about being a connoisseur rather than a collector.

Smith's conviction in his holdings isn't based on hunches or hot tips. It's the result of deep, thorough analysis of companies' fundamentals, their competitive advantages, and their potential for long-term growth. He looks for businesses with high returns on capital employed, strong free cash flow, and sustainable growth prospects.

This approach requires patience, discipline, and the courage to go against the grain. It's like being the only person at a wine tasting who chooses to savor one exceptional vintage rather than sampling everything on offer. You might miss out on some variety, but you're guaranteed to enjoy the best the cellar has to offer.

It's not about blindly copying Smith's picks, but about adopting his mindset. Instead of trying to own a little bit of everything, focus on understanding a few great businesses deeply. It's about developing the knowledge and conviction to make meaningful investments in companies you truly believe in.

This doesn't mean you should put all your money in just a handful of stocks. Even Smith, for all his concentration, maintains a level of diversification across different sectors and geographies. But it does mean being selective, doing your homework, and having the courage to make significant investments when you identify truly exceptional opportunities.

Smith's Fundsmith strategy reminds us that in investing, as in life, quality often trumps quantity. It's not about having the biggest portfolio or the most stocks. It's about owning pieces of the best businesses you can find and holding onto them for the long haul.

So the next time you're tempted to buy a stock just because you feel like you should own a piece of every industry, remember Terry Smith and his Fundsmith formula. Ask yourself: Am I buying this because it's truly one of the best companies out there, or am I just adding another name to my portfolio? Because in the world of investing, it's not the number of stocks you own that matters – it's the quality of the businesses behind them.