Investing for Growth – How to make money by only buying the best companies in the world

Introduction

Terry Smith began his career as a stockbroker in 1984 and became London’s top-rated bank analyst before heading UK company research at UBS Phillips & Drew in 1990. His career took a dramatic turn in 1992 when he published “Accounting for Growth,” a devastating critique of creative accounting practices that correctly predicted several high-profile corporate collapses. The publication led to his dismissal from UBS, but the book became a cult classic. After building two successful broking firms, Smith launched Fundsmith in 2010, his fund management venture built on a deceptively simple philosophy. His Fundsmith Equity Fund delivered annualized returns of 18.2% since 2010 till 2020, earning him the moniker “the English Warren Buffett.” However, the performance has since dipped, with annualised returns since inception at 13.8% as at the end of 2025.

“Investing for Growth” is an anthology of essays and letters written by Terry Smith between 2010 and 2020 for different publications including Financial Times, Daily Mail, Telegraph and his annual letters to shareholders. All put together, the book details his investment philosophy.

The Core Philosophy and Smith’s Blunt Style

“Buy good companies. Don’t overpay. Do nothing.” This three-step mantra forms the foundation of Smith’s investment philosophy. He has illustrated this in a direct, blunt style, which makes it very easy read. His essays are readable, easy to digest and refreshingly light on jargons. Terry provides a narrative that challenges the normal views we read today, often using examples that expose how little homework most investors actually do. His bluntness cuts through industry norms with surgical precision. On companies that keep destroying value, he writes: “But each day you wait for such events, these companies destroy a little bit more value”—no softening, no hedging.

What Defines a “Good Company”?

Smith’s definition of quality flows directly from Warren Buffett’s insight about returns on capital. He seeks businesses that generate serious amounts of cash and know what to do with it, creating a powerful compounding effect. These aren’t just profitable companies, they are cash machines with high returns on capital employed, minimal capital requirements, and pricing power. These quality companies have demonstrated resilience that transcends economic cycles, with proven track records of weathering downturns and maintaining pricing power through various market conditions. He cautions against relying on predictions in volatile sectors like technology, underscoring how Microsoft was the only company from a group of top software firms in 1984 that uniquely remains influential today.

The Valuation Discipline and “Do Nothing” Imperative

“Don’t overpay” sounds obvious, yet Smith demonstrates how even great companies can be terrible investments at the wrong price. He notes: “I suggest you consider how you might have reacted if someone suggested you invest in Coca-Cola or Colgate at twice the market PE in 1979. In rejecting that idea, you would have missed the chance to make twice as much money as an investment in the market indices over that period”. Smith’s preferred methodology is looking at free cash flow yield (free cash flow divided by market cap)then comparing that with other companies and factoring in FCF growth over the next five years.

Perhaps most contrarian is Smith’s advocacy for inactivity. Writing in the Financial Times, Smith used a Tour de France analogy: “The Tour has never been won by a rider who won every stage, and it never will. Like the Tour, investment is a test of endurance, and the winner will be the investor who finds a good strategy or fund and sticks with it”. He challenges investors who talk about “taking a profit,” noting: “If you have a profit on an investment, it might be an indication that you own a share in a business which is worth holding on to”.

However, I believe this “do nothing” philosophy requires an important caveat: one must be ruthless about selling companies that are no longer performing as expected. When a company’s ROCE begins to deteriorate, or its competitive moat shows signs of erosion, holding on out of loyalty or hope can destroy returns. The discipline isn’t just in doing nothing with winners, but it’s also acting decisively when the fundamentals that justified the original investment thesis have changed.

Warren Buffett’s 1979 Letter: Smith’s North Star

Throughout the book, Smith returns repeatedly to a single quote from Warren Buffett’s 1979 shareholder letter. Buffett wrote: “The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share”.

This distinction between return on capital employed (ROCE) and earnings per share (EPS) forms the intellectual foundation of Smith’s entire approach. Smith notes: “It has often puzzled me why such a clear statement from such a successful investor is so widely ignored”. Most analysts obsess over EPS growth, which can be engineered through share buybacks or accounting manipulation. ROCE, by contrast, reveals whether a company is actually creating value with the capital it employs.

Smith illustrates this with devastating effect in his analysis of Tesco, the UK retailer that even Buffett owned. While Tesco reported steadily rising EPS, its ROCE collapsed from 19% to  just 10% under CEO Terry Leahy. The company was borrowing to fund dividends while destroying value.A disaster hiding in plain sight that Smith spotted by applying Buffett’s 1979 principle. The irony that Buffett himself missed this is not lost on Smith.

The IBM Accounting Error: A Masterclass in Due Diligence

Perhaps the most memorable anecdote involves IBM’s 2009 annual report. When Fundsmith was evaluating IBM in 2010, Smith’s colleague spotted a US$1.9bn mistake in the cash flow statement. When they called IBM’s investor relations department to verify, IBM confirmed the error was real and said they were the only people who had asked about it. Smith reflected: “Maybe others had discovered it and didn’t bother to call, but I suspect the reality is that very few investors or analysts read annual reports and 10-K filings anymore”. The average investor, including professional investors, does not read the accounts. Instead, they rely on slides handed out by management, which omit all the bad stuff.

Adjusted Earnings and Corporate Shenanigans

Smith devotes an entire chapter titled “Why bother cooking the books if no one reads them?” to exposing how companies manipulate accounts through “adjusted” figures. He highlights restructuring charges, exceptional costs (particularly legal charges), and intangible asset amortization and impairment charges as common tools used to distort accounts. He particularly attacks pharmaceutical companies such as AstraZeneca and GlaxoSmithKline, where adjusted earnings have become so divorced from reality that investors are essentially flying blind.

The Book’s Value

For portfolio managers and serious investors, the book provides both philosophical grounding and practical tools for identifying genuinely superior businesses worth holding for decades.

Saurabh Chugh

May 2026