3 tips for finding good companies from Fundsmith Equity Fund Manager Terry Smith

I discovered Terry Smith some time ago and invested in his Fundsmith Equity Fund which has yielded some impressive returns over the years. He like Warren Buffett is obviously a master at what he does and this morning I found a video where he tells you how he does it.



In the video Terry refers to three basic principles when trying to select a 'good' company :

1. Don't buy a company with a low Return On Capital Employed (ROCE) percentage which he states should be above 15% and definitely no lower than 10%.
2. Work out what percentage of the company's profits arrive in cash and if the answer isn't 90% or more - don't invest.
3. Does the company make it's money from a  large number of everyday repeat predictable transactions i.e. you don't want to select a company that relies on one off things that may or may not happen such as winning contracts.

I have purchased many individual stocks and tried to use some sound fundamentals but I have never implemented a filter like this one so I will be trying it out and reporting back in future posts.

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