Legendary fund manager Terry Smith says the most challenging part of an investment strategy is to have the patience of sitting and doing nothing when the investment climate is not conducive for trading.

Smith says investors should have a high quality, concentrated portfolio of 20-30 resilient global growth companies which are held for the long term.

As per him, investors should follow a simple three-step investment strategy, which is-

1. Buy good companies
2. Don't overpay
3. Do nothing

According to Smith, in order to gain superior returns it is not enough for companies to earn a high unlevered rate of return.

He says investors should try to find businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return.

"The businesses we seek must have growth potential. Our definition of growth is that they must also be able to reinvest at least a portion of their excess cash flow back into the business to grow while generating a high return on the cash thus reinvested," he said

Smith says investors should invest in companies that earn a high return on their capital on an unleveraged basis in recognition that sometimes credit is withdrawn.

“We seek to invest in businesses whose assets are intangible and difficult to replicate," he says.

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