Terry Smith, Mr. "Do Nothing," breaks his own investing rule

1️⃣ Terry Smith, Mr. "Do Nothing," breaks his own investment rule

Veteran fund manager Terry Smith has everyone talking after publishing his semi-annual letter reporting unacceptable performance. His main fund, Fundsmith Equity, has dropped -2.9% compared to an 11.2% increase for the MSCI World in the last six months. 

Incredibly, it is not the ~14% gap that is causing a stir, but rather the actions Smith decided to take, abandoning his famous "do nothing" philosophy to adapt to a market dominated by momentum and (you guessed it) index funds.

For 16 years, Smith's investment philosophy, inspired by Warren Buffett, by the way, was summarized in three rules:

1. Buy good companies

2. Don't overpay

3. Do nothing

In the letter, although he confirmed that he maintains his philosophy, he reported a portfolio turnover of 51.8%. Literally more than half of the portfolio ended up different from how it started in just 6 months. This is the exact opposite of “doing nothing.”

Smith argues that the fundamental laws of the stock market are broken thanks to the massive exodus of capital from actively managed funds (like Smith's) to passively managed ETFs (index funds). And according to Smith, passive tracking and momentum algorithms create a feedback loop that inflates AI-driven valuations, regardless of companies' fundamentals.

Personally, we are followers of Terry Smith; even with the ~14% gap this semester, Fundsmith maintains a historical annualized return of 13.1% since its inception in 2010.

Smith's real problem is not his philosophy; Smith's problem is the panic of his clients who do not have the same tolerance, and consequently, the fund's redemptions.

When a client sees that their investment is “not doing well” and decides to sell their shares of Fundsmith Equity, Smith is forced to sell positions within the fund to give the cash to his client. In most cases, those sales happen at the worst possible time because people tend to withdraw right there, taking unnecessary losses from which it is hard to recover.

In view of the number of redemptions (which have been happening for years), Smith is radically changing the way he invests. They completely liquidated major, long-term positions for the fund like Nike, Unilever, Zoetis, and Novo Nordisk, and added giants that “align with current market dynamics,” such as TSMC, Uber, Mastercard, and GE Vernova.

Both Smith's followers, as well as analysts and critics, cannot agree on whether this is a pragmatic and disciplined adaptation or a loss of identity. Whatever the case may be, this is the reality for the vast majority of actively managed funds.

💡 What you should know: Interestingly, Warren Buffett also went through prolonged periods of unfavorable returns on many of his investments, including some that have now become his best. The difference is that Buffett did not manage a fund and did not run the risk of a client simply forcing him to sell. The moral is: If you want to invest actively, you might have an advantage by doing it yourself. Oh! And that index funds rule. 🤘

2️⃣ Stripe wants to buy PayPal (wow)

This could become the biggest tech marriage of the decade: Stripe (along with private equity firm Advent International) put a formal proposal of $53 billion ($60.50 per share) on the table to fully acquire PayPal. 

When we read that headline, we literally said “wow” in the Latin American colloquial version.

Stripe dominates (and very well, in our opinion) the merchant side (B2B) but fails in the consumer ecosystem. By absorbing PayPal, Stripe would control both ends of the transaction chain. 

The real benefit? They could route payments through their own infrastructure, bypassing Visa and Mastercard fees.

If consolidated, the new giant would process an absurd $3.7 trillion annually (short scale), 

💡 What you should know: Although PayPal has not issued an official response, this move proves that massive scale and vertical integration are the only viable tools in the crowded fintech space to maintain profit margins against the traditional banking business.

3️⃣ Crisis at Netflix: stock drops 12% in a single day

The Q2 2026 earnings season began, and Netflix reported very good numbers: record gross revenue, operating income, and net profit, driven largely by price restructuring and the success of its ad-supported plan. 

However, the stock plummeted 9% (dropping up to 12%) after the report, marking almost -50% from its peak in June 2025. 

The reasons? We believe there are 3:

First, guidance below expectations: Netflix projected revenue growth of 11.7%, which would be the slowest in three years; and earnings per share of $0.82 for the third quarter, below the estimate of $0.84.

Second, taking a step back in transparency: Netflix wants to report less data, and this frustrates investors. They had already stopped reporting new quarterly subscriptions, and now they are going from publishing their semi-annual audience report "What We Watched" to an annual one starting in 2027.

Netflix argued that it wants the market to focus on financial metrics rather than gross viewing hours, but this type of move is usually interpreted as a reduction in data transparency and signs that management wants to hide weakening performance.

And third, the feeling of over-reliance on price hikes: Revenue growth for the quarter was mainly due to price increases in its subscription tiers, including raising the standard plan to $19.99 a month.

Relying on price hikes to grow revenue (instead of capturing new subscriptions) is an unsustainable strategy in the long run because with every price increase, cancellation rates also rise.

To give you an idea, we are one more hike away from cancelling. We remember when we paid $7.99 a month without limitations and now we are up to $20 with a bunch of restrictions.  

💡 What you should know: Netflix's business is still a cash-generating machine, but the market knows that the days of easy and explosive subscriber growth are behind us. Now the reigning metric is retention and monetization per minute played, but Netflix doesn't want to show those numbers.

4️⃣ Deflation in the US. What?

The United States consumer price index (CPI) showed the most unexpected data in years, falling -0.4% month-over-month.

This monthly deflation represents the largest drop in prices since April 2020, when the global economy ground to a halt at the start of lockdowns.

We believe the biggest surprise of the report was the energy sector, which plummeted -5.7%, mainly due to a -9.7% drop in gasoline prices.

With these numbers, year-over-year inflation fell to 3.5%, a sharp drop from the 4.2% in the previous report. Core inflation, which excludes volatile food and energy, fell to 2.6%.

💡 What you should know: This inflation report gives Warsh and the Federal Reserve the perfect excuse to say that restrictive monetary policy is working, clearing the way for the first interest rate cuts to materialize sooner than expected.