Many different strategies can be successful when it comes to investing in UK shares. But I keep coming back to the elegant simplicity of Lord John Lee’s approach. In 2003, he famously came out as the first person to publicly declare himself a Stocks and Shares ISA millionaire in the UK.
Turning thousands into millions with UK shares
Since then, his investment strategy has propelled his portfolio to a value of several million. But the money he paid into his ISA over the years can be measured in thousands. Much of the rest of the value came from the returns delivered by his UK shares.
Firstly, Lord Lee looked for small companies. After all, elephants rarely gallop and little businesses often have more room to grow. I’ve embraced that tactic and look for my own investments in the small-cap space. Of course, there are no guarantees that businesses will grow just because they are small.
Next, Lee targeted companies paying a shareholder dividend. He once said: “All I’m interested in during the short term is the flow of dividends. The capital value will hopefully take care of itself over a long period.” And I reckon the fact that a company can pay a dividend reveals much about the strength of its finances.
Skin in the game
But the third step in the strategy was to expect big director stakes. The directors of a company should have their own money on the line by holding shares in the company. After all, if they don’t believe in the prospects of the business, then why should I?
And Lee insisted on “some sort” of profits record. He was clearly looking for evidence of a viable business. And profitless ‘jam tomorrow’ UK shares with a good story wouldn’t have made it past this step.
The fifth requirement was a stable board of directors. If Lee saw frequent board changes he was likely to pass over a company and move on to the next opportunity. If the directors keep leaving for whatever reason, I’d be inclined to wonder what’s wrong.
Step six was to pick businesses that are understandable. Indeed, we all have our own circle of competence. But at the very least I’d want to know how the business makes its money. And for me, that requirement would rule out several UK share opportunities in today’s world.
Strong finances and good value
Lee’s seventh requirement was for a cash-rich business. And step eight was for low debt. He would settle for one or both of those and having them shows a company is well financed with a strong balance sheet.
The final step was to look for a modest valuation. It’s no good finding a great company with lots of fine attributes and then paying too much for the stock. I could end up with a good business and a poor investment.
I always remember that following a decent strategy doesn’t make any gains certain from UK shares. And I could even end up losing money rather than making millions. However, this strategy makes sense to me. And I think it’s easy to follow. It could even be the best strategy ever devised for UK shares.