Lord John Lee’s book How To Make A Million – Slowly is a big influence on my investing these days.
Lord Lee tells us how he deposited a total of £126,000 in PEPs and ISAs, and invested his way to more than a £1m by 2003. Since then, the total is several million more. His methods clearly work.
Keeping it simple
The core of Lord Lee’s investment philosophy is to buy into firms, stick with them, and to prosper with them as they grow. That’s why he tends to go for smaller firms than those filling the ranks of the FTSE 100. A business needs room to grow if it’s to produce the multi-bagging returns that Lord Lee has enjoyed over the years.
Rather than chasing growth, he looks for a firm capable of delivering sustainable and rising dividend payments. In the beginning, he’s looking for no more than a steady income, believing that if he gets his analysis right, capital appreciation will take care of itself over time.
So, rosy forecasts for earnings growth and high price-to-earnings (P/E) ratios tend to be absent from his targets. He reckons most investors and analysts over-complicate matters. Instead he considers relatively few metrics to start with, such as the P/E rating, dividend yield, debt level and net asset values in some cases, such as for asset-based investments like property firms. Â
Value investors will recognise this focus on avoiding losses rather than chasing profit. Hunting for quality businesses in the bargain bins takes Lord Lee towards out-of-favour firms whose prospects are under-valued by the market. However, unlike some approaches to value investing, he aims to stick with a company for years until it (hopefully) sees accelerating profit, and the shares enjoy an upwards rerating to a higher P/E ratio. In the end, he often exits a position only when the company is involved in a corporate action such as being taken over by another firm. Â
Quality with potential
It’s not just about buying firms that are cheap though. Lord Lee does several things to establish that each company he picks has a quality business with potential. He focuses on cash-rich companies or those with low levels of debt. “Look for a stable board of directors,” he urges, because frequently changing management or advisers can signal turbulence beneath the surface. He also makes sure the directors have ‘clean’ reputations and are also invested in the enterprise with meaningful shareholdings themselves in the firm.
In terms of immediate potential, Lord Lee looks for moderately optimistic or better comments from the top directors in investor updates. It almost goes without saying that companies must have a record of profitability and dividend payments. Lord Lee sees growth in earnings and the dividend as two sides of the same coin. So he only considers established firms that can prove their cash flow with regular cash returns to their shareholding investors. Start-ups and jam-tomorrow propositions don’t make the cut.
Letting them run
Once he finds a winning investment, Lord Lee sticks with it, letting his profits run and often adding more funds to his position. If things go wrong from the beginning and a business executes its operations poorly, taking the share price down, he’ll often sell out. But he cautions against doing that during periods of general stock market weakness when many share prices are falling.