Book Reviews, Value Investing

Book Review of How to Make a Million — Slowly by John Lee

The full title of this book is How to Make a Million — Slowly: My Guiding Principles from a Lifetime of Successful Investing by John Lee.

John Lee, or Lord Lee of Trafford, wrote the My Portfolio column in the Financial Times for 14 years. He was a Conservative MP for Nelson and Colne from 1979 to 1983, and then for Pendle until 1992. Lee was also Minister in Defence, Employment and Tourism for 6 years.

The title of the book arose from the feat he accomplished, where he invested the maximum allowable each year into his Peps (personal equity plans) / Isa (individual savings account) since 1987 for a total of £126,200, and managed to achieve a total portfolio value of £1,015,843 by December 2003. The Peps/Isa plans let U.K. investors invest in stocks, free from income tax and capital gains tax.

Lee proclaimed himself a DVD (defensive value plus dividends) investor. He is a value investor that buys profitable companies that are valued cheaply and giving out good dividends that are well covered by earnings. Lee has a phrase that probably best sums up his investing philosophy: “Buy sound established profitable companies at the right price, put time into the equation and be patient. Value will always come through in the end.”

The book included many articles that he had previously written and covered a number of stocks that he had invested in, or is still currently holding. Lee’s holding period is really long. One example he had, PZ Cussons (Paterson Zochonis Cussons), has been held for 36 years since 1976, so much so that the current annual dividend is ~38% of his original cost. In 2001, he wrote that “around half of my current holding is historic, the balance being acquired in the latter 1990s.” He also acquires additional stock of companies over many years and occasionally takes partial profits. Pretty amazing.

Another thing that struck me was the kind of companies that Lee invested in. You would assume that a value investor would look for companies with a strong moat, so those would be quite rare, but Lee really invested in all sorts of companies that turned out well, e.g. bell chimes manufacturer, small electrical appliance manufacturer, lights/switches/cable manufacturer, property developer, jewellery manufacturer, shipping company, soft drinks, lenders, industrial lightning, hotels, cigarettes, textiles, etc.

At the start of the book, John Lee disclosed his performance from 12-year annual performance from 2001 to 2012

  • Performance: +5%, +5%, +44%, +30%, +20%, +18%, -14%, -42%, +28%, +29%, -2%, +24%
  • Compounded annual return over 12 years was 9.4%. This was severely impacted by the large drawdown in 2008, without which it would have been 14.4%.
  • Largest drawdown was 42% (2008)
  • Largest annual return was 44% (2003)
  • (Arithmetic) average return was 12.08%.
  • Three losing years of -2% (2011), -14% (2007), -42% (2008).
  • Nine profitable years, lowest positive return of 5%, average positive return of 23%.
  • Beat the FTSE 100 in 10 out of 12 years.
  • Beat the FTSE Small Cap in 8 out of 12 years.

12 Guiding Principles to Making a Million Slowly

  • Valuation
    1. Endeavour to buy shares on modest valuations – hopefully with an attractive yield and single-figure price earnings ratio and/or discount to net asset value/real worth.
    2. Ignore the overall level of the stock market. Don’t make judgements on the macro outlook — leave that to commentators and economists. Focus on your particular selection.
    3. Ignore minor share price movements. Looking back years hence you will have got it either right or wrong; whether you originally paid, say, 55 pence rather than 50 pence will be totally irrelevant.
  • Business
    1. Have a broad understanding of the company’s main business activity — one which makes sense to you.
    2. Focus on preferably conservative, cash-rich companies or those with low levels of debt.
    3. Seek established companies with a record of profitability and dividend payments — avoid start-ups and biotech or exploration stocks.
    4. Look for Chairman’s / CEO’s most recent comments which are moderately optimistic or better.
  • Management
    1. Ensure the directors have meaningful shareholdings themselves in the company and ‘clean’ reputations.
    2. Look for a stable Board — infrequent directorate changes. Similarly with professional advisers.
  • Investment management
    1. Be prepared to hold for a minimum of five years.
    2. Face up to poor decisions. Apply a 20% ‘stop-loss’ — sell and move on. However, ignore stop-loss if there is a major overall market fall.
    3. Let profitable holdings run. Don’t try to be too clever, i.e. selling and hoping the market will fall to ‘buy back’ at a lower price.

Characteristics to Look For

  • Smaller caps (~25% of portfolio was made up of companies with a market capitalisation of less than £50 million, ~50% of holdings are AIM stocks)
  • Established
  • Profitable
  • Conservative dividend-paying
  • Cash positive, or with low levels of debt
  • Preferably having a recognised ‘brand’ or unique selling point (USP)
  • Preferably also trading internationally
  • Directors held serious personal shareholdings in it — the larger the better — for alignment of interests.
  • ‘Cluster’ transactions by directors, i.e. purchases made by a number of board members at roughly the same time.

Valuation Yardsticks

  • For a trading company
    • Dividend yield
      • Ideally 5%+, and covered a few times by earnings
    • Price-earnings ratio (PER)
      • Single-figure PER
  • For an investment or property company
    • Net asset value (NAV)
      • Always at a discount
    • Gearing (i.e. borrowings / assets)

What We Want — A Double Whammy

  1. Profit growth
  2. Upwards re-rating (i.e. higher PER)

Resources to Look for Opportunities

Analysis Checklist (1999)

  • Items
    1. Trade / activity
    2. Profits record (earnings per share growth)
    3. Dividend yield and cover (number of times dividend yield is covered by earnings)
    4. Asset backing (shareholders’ funds vs. market capitalisation)
    5. Cash / borrowing (cash positive or low gearing)
    6. Board shareholdings (how much shares the directors own)
    7. Institutional holdings (what institutional investors are in)
    8. Price/earnings ratio
    9. Professional advisers / non-executive directors (auditors and non-executive directors)
    10. Company optimism / brokers’ forecasts
  • Scoring
    • Apply a score of 1 to 10 to each item
    • 90+ = outstanding investment
    • 80+ = excellent opportunity
    • 70+ = good, but better value might be found elsewhere
    • 60+ = nothing special
    • < 60 = forget it

Investigate Your Prospective Investments

  • I always like to visit prospective investments, to meet the executives in situ, to see the layout of the business, walk the shop floor or equivalent, and get a ‘feel’ for employees’ attitudes and enthusiasm.
  • Attend AGMs and phone discussions after results and other announcements.
  • Most private sleuthing is both sensible and acceptable. I remember visiting a couple of HMV stores and talking, as a shopper, to staff. There were enough doubts and negatives to have discouraged me from investing, but I foolishly ignored them and paid the price.
  • In the annual report, the chairman’s and/or chief executive’s comments on future trading should be seriously studied.

Takeover Opportunities

  • Characteristics
    • For the ideal bid opportunity, look for small, well managed businesses in sectors dominated by much larger and wealthier groups.
    • Bids tend to be rarer in “proprietorial” companies where there are significant family shareholdings, with the present generation “stewarding” the business for the next.
    • If the chairman is the dominant shareholder, any lack of family succession points to a future takeover.
    • As a generalisation, a small profitable PLC providing specialist services or products, particularly with a recognised brand name, is almost always going to attract predatory eyes at some stage.
  • Lessons
    • Be patient and back your own judgment. Don’t be tempted to take profits too soon before a likely bid.
    • It usually pays to see a bid situation through to the end. A rival bid often appears and there is nearly always a premium paid for a recommended bid.
    • Do not be tempted to take loan stock or similar as consideration purely to defer or avoid capital gains tax liabilities. This ties up capital for a longish period.

Don’t Sell Too Soon – Highlighted Examples

  • Organic multi-decade growth
    • William Morrison Supermarket
    • Associated British Ports (ABP)
  • Business transformation
    • Bodycote moving into heat-treatment
    • Wire and Plastic Products (WPP) moving into advertising
  • Long-term industry growth cycle
    • Clarkson went from 149p to £20. (Chariman) Tim Harris used to warn me of shipping’s famous cycle. Thus I could not resist the banking of a good profit. I sold steadily between 2004 at 485p and 2009 at 1030p. Although shipping cycles are well documented, I had not fully appreciated what a growth industry shipping is (powered by China’s economic growth).
  • Lack of patience
    • Border TV was a share I bought in 1992, convinced that as a regional TV tiddler it would be gobbled up by a larger player…. although I still profitably sold out my £5,000 holding six years later for £17,000 at 346p. Had I held on for just two more years I would have exited at no less than £14 after a takeover battle.

Failures in Judgement That Could Have Been Avoided

  • Companies brought down by management / market failure where I had obviously over-rated the ability of individuals
    • Abbeycrest  – jewellery manufacturer
    • Wensum – corporate clothing specialist
    • Fountains – environmental services
    • European Colour  – pigments producer
  • Companies where I failed to heed the warning signs
    • Jasmin – software systems – multiple changes in financial advisers, broker, auditor, and directors
    • Aero Inventory – airline spare parts – high level of debt
    • HMV – music retail – high level of debt, industry change
  • Companies that were clearly drifting down and where I stayed aboard too long
    • Litho – printers
    • Titon – window ventilation specialist
  • Companies where I just lost patience or tried to be too clever by buying as they were falling
    • BP Marsh -insurance industry investor / venture capitalist
    • Pendragon – motor retailer

Portfolio Size

  • In my current portfolios, putting together my ISA and non-ISA holdings, I hold around 35 different stocks.

Investor Communities Mentioned



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