Book review: How to Make a Million – Slowly

How to make a million slowly

How to Make a Million – Slowly is a book about the lessons learned and experiences gained by a private investor over a 50 or 60-year investment lifetime.  The book is written by John Lee (Lord Lee of Trafford), who for many years wrote a column in the FT, and excerpts from that column feature heavily in the book.

John’s own portfolio became even more famous when he mentioned in 2003 that his ISA account was valued at more than £1 million (hence the name of the book).  So how did he do it?

The answer is through the patient application of what he calls a DVD investment strategy.  DVD stands for Defensive Value plus Dividends, which explains itself quite nicely.  I only wish I’d thought of it first because it neatly captures my own approach to investing as well.

The book is full of ideas on how to find good companies and how to value them.  There is some theory, but the bulk of the book is from John’s actual experience, with many detailed accounts of how he found, analysed, visited, bought, held and occasionally sold many companies over many decades.

The book is full of many insightful comments, and here are a few of my favourites:

He looks for companies with strong finances, committed managers, and improving outlooks – and buys their shares when they are at attractive prices.  Then he waits for years if necessary.  This is essentially the same approach followed by legendary value investors such as Warren Buffett and Benjamin Graham.  It worked in the US back in the 1930s, and it works now in the UK.  With patience, method and discipline, anyone can do it.

I have called the book How to Make a Million – Slowly because it sums up my approach to stock market success – building up a portfolio brick by brick, share by share over many years.

There are those who treat the stock market like a casino – constantly dealing in and out – not knowing or caring what activities the companies they buy and sell are engaged in.  Good luck to them – that is their choice – but it is not my way.

12 guiding principles:

1. Endeavour to buy shares on modest valuations

2. Ignore the overall level of the stock market

3. Be prepared to hold for a minimum of 5 years

4. Have a broad understanding of the PLC’s main business activity

5. Ignore minor share price movements

6. Seek established companies with a record of profitability and dividend payments

7. Look for moderately optimistic recent comments

8. Focus on preferably conservative, cash-rich companies or those with low levels of debt

9. Ensure the directors have meaningful shareholdings themselves and ‘clean’ reputations

10, Look for a stable board

11. Face up to poor decisions

12. Let profitable holdings run

I have always believed that most investors and analysts over-complicate matters.  I try to focus on just two yardsticks when investing in a trading company… dividend yields and PERs, and two for an investment or property company… net asset values (NAVs) and gearing.

I like to buy shares on a modest valuation – ideally say a dividend yield of 5-6% – and on a single-figure PER.  

The payment of a dividend acts as a significant discipline on the Board of a PLC in that it has to find the cash, each year, to pay those dividends.

What we want is a company that increases profits (and hopefully dividends) each year and where the rating (PE ratio) that the stock market/investors place on the company’s shares increases significantly.  This is the ‘double whammy’ any investor should be seeking.

Today [2009] we are in an extraordinary period when not only do large-caps yield 5-6% and ‘proper’ small-caps twice that, but returns on cash deposits are minuscule.

Stock market movements are often exaggerated both ways – sometimes too bullish, sometimes too bearish.

The key to building an appreciating portfolio is to avoid the losses – don’t take unnecessary risks or buy at inflated levels.

I like the alignment of board and shareholder interests, the focus on conservative growth and “stewarding” a business through generations, their generally low borrowings and usually progressive dividend policy.

My core investment philosophy is that ‘value’, i.e. real worth, always comes through in the end, but you must be patient.

Smaller caps, established, profitable, conservative dividend-paying companies, cash positive, or with low levels of debt are for me, preferably having a recognised ‘brand’ or unique selling point (USP) and preferably also trading internationally.

Nothing is certain in stock market investing – equity investing always involves a degree of risk.

I have been a happy holder for 36 years – today it is one of my largest holdings, with an annual dividend return of approximately 38% on original cost.  This is what long-term investment is all about.

To be a successful investors requires commitment and time, and you’re only going to put in the required effort if you find the stock market enjoyable and absorbing.

Apart from the financial columns I regularly subscribe to the weekly Investors Chronicle, having done so for many years, and find it an invaluable source of comment and ideas.

I would not invest in a PLC unless the directors themselves held serious personal shareholdings in it.

Investing by watching screens is all very well, but you can’t beat human contact.  So get out there.  

Visiting a PLC such as Cropper’s is for me part of the interest and enjoyment of serious investing – an opportunity to embrace our industrial heritage and to appreciate the role that founding families and their businesses have played in the life of their communities.

Major institutions rarely attend AGMs (having their own private briefings) so the meetings are the private investors’ theatre.  But be strong-willed.  Do not waste time in which you could be gathering crucial information by going back for a second helping at the buffet.  Circulate – and make sure you stay sober.

Few investors apply much consistency or logic to the creation of their personal investment portfolios.  Your average investor will usually hold a range of stocks, with substantially differing values, delivering wildly varying yields, with no obvious theme or structure.

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

One of my cardinal principles has been to focus on avoiding losses rather than chasing profits.

As the legendary Warren Buffett famously said: “Lethargy bordering on sloth remains the cornerstone of our investment style.”.  Definitely an attitude to be encouraged.

My late father jokingly used to say that money was not for spending but for buying shares.

For me, equity investment is about long-term growth in both capital and income.  I have never worried too much about annual performance comparisons.

I ask 10 questions, applying a score from 1 to 10 for each.  The subject areas cover trade/activity, profits record, dividend yield and cover, asset backing, cash/borrowing, board shareholdings, institutional holdings, the price/earnings ratio, professional advisers/non-executive directors, and company optimism/brokers’ forecasts.

A number of groupings of private investors have been formed in recent years.  For example, ShareSoc, with 3,000 members, takes up investors’ grievances, and Mello Meeting, with over 800 members, arranges regular company presentations.

Overall it was an enjoyable and interesting read, and it certainly gave me a look inside the activities of an investor who likes to visit the companies that he invests in.  It’s also good to see that Lee also covers his mistakes, which is very helpful for other investors, and should help to ease the fear that investors feel when an investment performs badly.  Mistakes are inevitable, and you just have to accept that.

I’ll end with one final quote that sums up this whole Defensive Value plus Dividends (DVD) approach in a nutshell:

A substantial portfolio can be built, brick by brick, by applying common sense and basic investment principles.  But it does take time!

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

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