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Investment Approach

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My Approach to Investing


My approach to investing has developed over the years, and it has only been since I have been solely managing my own money, that I have nailed down what really works for me.

I focus my efforts on small and mid-sized companies searching for those where the growth prospects are not reflected in the share price. I am disciplined about the valuation I am prepared to pay; I baulk at paying over 20x forecast earnings and like companies that are paying a growing dividend. I favour companies generating strong cash flow and with low to moderate debt levels. Where possible I like to meet management and understand what makes them tick and if they have a decent stake in the business so much the better; our interests are aligned! I favour stocks that are beating expectations and earnings forecasts are being upgraded; ultimately I want to be invested in stocks where I have both the potential for share price appreciation from a re-rating and from faster than expected earnings growth.  Having found a potential investment I look at the share price chart as it can help with timing; so often resistance and support levels work. I hold between 20 and 30 holdings, making use of investment trusts for overseas or thematic exposure.

The most important number to me is the return of the Portfolio! I try not to get emotionally involved with individual companies; if I cut a holding and it immediately bounces, so be it. All that matters is the return of the Portfolio, each week, each month, each year!

I invest principally in the UK

I invest mainly in UK stocks as that is where I have gained my experience. There are clearly opportunities to invest in overseas companies, and it is fair to say that through the internet it is now much easier to get the information you need, but I think that for a private investor, such as myself, with limited time resources, it is better not to spread my net too wide. For me it makes sense to focus my efforts on a market where I have experience and familiarity.

I focus on mid and small sized companies

I focus on mid and small sized companies but not exclusively.

The FTSE 100 Index comprises the largest 100 companies and by value accounts for around 70% of the UK market, The FTSE 250, (the next 250 companies) accounts for about 25% of the market by value and the FTSE Small Cap and FTSE Fledgling the remainder.

The table below shows the percentage returns over 1, 3, 5 and 10 years to 29th October 2015


Over the long term small and mid-cap indices, although more volatile, have significantly outperformed their larger relations.

The FTSE 250 is in my view, an excellent hunting ground for companies with good growth prospects and reasonable valuations. I invest in FTSE 100 companies when there is a compelling reason, (at the time of writing I hold Melrose Industries and easyJet) and also in smaller companies. Small companies can be incredibly rewarding but they are also far more risky as the share price can move violently on little news and it can be difficult to get out when you need to.

The table below shows the breakdown of the JIC Portfolio at 29th October 2015


I like companies that are valued attractively relative to their rate of profit growth

In general, I look for companies where the projected PE ratio is around 15x and below and the projected PEG Ratio, (PE Ratio divided by the percentage growth rate in earnings) is below 1.5x, and preferably below 1.0.

I prefer the projected PE ratio to be below 15x as it gives me some protection should I be wrong. A highly rated growth stock may look attractive on a PEG Ratio basis because it is growing rapidly but if that growth unexpectedly falters the share price gets hit twice, once because the earnings per share take a hit and second, because the shares get de-rated to reflect the uncertainty and disappointment.

I like dividends as well; in most cases I will want to see a forecast dividend of 3.0% or more at purchase. I am prepared to buy at a lower prospective yield but in the expectation that future dividend growth will be fairly rapid.

I tend to steer clear of companies with high levels of debt. I rather liked the simple ratio that Robbie Burns uses in his book the “Naked Trader”; net debt should be less than 3x profits!

Where do I find BUY ideas and get my information?

I subscribe to Stockopedia online and to the Investors Chronicle, Shares Magazine and MoneyWeek.

I spend much of my time looking at potential investments and finding a reason not to buy! I am happy to follow up financial magazine tips but often, by using ShareScope and Stockopedia, I can see very quickly that it does not meet my criteria, (growth, valuation, balance sheet), can dismiss it and move on to the next.

I will do further research on those stocks that merit it by reading recent company announcements, looking at the company website and the latest report and accounts for example.

Before initiating a holding the main question I ask is whether I can realistically see a 30% total return from the stock over the next 12 months and I try and quantify the downside if I get it wrong.

Stockopedia has excellent financial information on individual stocks as well as a number of ready-made stock screens based on the approach of investment “gurus”. For instance there is a Jim Slater “Zulu” principle screen which shows all the stocks that currently meet the criteria laid out in his aforementioned book. I have had a number of ideas from this screen over the last few years in which I have invested.

I regularly screen for companies that have hit a new 3 month share price high and then try and understand why it is doing so. If I think I have worked it out, and it meets my other criteria, (growth, valuation, balance sheet) then it may well be worth an investment. I have found this exercise particularly useful in a poor market; a stock that is performing well against the general market trend is worth looking in to.

I  have set up some of my own stock screens on Stockopedia; VGM (Value Growth Momentum) and Earnings Upgrades (EU), which throw up ideas. I got AdEPT Telecom from my VGM screen back in September 2013.

My VGM screen as at 31st August 2015:


…and my EU Screen


Stockopedia has a “traffic light” system for seeing easily how a stock compares on a number of metrics with its industry/ sector and with the market as a whole. Stockopedia also has its own scoring system for Growth, Value, Quality and Momentum, which it combines into one overall score, the StockRank.

Example of a stock sheet, (Matchtech) from Stockopedia:


 You can sign up for a two week free trial of Stockopedia HERE

I also attend investor events such as the quarterly evening event held by Equity Development at which three, usually interesting, companies present and the excellent events hosted by Mello

I use www.investegate.co.uk for company regulatory news such as results and trading statements. It is a free service and one can set up alerts for companies in which one is interested.

I try to avoid catching falling knives

I like investing in companies that are hitting new price highs. It means things are going well and that investors as a whole like the story. It should however meet my other criteria to guard against purely jumping on a momentum band wagon in an overvalued “blue sky” story. Conversely I tend to shy away from investing in stocks that are hitting new price lows. It may meet all the other criteria but if the stock is heading downwards it probably means I have missed something. Even if I think the share price action is irrational, I remind myself of the words of the great economist and investor, John Maynard Keynes; “Markets can remain irrational a lot longer than you and I can remain solvent.”  In such a case I would most likely add it to my watch list and wait until the share price establishes what looks like a solid base.

Charts help with timing

Before investing I always look at a chart of the stock price. It can help with timing my entry and exit from a stock as well as stopping me from buying into a stock that is clearly in a down trend and from holding on too long when a holding starts to fall!

The following is my standard chart layout which I have set up on ShareScope.


I use candles for the share price. It shows the price range during the day and the closing price. The candles are shaded blue for up days and red for down.

I use four moving averages; 6 day (blue line), 21 day (red), 50 day (green) and 200 day (black).

The green “b’s” along the top of the chart are directors buying. On ShareScope, if you hover your pointer over the “b” a pop up box will tell you the size and price of director buying.

The letters along the bottom are “R” for results, “X” for ex-dividend and “D” for dividend pay date.

The “B’s” and “S’s” on the candle sticks are when the JIC Portfolio bought and sold. On ShareScope if you hover over them with your mouse it gives the trade details; how many shares, price and value.

I feel most comfortable invested in stocks that are performing well, (have a nice trend) and are above their 200 dma, (day moving average). The 200 dma can often act as support and as a buying opportunity. If the share price drops through it that would set alarm bells ringing. If the 50 dma crosses the 200 dma going upwards I often see that as a good sign to buy, in this case in October 2012, and vice versa. I find the the shorter term 6 and 21 day moving averages useful for shorter term timing.

The yellow shaded area is a “Donchian” Channel. The boundaries are the 21 day closing high and the 21 day closing low. In the example above taken on 31st August 2015 one can see that the lowest closing price in the last 21 days for Next was £74.70 on 24th August and the highest end of day price was £80.15 on 6th August.  As each day passes the chart will adjust if there is a new closing high or low level in the last 21 days. I use 21 days because it is roughly a trading month and if the channel starts to drift downwards it prompts me to at least question whether the trend has changed. The bottom of the channel often acts as support.

How many stocks do I hold?

I generally hold between 20 and 30 holdings. I feel comfortable with this as I believe it gives me a reasonable balance between the risk of focusing on too few stocks and having so many, that any individual stock has little impact on the whole portfolio.  At the time of writing the JIC Portfolio has 25 holdings, six of which are investment trusts. The largest 10 holdings comprise 54.9% of the portfolio by value.

I have been asked a number of times what criteria I use when deciding what weighting to give an individual stock in the Portfolio. I don’t think there is any right or wrong answer and that ultimately it is all about what one is comfortable with.  I think it is all about judgement; what’s the upside, is the valuation on my side if things go wrong, how convinced am I that it will deliver to my expectations?

I think that it is more an art than science with different investors taking different approaches. Neil Woodford for instance, as at end of July 2015 held 95 stocks in his Equity Income Fund, with the largest 10 making up 45.5% by weight. Stock number 31 was less than 1.0% of the portfolio and the 14 smallest holdings comprised just 1.0% of the portfolio!  He has clearly been very successful with this strategy; the larger, safer holdings provide steady growth and income whilst the smaller holdings have the potential to provide a boost to overall portfolio growth and no doubt, whilst there will probably be some failures in the bottom 40 or so stocks there could be some multi-baggers to which he will probably add. Anyway, that’s enough about Woodford, what do I do?

I prefer a more focused portfolio with between 20 and 30 holdings, (currently 25) and am keen, that in general, all my holdings are contributing to performance; I try not to have too many sleepers which I think will come good at some stage in the future.  This does not preclude me from holding the occasional small growth stock where I think there is substantial upside if things go well; current examples might include Bioventix, Fox Marble, Gem Diamonds and Avation. I am quite happy to start with smaller weightings in these types of stocks, i.e. around 1-2% and then if they start to deliver, as I hoped when I initially bought the holding, I will add.

As a general rule my largest holdings will be focused on those stocks which I judge to have the greatest upside and where I have the highest conviction that my expectations will be achieved. I try also to take a stab at what the downside might be if things go wrong. For instance, earlier this year I bought a holding in FlowGroup, but only 2.0%, as although I was excited by its potential the valuation was not priced to withstand disappointment. Had everything gone swimmingly well I could have added to the holding but sadly news from the company pointed towards slower order flow than expected. I ended up cutting at a loss and although painful, it did not hit overall portfolio performance too badly.

Currently, four of the top 10 holdings are investment trusts, where my main risk is getting the theme wrong rather than individual stock risk. Sure, if Japan does not do what I expect and starts to fall, then Baillie Gifford Shin Nippon is unlikely to emerge unscathed; equally it is also highly unlikely that I will come in one morning and find it down 30% due to a profit warning! The same goes for European Assets Trust, Worldwide Healthcare Trust and the other investment trust holdings.

Finally, I am happy to push holding sizes up in the short term if I am expecting some sort of catalyst that will drive up the share price but will then be happy to book some profits and pare the holding back a little after a good short term run. Take Crawshaw for example: it got sold down at the start of the year providing an opportunity to build up the holding but then by late June had recovered some 65% from February’s lows. In the mid 60p’s, although the longer term story still looked attractive, the valuation looked rich in the short term, so I booked some profits and pared back the holding. A more recent example is Matchtech; I took the holding up to 4.0% in mid-July as I was hopeful that its first half trading statement due early August would drive the share price up towards my target price of 680p. The valuation looked attractive and recent statements from the company gave me some confidence that I wouldn’t be disappointed. So, why not 5.0% or 6.0%? Ultimately, it’s all about judgement and what I feel comfortable with, as I could of course, be wrong!

When do I sell?

In many ways this is far more difficult than when to buy.

In many cases I sell or at least reduce when the share price drops through the my stop loss. I am attracted to having a trailing stop loss which moves up as the share price moves up. It means that one will rarely sell at the peak in a share price, (who does?), but will get out once the share price trend appears to have changed.

If I am unfortunate enough to hold a stock that issues a profit warning I tend to get out. Humans are generally optimists and management rarely communicate how bad things really are, either because they cannot see how bad it is or because they have an innate optimism that things will get better, or that they can make them better. Things normally get worse before they get better and as the old saying goes “profit warnings are like buses – they come in threes.”

I might also sell to reduce the concentration in my portfolio to a particular stock or sector if I feel it has got too high.

The last reason for selling out is when the valuation no longer seems attractive and I have a more compelling opportunity in which to invest the proceeds.

For all my holdings, I set a level at which I review the holding; both up and down

I do not put automatic stop losses on with my online broker; I like to have control of when I sell and in any case I tend to look at the closing price. I don’t like being taken out by an intra-day spike down in the share price which proves temporary.

My view, learned through bitter experience, is that you are best cutting losses quickly. Conversely, you should let your winners run. As Warren Buffet said “cut out your weeds and water your flowers”! All too often we are tempted to do the opposite. We add to our losers as it reinforces our original decision to buy it: “I was right to buy it at 100p so I must be even more right to buy more at 85p, after all it’s cheaper. Oh, and I will fund my purchase by selling some of my holding in another stock which is doing really well!”

My opinion is that one should sell and move on – it saves a lot of emotional heart ache as well as money. The only stocks I really worry about are the stocks that I hold, after all they are the only ones that can damage my wealth should their share prices collapse. Stocks that are going up that I do not hold are purely “opportunities lost”. In other words, if I cut a holding because it looks like it is going to damage the overall portfolio, I do not beat myself up if it bounces afterwards!

I set my stop loss at a level where the trend would look as though it has changed from moving upwards to downwards.  A chartist who I used to follow in the City showed me a simple rule which I quite liked; if you put a chart up on the wall and step back to the other side of the room, you can get a pretty good idea what the trend in the share price is. If it looks like it has changed then I will in all probability sell.

In addition, I review holdings when the share price drops through the 21 day low in the share price, (the bottom of the Donchian channel). This covers the last month of trading and it seems to me that if the stock is falling through the lowest price it has hit in the previous month and hitting a new low, maybe the trend has changed.  I do not automatically sell but in essence this is my “first line of defense”! I will then think carefully if this looks like the trend really has changed or whether there is a more obvious level close by. 

Investment Trusts

Where I do have overseas exposure it is generally through holdings in investment funds. I prefer Investment Trusts but also use Exchange Traded Funds. I have long been a fan of investment trusts:

  • You can often invest when the shares stand at a discount to NAV (Net Asset Value) with the expectation of the discount closing and in some cases moving to a premium.
  • The total annual charges on investment trusts are, in general, lower than with Open Ended Investment Companies, (OEIC)
  • An OEIC manager has what might seem a “nice” problem when there are lots of new buyers as he has lots of new cash to invest. However, he may be forced to buy stocks that no longer look attractive and drive the price up even further. When flows move the other way, either due to a market correction or poor performance, the manager is then forced to sell stocks to meet redemptions, thus driving the price down further. That is partly why towards the end of a “bear” market you see stocks being sold when the valuations look ludicrously cheap. The manager is being forced to sell! The manager of an investment trust however, has a stable portfolio to manage without daily inflows and outflows.

I also use investment trusts to gain exposure to a theme, especially where I do not have the expertise to pick individual stocks myself; I prefer to leave it to the experts! I currently own The Biotech Growth Trust to gain my exposure to the biotechnology theme, in healthcare I own the Worldwide Healthcare Trust and for resources, the BlackRock World Mining Trust

and finally Discipline!

Discipline is very important. The discipline not to get sucked into a stock because the story sounds good, (but it does not meet your criteria), the discipline to ignore all the “emotional” chatter that goes on that can make you act on impulse rather than in the cold light of day and the discipline to cut positions when you should and not to be worried about admitting you were wrong.

Its easier said than done and over the years I can count many occurrences when ill-discipline has let me down; must try to do better!






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