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Investment Approach

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My Approach to Investing


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 favour companies that are paying a growing dividend and have a prospective dividend yield of at least 2.0%. I search for companies generating strong cash flow and if not having net cash, then debt levels that is low to moderate. 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 am looking for the “double whammy” that comes 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 size a position based on my assessment of the potential Risk/Reward of the stock. 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 too 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 it is now much easier to get the information you need. 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, FTSE Fledgling and FTSE AIM, the remainder.

The table below shows the percentage returns over 1, 3, 5 and 10 years to 24th December 2019

Screenshot 2019-12-27 at 10.22.27

Over the medium and 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 25th December 2019, I owned Scottish Mortgage Investment Trust) and also in smaller companies. Small companies can be incredibly rewarding but they are also far riskier 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 on 24th December 2019

Screenshot 2019-12-27 at 10.19.10

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 between 10x and 20x 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 20x 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; a reverse double whammy!

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, simply Wall Street, 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 six-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 27th December 2019:

Screenshot 2019-12-27 at 10.25.44



…and my Earnings Upgrades Screen

Screenshot 2019-12-27 at 10.26.42

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, (Renew Holdings) from Stockopedia:

Screenshot 2019-12-27 at 10.29.59

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

I also attend investor events such as the excellent events hosted by Sharesoc and Mello

I use voxmarkets 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 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 bandwagon 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 position as well as stopping me from buying into a stock that is clearly in a downtrend and from holding on too long when a holding starts to fall!

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


Screenshot 2019-12-27 at 10.35.05

I use weekly OHLC Bars, (Open, High, Low, Close) for the share price. It shows the opening price, the range during the day and the closing price. The bars are shaded blue for up days and red for down.

I use two moving averages; 50 days (blue) and 200 days (red).

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

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 bars 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 investing 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.


How many stocks do I hold?

I generally hold between 20 and 25 holdings. I feel comfortable with this as I believe it gives me a reasonable balance between the risk of focusing on too few stocks, ( high portfolio volatility) 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 positions, nine of which are investment trusts or ETF’s.

Naturally, my largest positions will comprise those stocks where I have a high conviction that the upside I am expecting will be realised. Coupled with this, I try to assess what the downside might be if I’m wrong.  Currently, three of my largest 10 holdings are investment trusts, where my main risk is getting the theme wrong rather than individual stock risk. Sure, if Japanese small-cap companies start to fall, Baillie Gifford Shin Nippon is unlikely to emerge unscathed; likewise, it is highly unlikely that I will come in one morning and find it down 30% due to a profit warning!

In conclusion, I don’t think there is a right or wrong answer to the number of positions one holds. I think it is more an art than science, with different investors taking different approaches. It’s all about judgement, what one is aiming to achieve and ultimately, what one feels comfortable with.


How do I decide how much to invest in each position?

I try to align my stock weightings in the JIC Portfolio with my rating of each stock’s potential and risk.

This approach came from a super investment book, “Excellent Investing: How to Build a Winning Portfolio” by Mark Simpson. He proposes a disciplined way of matching one’s weighting in a stock to the expected risk/reward.

As a result, I rank stocks on risk, (potential downside), as low, medium or high and on reward (potential gain), also as low, medium or high.  The most attractive investments would clearly be low risk/high reward into which I invest a whole “unit”. Medium risk/ high reward and low risk/medium reward have target weightings of two-thirds of a unit. Finally, high risk / high reward stocks have a target weighting of one-third of a unit as would medium risk/medium reward. If the expected reward was low, one simply wouldn’t hold it at all, whatever the risk.

I  settled on a unit size of 6.0% of the Portfolio. This leads to three target weightings of 6.0%, 4.0% or 2.0%.


When looking at the JIC Portfolios there are two columns ranking each stock on risk and reward. There is of course, a degree of subjectivity involved. For instance, I rank Games Workshop as low risk due to its strong balance sheet, cash flow and “moat”.  Some might argue it should be medium risk. On Reward, I rank it medium because I think the current valuation does not leave enough upside over the next year to merit it being ranked high. I know some would disagree, thinking high reward is more appropriate. One of the benefits of this approach is that it provides a good point of discussion. Rockrose Energy is the only stock I currently judge as low risk/high reward. With it trading at less than cash on the balance sheet, I think low risk is appropriate and with strong cash flow and further value-enhancing deals likely, I am happy to give it a high reward ranking.


Whenever I review a stock, I refer to my risk/reward rating and consider whether it is still appropriate. When I make a change, I explain why.


What are my expectations on the “Reward” rating? 


Low Reward: Less than 10.0% total return, (including dividends) over the next 12 months


Medium Reward: Between 10% and 20%total return over the next 12 months


High Reward: More than 20%total return over the next 12 months.


This again is not an exact science but one that is driven mainly by the current valuation. Taking Avast and Renew Holdings for example:


I bought a position in Avast in May 2019 when it was valued at 13.4x December 2019 earnings forecast for 15% earnings growth and 12.4x the year ending December 2020, for a further 8% forecast earnings growth. It was also valued at around 11.0x free cash flow and a prospective dividend yield of 3.0%. It seemed to me that given such an attractive valuation there was scope for an upward rerating of the stock and that a 20% plus return was achievable over 12 months.


Six months on, Avast’s stock price had risen over 40% to 440p with the valuation no longer looking anomalous. On 2nd December 2019, it was valued at 18.9x December 2019 forecast earnings, falling to 17.2x 2020. I reckoned that achieving a more than 20% return from that valuation might be a stretch. I was happy to reduce my Return forecast from High to Medium and halve my position. I recycled the cash into Renew Holdings, valued on 2nd December, at just 9.3x September 2020 forecast earnings for 9.0% growth. A re-rating seemed likely from such a low valuation, especially in light of a decent trading update from the company. I rated it High Return. By 24th December it had gained 30% but was still only valued at 12.5x for 9% forecast earnings growth. I stuck with my High Return rating thinking a further re-rating was likely; in 2017, when I sold Renew Holdings it was on a prospective PE ratio in the mid-teens and a dividend yield of around 2.0%. Earnings expectations have been upgraded post results on 26th November 2019. I think there is a good chance of further upgrades during 2020.


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 my stop loss. I use 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, (my Reward rating drops to Low), 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 looks 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 heartaches as well as money. The only stocks I really worry about are the stocks that I hold as 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.


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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