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We are fortunate at Stockopedia to have a community of successful investors who have built portfolios worth more than £1m in their ISAs and kindly agreed to share their insights. In this series of articles we will explore their investment strategies and key lessons learned on how to pick stocks and manage risk when building a portfolio. Whether you are an experienced investor or just starting out, we hope that these interviews will provide valuable insights and inspire you to achieve your own investment goals.
Name: Michael
Job: GP and teaching professor at a university
Number of years as a private investor: 20
Portfolio Size: Over £1m
Investing Background: After paying off his mortgage and with a little more available cash than before, Michael read an investor diaries column article in the Independent. The article mentioned the Zulu Principle which encouraged him to buy Jim Slater’s books and “they just made sense to me.” He set up his own screen to identify Slater-style stocks and has used it to build a portfolio of mainly individual companies and some Investment Trusts.
Investing Goals: Continue to outperform the market
After paying off his mortgage, Michael had enough cash left over at the end of every month to begin investing in the stock market. As a GP and teaching professor he had a busy work schedule and needed a strategy to provide decent returns without taking up too much time.
He came across the Zulu Principle, a book written by the esteemed investor Jim Slater, designed to help private investors make “extraordinary profits from ordinary shares”. Slater is a strong advocate of the price to earning to growth (PEG) ratio which compares a company’s value (PE ratio) to the pace that it is growing. PEG ratios of less than 0.75 are enticing (according to the Zulu Principle) and when that is combined with strong profitability metrics (a high return on capital) and good momentum (strong relative strength), Slater says extraordinary profits might be on the table.
Michael said the ideas advocated by Slater, “just made sense to me,” so he set up his own screen to identify stocks without having to spend too much time doing research. In the early days Michael used Company REFS, the data screening business founded by Slater in the 1990s, for online screening. Company REFS was acquired by Stockopedia and Slater Investments (which is run by Jim’s son Mark) in 2019.
Insight 1: Pick a strategy which makes sense and use screening tools to help save time when identifying opportunities
Michael’s screen identifies potential ideas for him, but it is still important to look at each individual company as it comes up in the screen. “There are some false positives,” he says, such as companies which have been captured by the screening rules because of share price movements owing to merger discussion. “I also check that I am comfortable with the sector - if it’s gas holding in the far east, I would be less comfortable with that.”
After the screen has identified potential ideas, the next question is how much money to invest. “It’s a bit of trusting your instinct,” says Michael. “How much I put in will depend on how volatile I think the stock will be - if it’s a larger company I would put more in.”
It is important for investors to assess a stock’s potential volatility before investing. Some investors might want to use screening rules to cut off highly volatile micro caps, or those with very small free floats (the number of shares in the public domain).
Michael says he generally spends about half an hour checking that the stocks which come up in his screen are appropriate for his portfolio before adding them. It’s a strategy which has proven very successful. “Over the years it’s [the portfolio] done quite a bit better than the FTSE 100,” he said, “On average about 6% better [per year].”
Insight 2: Build a screen which you trust to identify ideas which fit your strategy
Sticking to the discipline of his screen means Michael doesn’t trade very often. “On average maybe [I buy] less than one stock a month,” he says. “I probably make five to 10 purchases a year.”
While the decision to add stocks to his portfolio isn’t too time consuming, Michael does devote some time every day to checking the performance. “I keep an excel spreadsheet, which shows me how my stocks are doing,” he explains. “It shows the day-to-day changes in the price or PE and I check that every day.”
The spreadsheet is also designed to help Michael make selling decisions because he uses it to check whether stocks in his portfolio no longer have any chance of being growth shares. Still, he admits that “it’s a lot more difficult to make selling decisions than buying decisions.”
Like many investors (both amateurs and professionals) Michael admits to suffering from psychological attachment to his shares. “I know a lot of the amateur investors who, like me, don’t want to crystallise to a loss. Even though I know that is stupid.”
Sometimes crystallising a loss is the right thing to do if the stock no longer exhibits the same characteristics as it did at the time it was added to the portfolio. At other times, it is far better to hold onto or even top up on underperforming assets. “If [the shares are falling and] it still meets the buy criteria, I put more in,” says Michael.
Insight 3: Trade with discipline - add stocks to your portfolio when they fit your criteria and remove them when they don’t
About Megan Boxall
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The Excel spreadsheet is so important when investing because you can set targets to achieve each year. The one I find most useful is one where I put my initial fund size in the top cell, then each row down represents a year, the columns along the top are compounded growth from 10%, 11%..... to 20%. I can look at my fund value now for my SIPP and see what figure my compounded growth of my fund is right now. I know that based on the current valuation I need to lock in £30K of profit before the end of August 2023 to hit an annual compunded growth of 15%. With that knowledge I can adjust the portfolio to hit that target.
I've worked out to hit targets each year I need 5 stocks to make 25% gain, I need 1 stock to make 50% gain and 2 stocks to basically not do very much. Out of 8 stocks in your portfolio (optimum being 8-10) you are looking to profit from 6. That equates to 20% gain approx.
Good food takes time to prepare and buying stocks is no different. It takes practice - lots of practice.
Very interesting. My experience was very similar, in fact I still have - and use - my Jim Slater check list. Although computers have simplified analysis, your article made me very nostalgic for Company REFS - surely one of the most useful publications ever ! I must admit that I don’t feel the same affinity with a stock these days as I did in the days when Saturday mornings were spent manually entering prices from the (paper!) FT into a spreadsheet I had written !
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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Nice. It would also be interesting to add a question asking what has been the most successful buy and, similarly, the worst.