Investing in small-cap stocks

Welcome to another blog post by me LJ Nissen. Due to travel this post will be about half the size as usual. Today I will be looking at investing in small-cap stocks that are not resource companies but still provide good value.
small-cap stocks

If you are a regular reader of my writing, you will know that I read the Financial Times in the morning and one of the sections that I appreciate the most there is the “FT Money”-section, which is published every Saturday.

In it, famous investors lay out their investment strategies, advice on taxes, what has worked recently and what did not work as well.

The investment-philosophy of former “Money”-section columnist Lord Lee of Trafford is worth looking more deeply into.

He has invested £150.000 in a British investment vehicle (ISA) into various small-cap stocks since 1987 and made them into £4.5 million.

Actually, he was the first to become an ISA millionaire when he broke the £1.000.000 level in 2003.

In an interview with the FT’s Claer Barrett a few weeks ago, John Lee (as his real name is) lays out his investment strategy, which is surprisingly simple (please note that the article may require registration.)

One of the first columns that he wrote for the Financial Times was titled “Double 7s” where he laid out the case for companies with a dividend yield of 7 percent and a P/E-ratio of 7.

These companies don’t exist today and if they do they are probably value traps.

Instead he insists on being conservative with what he buys and tries to buy companies with a lot of cash and with as low P/E-ratios as possible.

In his book “How to make a million – slowly” he lays out his investment criteria which boils down to 12 rules (if you look at the original FT article you will find them all reproduced there.)

Because I’m not in a position to reproduce all the rules here, I’m only going to talk about the main ideas behind his thinking.

  • He has focused on buying small-cap stocks with reasonable valuations and high dividend yields. Preferably with a good discount to Net Asset Value.
  • He also tells us to ignore the level of the overall market and leave the macro outlook to economists – which seem like very good advice indeed. Instead he tells us to focus on our own selection.
  • Then he also tells us to be prepared to hold our stocks for at least five years in order not to be caught up in short-term market fluctuations.
  • Another thing to consider is to choose conservative cash rich companies and those with a low level of debt.
  • Finally he tells the investor to have basic knowledge of what kind of business that the companies invested in are in.

To test out Lord Lee’s investment strategy, I will set up a portfolio of small-cap US stocks over the Christmas holiday that I will come back to over the next few years to see if his philosophy bears fruit.

So please follow those posts.
The investment strategy of John Lee, a former minister in Margaret Thatcher’s government, is worth looking in to.

He has made £4.5m out of an investment of only £150.000 by investing in small-cap stocks since 1987.

He has done so by focusing on companies with a low P/E-ratio, low debt and high on cash.
Now that I’ve caught your attention, I would appreciate it if you downloaded my primer “My three favorite gold stocks”.

You can download it for free here.

Published December 24’th 2015.

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