Lord Lee Interview - How He Made Millions From British Small-cap Shares

14th Dec '15 by Ben Hobson

28 comments 26523 reads

When it comes to investing successfully in UK smaller companies, Lord Lee of Trafford needs no introduction. Famous for being one of Britain’s first ISA millionaires, he invested around £150,000 in tax-free wrappers over the course of 17 years after personal equity plans were first introduced in 1987. His investments took him past the million pound mark in 2003 and his portfolio is now worth considerably more.

Lord Lee credits his success to a patient, common sense approach to investing in smaller companies. He takes positions in attractively valued, good quality, high yielding shares. Many of them he buys and holds for many years, often with no intention of selling. He’s an evangelist for individual investing and played a role in opening up the predominantly small-cap Alternative Investment Market to ISA investors in 2013. He is also a strong believer that investors should take every opportunity to get face to face with company executives. In 2014, he wrote about his investing successes (and failures) in a book called How to Make a Million - Slowly.

Armed with a huge number of questions from Stockopedia readers, covering an array of investing topics, we went to the House of Lords to put them to him...

Lord Lee, what do you think it takes to be successful in the stock market?

I believe that the stock market is much more simple than people imagine, and I encourage people to back their own judgement rather than go into funds. There are only two things you need for successful investment, and that’s patience and common sense. Patience I think is number one and it’s something most people don’t have. They see a profit and they want to take it. In a way, modern technology actually encourages more of that short term trading activity. Days before we had instant prices and instant coverage people would invest in a share and almost forget about it for years. Now you can press a button and the instant prices come up. If you have got patience and common sense and are prepared to put some time to it, you should be able to do reasonably well.

In all my articles I have always tried to simplify the stock market for people. In some ways I suppose the one thing I regret in life is that I…

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MarcHowell

15th Dec '15

a very enjoyable read.

tomomo

Interesting read. Thank you.

MichaelFBS

16th Dec '15

You can find it here:

http://www.stockopedia.com/screens/my-screen-22676/

hayashi22

17th Dec '15

Lord John Lee is totally wrong . It's something an American might call someone-a dumb one at that.

Rusty2

How is that screen made up?

I think Lord Lee has only held one of those stocks recently.

What do you mean?

Correct title is Lord Lee of Trafford. He styles himself Lord Lee so that is fine.
However Lord John Lee is totally wrong.
Whether it matters a jot is a different matter.
Anyway I was also surprised at that list. There is some right old rubbish there eg Hargreaves and Molins-both have struggled badly over the past couple of years. You wouldn't have become an ISA millionaire by owning them.

Oh I see you are just taking about his title, I see now.

That list is nothing like Lord Lee's portfolio.

Yes.
It doesn't look like other lists I've seen eg Christie, Cussons etc.............

18th Dec '15

Hi @herbie47

If you look at the link

"Can't see the share you expect? View this screen as a checklist to find out why."

at the bottom of the list the link takes you to:

http://www.stockopedia.com/checklists/lord-john-lee-screen-22676/

this gives the checklist as to how the screen is constructed.

It was constructed by someone at Stockopedia (Ben maybe) after I had a conversation with them about Lord Lee's investing style.

I am no expert but I have read much of what Lee has written and I suspect that many of the companies he invests in are chosen based on qualitative criteria rather than pure quantitative formula. I know that he puts great store in quality of management and attends AGM and he likes to see management with skin in the game and often large family holdings. I am not sure Stockopedia is currently capable of screening for these sort of criteria but I also suspect that even if they were, they would not come up with a list of stocks that John Lee would invest in.

There is a good interview with him on the FT site at

http://www.ft.com/cms/s/0/1616896a-9851-11e5-9228-87e603d47bdc.html#axzz3ufljuJcx

and, in my opinion, some pretty asanine comments (particularly Jason Butler’s) by some so called “experts” at

http://www.ft.com/cms/s/0/cf5a4a7c-98da-11e5-95c7-d47aa298f769.html#axzz3ufljuJcx

Jason Butler states “Some of the best-performing small-cap funds have achieved significantly higher returns than the index or Lord Lee’s portfolio.” I wonder if he could have picked these funds 20 or 30 years ago that have out performed!

I for one will be sticking with investing my funds myself and have definitely taken on board some of John Lee’s teachings.

As to what we should call him, the few peers of the realm I have met, care little about how they are addressed and simply say call me John, Richard or Harry.

Michael

Thanks thats quite helpful. Interesting I put in some of Lord Le's holding to see why they fail, most are because of the PE less than 9.99 and yield greater than 5% rules, I think we have ended up with just a high yield screen, if these rules were relaxed you would get more of Lord Lee's holding into that screen which would be more useful? I notice also the Naked Trader does not have any of his holding either, so maybe something needs to change. Anyway I have done my own Lord Lee screen, which in 6 months has not done that well although thats mainly down to 1 share which he has now sold.

Its true some small UK company funds have performed very well in the last 5 years or so.

Thunderball

Thank you, an interesting read with clear straight forward advice.

Reassured to read his recommendation on Air Partner which I hold having acquired at 437p and have subsequently felt uncomfortable with ever since, despite its stockopedia score too. Maybe this article will save me the cost of trading it out and demonstrates that I will need to learn 'patience'!

timarr

As John Lee is a successful buy and hold investor you wouldn't expect most of his current holdings to meet his own buy criteria. So an accurate John Lee screen would not, almost by definition, throw up many of his current long-term core holdings which have long since ceased to meet his original requirements.

Merely because of this you'll find it impossible to devise a screen that captures his current portfolio even without taking to account the type of qualitative investigation he does into the management of the companies he invests in. And if he doesn't like the management he will sell - he recently dumped McColls because the CEO couldn't be bothered to talk to him.

All of which suggests that successful investing might be a bit more tricky than running the odd screen. Funny that ...

timarr

cig

Good point but then you should still be able to make an approximate screen that captures his holding discipline ("stocks he wouldn't sell if he had inherited them"). Essentially a buy-and-hold investor is defined more by what they don't sell, than what they buy (if they, somewhat irrationally, apply different rules to entry and exit).

Yes I see what you mean, however he has changed quite a lot of his holdings in the last year so I would expect that screen to have at least a few of his holdings. The only one it has is Northbridge Industrial Services (LON:NBI) but he sold that because the share price went down to his stop loss. Many of those holdings have high dividends/low p/e ratios because they have fallen from grace, like Drax (LON:DRX), and Hargreaves Services (LON:HSP), I don't think that is Lord Lee's investment strategy. Is there any performance figures for that screen?

I get the point, but I think it's really hard to do. Take Quarto, for instance: it's been a horrible business for many, many years but he's stuck with it despite the fact most of us have reckoned it's a basket case. Or Christies which went through hell a few years ago and still looks like a poor business. Or Gooch and Housego which he now seems to have sold, despite the fact it's a great business, but which had a massive profit warning just after he bought: but he stuck with it and reaped the benefits. Or Delcam, which never met his buy criteria (low yield, high-ish PE) but which was a fantastic performer until it got taken over.

To my eye JL does something more than he talks about. When he gets it right he's identifying cheap-ish companies that have hidden value and competitive advantages. At a guess that's initially gut instinct from decades of experience, backed up by detailed scuttlebutt with the company's management. Which is great but it's not something most of us have the time to do - and it's certainly not something that's going to be picked out by a screen.

Copying successful investors at any level is difficult. And mostly you can never be sure that they didn't just get lucky flipping coins. Apart from Buffett, but he's been operating on a different model to everyone else for the last 4 decades anyway.

timarr

Edward Croft

Yep - if you analyse John Lee's holdings you find they are all what I classify as high QM. (High Quality, High Momentum and certainly not 'cheap').

His buy discipline is to buy Quality when it's reasonably priced... i.e. a QV buy discipline (Quality+Value). But he holds beyond when value is realised as he expects the quality to be a strong driver of future growth. So his portfolio is not loaded with QV shares.

So (generalising grossly for my own understanding)... he buys QV, but holds till they are QM and keeps holding unless the Q disappears or they get bought out.

Ben has got a bubble chart of his holdings - and they clearly display this picture.

pka

19th Dec '15

Ed, you wrote:

"So (generalising grossly for my own understanding)... he buys QV, but holds till they are QM and keeps holding unless the Q disappears or they get bought out. Ben has got a bubble chart of his holdings - and they clearly display this picture."

That's very interesting. Would it be possible for us to see that bubble chart?

tony akram

16th Jan '16

great article yes would like to see bubble chart

jimmygee

17th Jan '16

Please post that bubble chart! Thanks in advance

Lord Lee Interview - How he made millions from British small-cap shares

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Ben Hobson

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