John Lee has "always believed that most investors and analysts over-complicate matters." By using a simple strategy that blends value with quality, Lord Lee of Trafford has managed to beat the FTSE 100 in ten out of the twelve years following 2001. The average annual performance of his portfolio has been 12%, while the FTSE 100 has returned a measly 1.1% per annum. The FTSE Small Cap did better, growing by 4% annually, but still lagged behind John Lee’s portfolio. In his best-selling book, How to Make a Million Slowly, Lord Lee tell us how he did it.

Dicing value with quality

Lord Lee has a strong focus on buying stocks cheap, insisting that “I focus on just two yardsticks: dividend yields and PERs.” He prefers to invest in companies with single-digit P/E ratios, on the basis that this is “safer” than expensive stocks where the “expectation of profits growth is already built into the share price.” Lee tells us that investing in stocks with a P/E ratio around 20 is “bad news” if the company fails to meet market expectations, simply because the price has further to fall.

Low P/E ratios also leave scope for share price appreciation. Lord Lee explains that investors should look for “upward re-ratings” to occur when companies “increase profits each year”, but were bought with a low P/E. John Lee also likes to see a dividend yield - ideally around 5% coupled with a track record for paying the dividends - on the basis that the “dividend acts as a significant discipline on the Board in that it has to find cash, each year, to pay those dividends.”

Sticking to small caps

Lee also has a particular interest in small caps, insisting that “no small cap can be too small,” and that around 25% of his current portfolio is made up on companies with a market capitalisation of less than £50 million. He outlines “small caps tend to be less well covered by analysts and thus offer greater opportunities to be ‘discovered’ by private investors.”  

Taking direction from directors

Lord Lee advises investors to ensure that directors have meaningful shareholdings in the PLC. He outlines that “a director has the inside track on knowledge about the company and an advantage over the outside investors.” If a company is doing well, the directors should be the…

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