Insights from ISA Millionaires: How to build wealth and confidence in the stock market

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.

Profile

Name: Geoff

Job: Recently retired from the National Grid

Number of years as a private investor: 40

Portfolio Size: Over £1m

Investing Background: Family knowledge encouraged Geoff to begin investing in unit trusts with the money he had available “which wasn’t very much”. He began investing directly in equities during the privatisation spree of the late 1980s and has been investing consistently since then, picking stocks for his portfolio on a case-by-case basis and reinvesting his dividends. He has recently retired with an impressive portfolio.

Investing Goals: Identify asset-light stocks

Getting Started

Geoff’s first foray into the stock markets was via the unit trusts given to him by family members. “That got me interested,” he says. Collective investment vehicles, including unit trusts, investment trusts, ETFs and funds are a good way for beginners without much time or capital to get started in investing in equities.

Then, in the late 1980s, Margaret Thatcher’s government began incentivising investment during the privatisation of British companies, so Geoff decided to start investing directly in equities. “Back then I didn’t have much to spend,” he said, but with his knowledge of the stock market from his family and his own portfolio of unit trusts, he had the confidence to take up the incentives of the privatisations.

Those companies (like British Telecom, British Petroleum and British Gas), were giants of British industry, with large reliable cash flows. Perhaps not with the growth capacity often sought by new, young investors, but dependable enough to not scare their new investors out of the market. For Geoff, the investments were “a good start and it built from there.”

Insight 1: Start investing early and use collective investment vehicles to get going if you need to build confidence.

Picking stocks

When Geoff first started investing he read an article by Keith Ashworth-Lord (chief investment officer at Sanford Deland which runs the Buffettology Fund) which suggested investing in asset-light companies, which tend to produce a higher return on capital. It’s a style that he has followed ever since.

Geoff identifies opportunities on a stock-by-stock basis, hunting for asset-light businesses with high operating profits and clean balance sheets. He says he used a lot of information written by domain experts, but steers clear of tipsheets from the newspapers.

Looking back he says that his easiest investment decision came prior to the availability of financial data when GUS (Great Universal Stores) was split into Experian and Home Retail Group. “Experian was business-to-business, asset light and doesn’t deal with customers, which was what I preferred. I bought into them, it was a gut feeling - but I’m sure it would have shown in the data.” Experian’s share price has more than quadrupled since the demerger. Home Retail Group was bought by Sainsbury’s in 2016, but the various operating subsidiaries (such as Home Base) that put Geoff off investing after the demerger have fared rather worse. Home Base was sold for £1 in 2016.

When he’s hunting for ideas, Geoff tends to stick on home soil. “I’m reaching beyond my circle of confidence in the UK already,” he says. Not that he is opposed to international diversification. But to keep costs and effort down, he relies on a small handful of funds for his overseas exposure.

Insight 2: Invest in high-quality, asset-light businesses and buy what you know

Building a reliable portfolio

Geoff admits that he didn’t consciously employ a specific strategy when building his portfolio, but in retrospect he has identified certain behaviours that were key to its success.

First is consistency. After identifying the type of stock that he believed could deliver the required growth, he stuck to it. “Consistency is important,” he says “of the companies in your portfolio and also of yourself. For example, I don’t like the tech sector (it’s too wacky for me), but if you are a tech person and you stick with them, stick with it.”

That consistency has also helped him develop a good attitude towards volatility. For example, Geoff bought shares in Domino’s Pizza during the dotcom era - a period which saw the share price fall from a high of almost 100p to a low of 50p. But “every year the store count went up and the sales went up,” said Geoff, “so I held on and quite easily tripled my holding.”

The same discipline has helped Geoff cope with the other side of the coin - when things go wrong. “I have got a list of failures,” he says, but his consistent approach to monitoring stocks has helped him avoid disasters. For example, Inter Link Foods which went bust in 2007 after years of declining sales. “I got out just before I made a loss,” says Geoff. And then Conviviality which went bust in 2018. When “their core sales started tailing off, it was time to get out, especially as it had been pitched as a growth stock.” The stock market tends to deliver over the long term, but avoiding disasters is crucial. As Warren Buffett says, the first rule of investing is “don’t lose money.”

Finally, that consistency has seen Geoff reinvest all his dividends over the years that he has built his portfolio. A strategy which has helped the portfolio compound.

Insight 3: Be consistent, avoid disasters and reinvest your dividends

Building confidence

In recent years, the stock market has grabbed the attention of young investors looking to get rich quick. But Geoff’s attitude towards steady growth provides a good lesson in the value of building a portfolio slowly.

“If I had been given £1m and told to invest it, I’d have been very scared,” he says. “But incremental and slow and steady growth and I am more relaxed.”

Geoff believes that attitude has come from his experience with volatility. “The price is less important now,” he says, “back in the day I would run scared if the price went down by 10%. Experience of volatility makes me a bit more relaxed about prices, but not totally relaxed.” Now he uses that volatility to help him make decisions: “Normally the market knows [that something is going wrong] before I do.”

Insight 4: Don’t fear price volatility but take it seriously as an input for decision making