Like many UK investors who foolishly pick stocks with a proportion of their portfolio, I’m a big fan of the writings of John Lee.
(Lord) Lee has been giving regular updates on his portfolio in the Financial Times for many years. A few years ago, he revealed that by investing in small caps held within tax efficient wrappers (first PEPs, later ISAs) he’d grown a portfolio worth over £1 million.
Considering the annual contribution limits on PEPs and the follow-up ISAs, that’s an excellent achievement in anyone’s book.
Lee’s method is to buy low P/E small cap companies paying decent dividends that he considers overlooked by the market, and to reinvest the income into new shares. I think it’s as good as any method of actively picking small caps; at the least it keeps you away from blue sky punts.
John Lee moves the market
There’s a downside to being a John Lee fan, however. Because Lee is popular and because he tends to favour illiquid small cap shares, anything he writes about often experiences a sharp spike upwards in its price.
On Saturday 4th September 2010, for instance, Lee wrote about four AIM shares: Christie Group, Concurrent Technologies, Pressure Technologies, and THB.
Here’s their performance in trading on the Monday morning, as I write:
- Christie Group: Up 15%
- Concurrent Technologies: Up 14%
- Pressure Technologies: Up 6%
- THB: Up 10%
In contrast, the FTSE 100 is up 0.42%, while Aberforth Smaller Companies (an investment trust that holds Lee-style small caps) has dropped 0.75%.
It’s clear that Lee has moved the market in his four shares this morning, for a hefty average gain of 11%.
Patience is a virtue
John Lee is richer this morning as a result of his column on Saturday, but I want to stress that I don’t think he is doing anything wrong at all. From all the evidence he is a scrupulous man, writing to share his knowledge with other investors.
Also, Lee is a long-term buy-and-hold investor. The price of these shares on one Monday morning won’t be of much interest to him.
It’s also possible that his fellow investors haven’t even had the chance to push the price of these four shares up much. Rather, market makers may have read Lee’s column over the weekend, and bumped up their prices in anticipation that new buyers will emerge. Many small caps are very illiquid at present – I’ve moved prices by investing just a couple of thousand pounds – so it’s a reasonable move on their part.
Now, I have both Pressure Technologies and Concurrent Technologies on my own watchlist, and I’m very heartened to see Lee likes these companies, too.
However, I have not so far bought shares in either. It’s senseless to pay 14% more for shares today just because another investor has shown his hand.
My suggestion if you like these or any other companies that Lee writes about is to be patient. The price rise should drop away as the buzz dies down.
In the short-term the stock market is a voting machine, but in the long-term it’s a weighing machine. It’s earnings that ultimately drive share prices, not newspaper columnists.
Beware of the ramp
Incidentally, some readers recently mooted a ‘Monevator effect’ in the comments to my article on Lloyds preference shares.
The price did run up the day after I posted that article, but I think that was a coincidence; the Investor’s Chronicle also published a piece that week, and I think it has rather more sway than my blog!
If Monevator ever does move prices, then you should certainly beware of buying into short-term spikes, just like run-ups from any other source.
In particular, be very careful with discussions of illiquid shares on bulletin boards. There have been cases where posters have been found to deliberately ‘ramp’ the price of some hapless small cap, then dump the shares at the top. There’s even been rumours of the professionals getting in on the act.
Anyone who lived through the frothy Dotcom days – where a share’s price could double on being mentioned in a popular lunchtime TV program – can tell you about the risks of chasing ramped small caps.
In my experience, the best stock picks are made in relatively unknown companies that you alight on through your own research. You may be wrong that the shares are a bargain, but at least the price won’t have already been over-inflated by the opinions – correct, incorrect, honorable, or self-interested – of others.
As with anything that eats your cash – if you’re tempted, wait 30 days. If you come back in 30 days and can still follow the tipster’s reasoning give it a go.
Particularly with the lower end of the share markets, unless you’re very experienced you shouldn’t be aiming for big returns in less than a few months, so 30 days shouldn’t leave you in a much worse position than if you invested immediately you read the tip
Totally agree. One of the first shares I bought was through a recommendation from a well known bulletin board. I’m down about 40% on that one, but I keep it in my portfolio as a reminder to myself not to do the same thing again. Luckily the next share I bought which I researched thoroughly myself has just announced excellent results and is up 60%, more than paying for my earlier rashness.
Here in the U.S. there was a young kid who made over $1 million pumping and dumping penny stocks on financial bulletin boards. The SEC finally shut him down, but he got to keep most of the money.
I think every investor should be aware of this scam and avoid micro-cap stocks being suggested by anyone.
@Bret – Excellent anecdote and a good warning to be on your guard. I think totally avoiding all micro-stocks that are suggested by anyone is a bit extreme – rampers do sometimes alight on decent companies, and we have a lot less stocks to choose from in the UK than you guys do in the US. But I would certainly agree 100% with ‘avoid investing just because someone has suggested it’s a buy’.
Also, while we’re at it, my blanket rule to NEVER EVER EVER invest just because someone has called you up. Nobody should be wheedled into some boiler-room tale about a small cap stock.
People think only idiots would invest on a phone call, but actually it’s often ex-directors and the like who are used to fielding high level calls in their previous business. They subconsciously carry this world view into their retirement.
Nobody has our financial interests at heart, except ourselves. I don’t make any financial choices that I didn’t instigate myself.
@Mosschops – Thanks for your comments. Alas I’ve lost 40% or more on shares that I researched and purchased myself, too, but at least in those cases I have nobody to blame but myself! 😉
@Lord Edam – Hmm, very interesting extending the 30-day purchasing rule to stocks. You could also extend it to signing contracts for life assurance, and so on. In general, almost nobody has any business moving quickly when it comes to to investing.
(Just make sure one doesn’t use that as an excuse for living in Neverland!)