Paul Mumford: simple steps to successful investing

Merryn Somerset Webb talks to veteran fund manager Paul Mumford about the secret of his successful career and the stockshe's buying now.

If you missed any of Merryn's past interviews, you can see them all here.

Merryn: Hi, I'm Merryn Somerset Webb, editor-in-chief of MoneyWeek magazine. Welcome to another one of our interviews. I have with me today Paul Mumford, who is a senior fund manager at Cavendish Asset Managers and also the author of this new book, this newish book, The Stock Pickers, which is full of the history of your investment career, right?

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Paul: Correct, yes.

Merryn: Now, you also run three funds at Cavendish.

Paul: Yes.

Merryn: So, let's start - if you don't mind - by just talking briefly about those funds, which ones they are and maybe a quick run-through of your investing style, which is, I suppose, covered in the book. But let's start there.

Paul: Well, the career started in '63. Fast-forward to 1987, we had the big bang etc. And suddenly stockbroking became less attractive. So I decided to jump over the fence and become a fund manager. I'd been specialising in smaller companies at the time and decided to start a smaller companies' fund. But I didn't want to be kept entirely to smaller companies so I then decided that I would invest in recovery situations and shares in out-of-favour sectors of the market. So, consequently, between 1988 and '92, I was in smaller companies, then I went into larger companies between '92 and '95. Smaller companies up until the banking crisis, a few larger companies then and smaller companies ever since. So that's the opportunities fund. By 2005...

Merryn: So this is the same fund all the way through, the opportunities fund?

Paul: Yes.

Merryn: Same funds, just changing its market-cap focus.

Paul: Yes, that's right. I changed, I was part of my own firm for part of the time but I came to Cavendish in '93. In 2005, I found that I was getting a lot of AIMscoming into the portfolio and I thought, "I don't want the opportunities fund to become an AIMfund. And so I decided to start an AIMfund, which I did. And I'm told that that's the only pure AIM fund. I think there are micro cap funds etc. etc. So that was great. Then we had the banking crisis. Gosh, a load of large cap stocks. I didn't want the opportunities fund to be full of large cap stocks. Didn't mind 10 or 11%. So I started a large and a mid cap fund and I've been running that one ever since. So I got the three funds and I can manage all over the spectrum of the market.

Merryn: Ok. And is the opportunities fund then a mixture of the stocks you caught from the other two? Not quite like that.

Paul: There is an overlap in places because if you've got a great stock, then it's a great stock. Even if it's an AIM stock, you can hold it in the opportunities fund. In the select fund, it's got to have a market cap of over 400 million so it can qualify on times. But there's not a great overlap between the three because there are so many great companies in the market today.

Merryn: Ok. Well, let's go back a little bit then because you said if it's a great stock, it's a great stock for all the portfolios. Now, what is it, for you, that makes a great stock?

Paul:A great stock is a stock that you can make money out of.

Merryn: That covers almost everything.

Paul: You buy it when it's cheap and you sell it when it's expensive. You tend to do things that are slightly unpopular because you're actually buying stocks that are out of favour in unfashionable areas of the market.

Merryn: So would you call that value investing? Would you call it contrarian investing? What would you call it?

Paul:Money making.

Merryn: Money making.

Paul: It is, yes, it is value investing to a certain extent because if I like a sector - say, for instance, at the moment, one of my themes is that at some stage in the dim and distant future the pound will recover from the current level and it will go back to $1.50.

Merryn: Why?

Paul:Because once we get over the European hurdle, I think people will quite like to hold sterling because it's detached from the euro. I mean, would you prefer to hold euros or sterling?

Merryn: Sterling.

Paul: Well, there.

Merryn: But you and I might think that. The rest of the world doesn't appear to.

Paul: No, not at the moment. And also you find that any commodity, any currency will drop far more than you think it will before it recovers. So, consequently, Sterling could easily fall back. I mean, if it fell back to 110 to the dollar, I wouldn't at all be surprised. I don't think it will. But I think, at some stage in the future, it will get back to $1.50. You might be talking about 10 years' time, might be talking about five years' time. It won't be tomorrow. But at the moment they're throwing up some huge opportunities for some of the domestic stocks. So coming back to this thing about great stocks, one of the sectors I quite like at the moment is the retail sector, which everybody hates. You've got input prices causing inflation, you've got the living wage putting pressure on things, you've got competition in certain areas of the market. But in certain areas, you can pick up stocks that are yielding six, 7, 8% on single figure PEs. Now, I would buy those sorts of stocks. They would be stocks such as Debenhams, Musgraves, Laura Ashley, whatever, rather than buying theASOSesor the Boohoos of this world, which have done incredible well but are on very high ratings.

Merryn: And you'd assume that those yields are sustainable despite the problems we've just discussed?

Paul: Well, the yields will be sustainable because they're 'over my dead body' stocks and these companies have actually been trading quite well. One of these stocks I've got, which everybody hates, is a company called Bonmarch, which is a relatively small company, and they've actually hedged their currency commitments all the way through to the end of 2017. Now, the retailers, as they're dealing for seasons in advance, hedge their currency forward and, consequently, - a bit like the oil companies when the oil price dropped, a lot of them had already hedged forward or hedged on the way down so they missed the worst of the effects. Now, if a company is giving a decent yield and the yield is sustainable, then the shares will pay for themselves even if the share price doesn't change. However, things do go wrong and I've got about three chapters in that book of my great accidents. And this is one of my themes. I like to have 70 stocks in the portfolio. I'd like to have a holding of, say - An average size holding is about 1.5%. So if a share goes up and it's 3%, 4%, it's because the share price has gone up, rather than me taking a view. And I think that if you've got 70 stocks and one of them goes wrong, you'll lose your penny, ha'penny on the pound. If it's a high risk stock, you only invest 1% in it and you're losing a penny in the pound. But on the other hand, if you've got a portfolio full of great stocks, then you're actually going to see the performance pick up...

Merryn: But some would say that's pretty low conviction stuff and 30 or 40 should be enough to give you diversification.

Paul: Yes. I've seen - coming back to experience - You've seen things likeSure Investwhich had 20 stocks in the portfolio. They were all pretty poor stocks and when the market started crashing, people wanted to get out, then they all started falling away. If you've got a portfolio with - Even in large stocks, large cap stocks, you get things going wrong. Things likeyour Pearsonsyour Capita, your British Telecom, BP in the past etc. Look at BP, that was a huge stock for all the income-wallahs. Once you had this unforeseen event in the Gulf, then the dividend was cut, the share price came back and everybody suffered. And people said this ridiculous thing - "We've got to have our rating, index rating. We've got to have our 8% in the stock." Why? British Telecom, back in 1999, that company was about 7.3% of the index or thereabouts. Now it's less than 2% of the index. These index trackers are absolutely stark raving bonkers. My fund in 1999, I've only one stock left in the funds since then and it's been relatively active but it's not sort of churning, it's just the way things happen. And looking at 2008, I've got about 25 stocks in there because once a stock has achieved its potential, I'll tend to sell it. On the other hand, if another stock comes along and says, "I'm a great stock," I fully invest in it so I have to sell something in order to make room for it. And it's the way the thing works.

Merryn: Ok. So, we talked about retail, which is one of your big themes at the moment, domestic retail. What else is there? Sectors that are really interesting to you.

Paul: On the domestic sector, you've got the breweries, which are absolutely unloved. Wetherspoons have performed reasonably well but I'd be less keen on that. Things like Marston's and Greene King, you've got the same sort of thing. You've got the lowish rating, you've got a decent enough yield. On the other hand, you have companies in that sort of area that you've still got some risks attached, like Restaurant Group, for instance, where you can't be sure quite where they're going. Similarly, in the retail space, things like Sports Direct etc. It's a career-threatening stock. If a broker put you into it and the share price halved, then you're out the back door type of thing. I think also that things like the construction sector, in places, is fine. And I would think of stocks like Costain, where it's all public works etc. Things like Kia Group, where they've got a decent property investment side.

Merryn: And commercial property? Housing etc.?

Paul: Property is great, yes. Property is one of these - Certain areas of the property market, you can buy property as we know property, as you see in that book.

Merryn: Yes.

Paul: Property is really interesting because you can get shares at decent discounts or assets. For instance, Taylor Wimpeycame out with their figures today of a 30% discount of assets. Decent company. Brown feels like adeveloper all over the country and decent management. Grainger, the largest residential property company. Another one that's quite attractive. You've got things like Daejan Property, which owns property around the Marble Arch area, some of which is in the books at cost, share price.

Merryn: Residential or commercial? Both?

Paul: Both. Commercial with a resident- Some of the blocks of flats around the Marble Arch are in the books at a very low level. Got some interest in the US, which will benefit from the pound depreciation.

Merryn: So these are inflation hedges, to a degree.

Paul: To some extent, but I wouldn't buy them for that reason. I don't like American property, to be perfectly honest. But the share price is 63p and the published asset value is £95, sorry £63 is the price and the asset value is £95, and the asset value is a fairly conservative one. And you've got these funny quasi property companies. One of my holdings that's done pretty well is a company called Lock and Store, which is a self-storage company. Now, self-storage companies, particularly smaller ones where they're nimble and cane move from one area to another, you've actually got quite an interesting investment because as the residential property market moves up, people move around the place. Then the occupancy levels move up. As the occupancy levels move up, they can increase their rental levels and the property value's based upon a multiple of what the company earns. So, therefore, it's like having a property company with a rent review every few weeks. Great. But you're also getting the growth in dividend and you're getting the growth in profits as well. Now, that's a great stock. But sometimes things run their course. I think I said earlier that I tend to be kind of cyclical and I tend to do things that people don't like. For instance, taking the housing sector, a broker sent me an email one day, saying, "You've got to sell Taylor Wimpey.You've got to sell the shares. The share price is 24p." And I thought, "Well, I hateTaylor WImpeybecause it was always geared up. But let's have a look at it." The asset value at the time was 60p. They were on the verge of selling their North American interests, which would have completely de-geared the company. So I thought, "Great. I can have my 1% or 1.5% inTaylor Wimpey.They go up to 60p, then I said, "Kiss them goodbye and sell them." Did I sell them at 60p? No, I didn't because you've got to be hypocritical in this game.

Merryn: Of course. Where did you sell them?

Paul: I sold them at 107. However, I'm going to be even more hypocritical because I have them in the select fund, which is a slightly different animal because I can hold them for longer, being a large company. It's not a recovery stock anymore. So I sold some of them at £2 and then bought some back at 143p and they're 170p or something at the moment. But at the time, people just hated the housing market and again, looking in there, you'll see back in around 2000-ish, I had interest in a lot of housing companies. They all got taken over. Things like ProutingI can't remember the names - and Wilson Connolly, Wilson Beldonetc. So in this last little round, I thought, "Well, what I'm going to do is I'm going to buy my Taylor Wimpey because that looks sound. I'm going to look at the sector again and I'm going to buy the companies that have got strong balance sheets, will survive in any case. Until those companies, one was Galliford Try and the other one was Bovis. Now, Bovis has been a bit of a dog of late but...

Merryn: You're still holding it?

Paul: No. Well, I've got them in the select fund but I'm not holding it in the opportunities fund, nor am I holding Galliford Try in the opportunities fund because they both actually did the business. And effectively, I don't really like the housebuilders because although they're going to do well, you're only going to make 25%, 50% of the money. Who wants to hold an investment if you're only going to make that sort of money?

Merryn: I think a lot of people would be very happy with 25, 50%.

Paul: I'm not. I want, ideally, I want the 10-baggers. Those are the ones that are actually going to do well. But if you can find enough of these stocks, then the point about having a concentrated portfolio, yes, you'll do pretty well with a concentrated portfolio. But if one of those stocks goes wrong, you're actually going to suffer. And I don't like sleepless nights. I like to have the stocks looking pretty attractive.

Merryn: Now, the other sector you're interested in at the moment is oil and gas, right? Or exploration.

Paul: Yes. Oil and gas, I got in pretty early because if we'd been talking a year ago, you would have turned up your nose when I said, "I really love the oil and gas sector."

Merryn: No, I don't think I would. You don't read all my columns, do you?

Paul: You wouldn't because you're comments are sensible ones. But a lot of people would. The oil and gas sector is just absolutely incredible. There are so many interesting North Sea shares. Unfortunately, of course, lots of my biggest holdings now are oil and gas companies because they've done so well because I've been in there for a long time. But there's still further to go.

Merryn: What's your favourite in that sector?

Paul: My favourite one got a takeover bid yesterday, which I hate it, hate it.

Merryn: Ok, second favourite.

Paul: Just think of this: You've got a company with a market capitalisation of, now it's, 490 million.

Merryn: Which company is this?

Paul: This is the Ithaca. It's doubling its production when its new facility comes on stream this month. You've got a cash flow of $230 million. Even if you take off the capex, it's $70 million. That's going to pay down its moorings, which are quite high, at about 600 million. And the balance sheet will be clean after a few years' time. The production facility they've got in place is in the North Sea and they've got this pretty decent field. But if you look at a map, you get hold of a fountain pen, you stick it in the ink and you go like that, all those blotches are discoveries which have been found in the past but they haven't been economic to get out because there has been no facility on board.

Merryn: But maybe there never will be. And we keep hearing about how the oil is just going to stay in the ground forever, we don't need it.

Paul: They've got the facility. They've just put it in. Look at Hurricane, which is in that area. I believe that Hurricane can tie out to this thing.

Merryn: Is this your second favourite one?

Paul: No, no, it's not. That's a massive, massive find. It's got a market capital of 600 million, without having any production at all. Now, admittedly, people are looking at Ithaca on its moorings but there we go. I quite like Faroe, it's one of my favourites. They're one of the biggest operators in the Norwegian part of the North Sea. And the great thing about the Norwegian part of the North Sea is, first of all, it's difficult to actually get licences, unless you've been there for a long time. They've been there since 1992. When you do get your licences, 80% of the drilling cost is paid back by the Norwegian government. So you've got wells that could be drilled relatively cheaply and you can also get the big companies, the Centricas of this world, into them as partners. A few decent finds from a company like that can be completely transformational. Who wants to invest in things like Shell and BP where you might make 25% of your money? What you want is the 10-baggers. Hurricane, bloody hell, I managed to pick up some at 10p and the price is 53p. And that's only in the last year.

Merryn: Are you keeping it?

Paul: Yes. They've got another well that's being drilled at the moment, where the result will be due by the end of the month, which could be pretty significant. So people do quite like it. Another one in that area is EnQuest, which recently did a dealwith Shell where it acquired some of Shell's assets, which effectively aren't really costing them that much. Another geared company, another one that's bringing on production in the next year, a great situation. I've got a little dog in the portfolio, everyone has it. Well, I had two little dogs. I must tell you this.

Merryn: Go for it. Tell me.

Paul: I really have had two little dogs in the portfolio.

Merryn: Recently. Two recent ones?

Paul: Yes. Great ones. This is why you should have a diversified portfolio, in my opinion. I've had Circle Oil, which is gone bust, and I've had the Xcite that's gone bust. The reason that both companies have gone bust is because the loan stockholders actually pulled the plug. And in the case of Xcite, they owned the rights to the Bentley Field, up in the North Sea, which is a huge area. They had cash in the balance sheet but they couldn't repay the loans so therefore the loan stockholders pulled the plug. In the case of Circle, it was even worse. They had the cashflow to pay the interest but they couldn't pay the capital and the loan stockholders pulled the plug.

Merryn: It's a warning about debt, isn't it?

Paul: Life is full of these things. And again, if you look in there, you'll find frauds, you'll find bankers pulling plugs when they shouldn't have done, and all sorts of things that can happen because equity investment is a high risk investment. But nevertheless, the winners tend to pay for the losers.

Merryn: Ok. So you are a pretty optimistic investor, obviously.

Paul: The time not to be optimistic is when the taxi driver gives you tips, when they say it's different this time, and when people start talking about, "Oh, you must buy this on 20 times 20, 25 PE" and then they get onto this ridiculous thing of talking about PEGs. And they are all excuses for buying stocks. And once this happens, you've got to be out of the market.

Merryn: So, as far as you can see, right now in the UK, this is a well-priced market and has a long way to run, in general.

Paul: Yes.

Merryn: Yes. We're at the beginning or the middle of a great bull market.

Paul: The market will fall when it looks too expensive, people are telling us it's too expensive. And we've got this ridiculous situation on bonds. I'd never or ever have dreamt that interest rates would fall below 3% or something. And through this ridiculous quantitative easing, you've now got interest rates down to a level where they can't possibly rise to a substantial amount because it would cripple the economy. But I'd never ever have thought that loan stocks would do this. I think that people buying loan stocks or gilts are stark staring bonkers because they're getting a return less than inflation. And inflation is going to go up because the oil prices are going up. With the pound dropping away, input costs are going up.

Merryn: Yes. So, oil, the pound. What else might enter inflation? Minimum wages?

Paul: Minimum wage is another thing. And also, I think, because of all those factors, the food retailers - which I'm not particularly keen on but being a hypocrite, I have got one -

Merryn: Which one? You can't remember or you're just not going to tell me?

Paul: No, I can remember but it's a convenience store group called McColl's. Now, McColl's is not a supermarket, it's a convenience store group. And the reason one likes McColl's is the fact that, on the one hand, they can turn some newsagents into convenience stores, put fresh products in there. The Post Office has paid money to them to put Post Office counters in their thing. They've got Subways in some of their larger stores. And they've recently acquired some outfits from Co-op, which they'll be bringing into the portfolio. So that's a different sort of situation.

Merryn: Sorry, I interrupted. Back to inflation, yes.

Paul: But with the supermarkets generally, the rise in input costs, I think, will take the pressure off the price wars that we're getting. And, yes, the Aldis and the Lidls are coming in and slightly ruining the market. But I think the pressure on prices will be less.

Merryn: You mean they'll stop competing on price, the way they are at the moment because they won't have a choice.

Paul: They'll still be competing because they have to. I think certain items in the shopping basket will naturally rise, which would be slightly inflationary. House prices, slightly inflationary. But it seems to be a bit under control, apart from areas of London, perhaps. And we were talking about house prices before and I said, 'I'm out of house prices and house builders in the opportunities fund."

Merryn: Well, maybe down here, in the South. But up in the Midlands; North is different altogether, right?

Paul: Let me say my "But".

Merryn: Ok, go for it.

Paul: But - But I did buy a housing company, Telford Homes, which develops properties around the fringe area of London. It pre-sells them, no buy-to-lets. They're relatively expensive but not as expensive as Central London properties, and in decent areas. They pre-sell them. They pre-sold up to 2020 in a number of cases.

Merryn: Pre-sold to who?

Paul: The big trick is they take a 20% deposit from their investors and it's non-refundable. So they can use that cash to build up the portfolio.

Merryn: So people are prepared to put down a 20% deposit on a house now? They won't get...

Paul: No, a flat.

Merryn: A flat? They won't get until 2020?

Paul: Yes. Yes.

Merryn: A long lease?

Paul: Yes.

Merryn: Jesus.

Paul: A lot of these investors are overseas investors. And property to overseas investors are a lot cheaper, 15% cheaper in cases, than they were because of the currency thing.

Merryn: Do these overseas investors know where the flats they're buying are? Or do they think they'll see Big Ben from the window?

Paul: Probably haven't got a clue.

Merryn: And do they understand the lease-hold system as well?

Paul: I would imagine that if you're a wealthy investor and you're spending that sort of money that you would know roughly where they are. But then, of course, some of these haven't actually been built yet. It's a funny old situation. Nevertheless, it's an interesting type of company.

Merryn: Ok. So, tell me, apart from bonds, what would you not touch with a bargepole at the moment?

Paul: If somebody's saying to me, a broker comes up and recommends an IPO, recommends a share for the AIM fund, for instance, I'll ask a number of questions. I get so many of these IPOs, I don't want to do the whole lot. And the questions are, first of all, is it a loss maker? "Yes, it is, but it's breaking even next year." Don't rely on those forecasts. Secondly, is it an overseas company coming onto AIM? No. Forget it. I wouldn't invest in that because I've seen mishaps there. Third thing would be, to some extent, it's the size of the company because in the AIM fund, my minimum investment is 6-700,000. So if you're going too small, it's got to be a really good investment. It's got to be a fixed asset. In the opportunities fund, the size is a couple of million quid. So again, you're slightly moving up the scale. I don't like financial companies.

Merryn: Ever?

Paul: Don't say that because I'm just in the process of buying a financial company!

Merryn: This is very hard to pin down, what's going on here. Everything has an exception!

Paul: This is the process of buyingan IPO for AIM that's a foreign company.

Merryn: A foreign financial company? I presume you're losing money as well.

Paul: No, it's making a lot of money. It's based overseas and it's an AIM list thing. It's a financial company, one I can understand. But, yes, financial companies, I'd avoid. I tend to avoid the mining sector because I don't understand commodity prices.

Merryn:Do you need to understand commodity prices or do you just need to understand the capital cycle for mining shares?

Paul: I couldn't tell you whether copper's going to go up or down or whether gold was better than platinum or...

Merryn: But why is that commodity cycle different to the oil and gas capital cycle?

Paul: Because oil and gas runs out. And copper doesn't.

Merryn: But it doesn't, really, does it?

Paul: Well, I think when you look at BP and Shell and Exxon and all the rest, they're having to actually find some pretty vast reserves in order to replace the ones that are being used up. Oil and gas will, some day...

Merryn: But you don't think that the rise of renewables, as solar becomes more efficient and easier, that in the end, a lot of this oil will simply stay in the ground, it will never come out.

Paul: Quite possible. And also, of course, the other thing is electric cars and they're more efficient. So that's going to be another factor. But, on the other hand, the reserves of copper or nickel are sort of infinite. I just don't understand the prices and I feel that -

Merryn: Fair enough. But even gold? Any gold companies in the portfolio?

Paul: No gold companies in the portfolio.

Merryn: Any physical gold hidden around your house at home?

Paul: You're trying to get me to tell you one that I've got in the portfolio that I'm being hypocritical about.

Merryn: There's always one.

Paul: Ok. I put my hand up.

Merryn: Come on, what is it? What is it?

Paul: I got Sylvanian Platinum in the portfolio of the AIM company and it's done pretty well. It's a relatively lower risk one. But I've also had shares in that area of the marketplace. In fact, I went down to South Africa once. This is why I'm not keen, because I've lost money on some of them. I had a thing called International Ferro Metals, which was a great story and I did make money out of it for the opportunities fund because, luckily, it went up to the main market and I decided to...

Merryn: You moved it out.

Paul: But, yes, generally, nowadays, I don't look at mining companies. But I have done in the past. So learning by mistakes. And the other area that I'd avoid like the plague would be biotech companies.

Merryn: Because it's impossible to tell whether it's going to work or not.

Paul: They never come through, they throw their money at it, it's too expensive to bring drugs to market. Invariably, a large proportion of drugs completely fail. Ok, now, you're going to ask me which biotech...

Merryn: Yes, which biotech companies are you holding?

Paul: Well, I've got a thing called Ergomed, which is a slightly different one because Ergomed actually does work for biotech companies for which it gets paid. It also finances some biotech company drugs. And rather than taking an interest in the company, it will take an interest in the drug, which is great because as the drug goes through its milestones, they get a proportion of the milestones, the get a proportion of the royalties if the thing should actually work one day. And it's a profitable company. So that's ok. But I think the healthcare sector is really quite good but who wants to buy Glaxo and Zeneca? Well, if you have a large fund, you've got to. When you can buy smaller companies which haven't got the same sort of risk and which are fairly nimble, and you can make a great amount of money out of them...

Merryn: I thought we weren't going to buy them. You just presented a wonderful case for buying biotech companies. Just after you told us not to.

No, they're not biotech. That's not a biotech company. I'd make a case for healthcare companies. For instance, Clinergen, which is another one, that will buy a successful drug and market it but it also supplies products to biotech companies. Now, if you're a biotech company and you're doing a test on a product, and you're doing that test against another product, then you've got to make sure that the other product is of equal consistency and same batch etc. etc. And you've got to have somebody independent to certify that so they don't cheat. So Clinergen supplies those products to the biotech companies to do research. So they get paid. They don't have any risk of getting things through Phase 1, 2 or 3. And they will benefit from it. There are some other great companies, you've got devices companies and manufacturing companies. I think healthcare is generally a pretty good idea.

Merryn: If you had to pick one stock, one stock from all your portfolios, as a favourite?

Paul: I would choose three stocks.

Merryn: Alright, three.

Paul: If you give me a bit of paper, give me a pen.

Merryn: It's not a pen, it's a rather bitten pencil.

Paul: Right, ok. Do you mind if I...

Merryn: No, no, go for it.

Paul: I'm going to write three stocks down on this and you're going to pick one and that's going to be my favourite stock.

Merryn: This, by the way, readers, is how investing works. It's a bit like gambling.

Paul: I did this once at a presentation and I had a box full of 50 stocks.

Merryn: Come on, come on. And pulled out one for your favourite?

Paul: Yes.

Merryn: I don't think we've ever done this before in an interview. I think we have a system where someone actively chooses their favourite.

Paul: I've got a hat.

Merryn: You'll have to put them in your hat.

Paul: No, I'm going to throw it on the table. I don't want you thinking I'm a magician.

Merryn: I'm looking forward to you rushing out after this interview and topping up your holding, whichever stock I pick.

Paul: Right. Here we go. One, two, three.

Merryn: Ok. Here we go. The one in the middle. What? You think it's a bad choice?

Paul: No, go on.

Merryn: I'll have another go.

Paul: Go on then, I don't know.

Merryn: This says Cavendish AIM.

Paul: Cavendish AIM fund.

Merryn: There we go. They all say Cavendish AIM?

Paul: No. No. That one says Cavendish Opportunities Fund. And the other one says Cavendish Select Fund.

Merryn: Ok. There you go. Your favourite things are your funds.

Paul: The problem is I've got 70 stocks in each fund. A lot of them are my favourite. I couldn't pick out one stock. It's just - What you could say instead, you could say, "Pick a sector." And I can pick a stock in a sector if you want.

Merryn: Ok. Pick a sector. Oh, I'll pick a sector?

Paul: Yes.

Merryn: Ok. Retail. Domestic retail.

Paul: Ok, I'll go, in that case, for Musgraves.

Merryn: Musgraves. The very idea of Musgraves makes me laugh slightly.

Paul: It's going to be a boring stock this year, share price, no further changes. It's good management. They're seeing their way through the living wage thing quite comfortably by changing the wage structure where people previously had a bonus and now the bonus is being reduced and the wages are going up.

Merryn: So people's net income isn't rising because the bonus is gone, it's been folded into their wages.

Paul: The bonuses haven't gone, the bonuses are there. They're getting the advantage of having a higher certainty of a wage and the bonuses will go up depending on how they trade. They're quite well trained, so they are customer-friendly. The thing that people don't realise about these domestic companies is that they've all got a growing internet side, which can open up overseas areas. Their traditional business of hiring suits etc. is actually doing reasonably well at the moment and they've got a decent range of suits they're actually selling. It gives you a good yield. They've got about 18 million or something, cash on the balance sheet. So they can afford to continue paying the dividend and trading pretty well. But don't expect them to go up in the short term because people don't like the sector so they won't invest in the sector. But great for me because that's what I want to do, rather than going into the high flyers. The banking sector at the time of the crisis, I lost money on Northern Rock. I didn't lose...

Merryn: I'm shocked.

Paul: Yes. It's in the book, if you don't believe me, look in the index. And I didn't lose as much money as I might have done because I did cut my position because I went into it on a false premise. But what I did do, I bought the three horrible banks - RBS, Barclays and Lloyds.

Merryn: After the crisis? When did you buy them?

Paul: I bought them when nobody really liked them, at ridiculously low levels. I took a profit on them fairly early on. They just looked ridiculously good value. But nobody liked them at all. The big lesson, again, that I've found - again, it's in that blooming book - was that the '73 crash. Love it. '73 crash. What would you feel like if you were investing money for your parents? You had your parents' portfolio and they didn't have much income apart from that and the share prices were sort of going down. You'd feel pretty dreadful about it. Then I was dealing - well, you can read more about it there - I learned the lesson that you've got to buy when things are bleak. Markets overreact. You've got to buy then. You've got to sell when everything is rosy, when the market's really at the top. The great thing about a market fall is that this is where you can find the great stocks.

Merryn: So does that mean you'd be longing for market falls?

Paul: Why do you find the great stocks in a falling market? In the smaller company area. It's because smaller company funds tend to have withdrawals. The fund managers have to sell. What do they sell? They sell what they can sell rather than the rubbish which they can't sell. So consequently, you can find some really fantastic bargains at those levels because everything goes down. Valuations are completely out of the window. And yet, you look beyond that and you think, "Well, yes, this is a really great time.Wow. What an opportunity to go into things. It's really great.

Merryn: We're going to have to leave it there, Paul.

Paul: We've only started, though.

Merryn: All the rest is in the book. I think everyone's had enough share tips to be getting on with. Thank you very much indeed.

Paul: Ok.