Invest in solid family-run firms, focus on dividend growth and take a long-term view, says noted private investor John Lee.
On results day, the directors of Treatt, the largest holding in my Isa, visit me in person and I treat them to tea in the House of Lords canteen,” Lord John Lee of Trafford tells us. “If they’ve raised the dividend then they get cake, but if they haven’t they only get tea and coffee,” he jokes.
While he may not be a household name in the way that Neil Woodford is, John Lee, 75, is one of Britain’s most successful private investors and was the first known individual to have built an Isa portfolio worth seven figures.
Like father, like son
Lee’s involvement with investing long predates the decision to set up personal equity plans (Peps, the precursor to the Isa). Indeed, his first contact with the market came through his father, who worked as a GP but was an avid hobbyist investor in his spare time.
Lee has fond memories of him “sitting in his library sifting through investment magazines and copies of the Stock Market Gazette, while puffing on his pipe”. Lee’s father was so eager to get his son involved in the market that, when Lee turned 15, he gave him a small sum of money to invest in shares.
Even today, Lee can remember his first stock investment in a shipping company. “The problem was that it only had one ship, and sadly it went down, taking the £45 that I had put into the company, with it.” A year later, Lee left school and joined a firm of accountants. While he was doing his training he continued to invest in the stockmarket. During our interview, he shows me a copy of the ledger in which he recorded all his investments, pointing out a page where he had noted his 1963 dealing in a rubber company. Sadly, in that particular case it hadn’t turned out well, and he ended up making a loss of £27.
By the time he was 21, in 1963, Lee had become a qualified chartered accountant. He decided to move from being a private investor to taking a direct role in the world of finance, joining Manchester stockbroking firm Henry Cooke Lumsden. He stayed there for only two years, but he gained invaluable experience, helping to bring several private firms to the stockmarket. This gave him an interest in smaller public companies “that has stayed with me forever”.
In 1966 Lee left the brokerage to set up his own company, focusing on amalgamations and mergers. This company later evolved into a small investment bank. However, by then Lee had become heavily involved in politics, standing for the Conservative party in Manchester Moss Side in the October 1974 election.
He lost that time around, but in 1979 he was elected MP for Nelson and Colne (which, after boundary changes in 1983, became Pendle), and served there until 1992, as well as taking various ministerial roles. However, throughout that time Lee remained interested in investing.
My first million
In 1986 the then chancellor Nigel Lawson announced that the government planned to allow people to invest up to £3,000 in company shares or unit trusts tax-free. Lee was immediately interested. But while the idea sounded good on paper, “few brokers were involved in the scheme at first” and those who were “wanted you only to invest in firms on their approved list, while I wanted to choose the companies that I would invest in”. After a lot of ringing around, Lee found a small brokerage that was willing to give him the freedom to select his own shares, and for the next 25 years he invested the maximum amount allowed each year.
Through the simple process of investing in companies, and then reinvesting the dividends, Lee became Britain’s first Isa millionaire in 2003 (a success that inspired him to write an investment book, How to Make a Million – Slowly, which was published in 2013). For a short time after he had achieved this milestone, he took a break from putting extra money into his Isa. However, the lure of growing his portfolio further proved too much, and a few years ago he started making contributions again.
While he is coy about exactly how much his Isa is worth at the moment, Lee admits that it “has increased by a very large amount” over the past 15 years. Indeed, one indication of how well he has done comes from the fact that his annual dividend payments alone are now worth more than his total contributions over the past three decades (which means that his Isa pot generates a substantial six-figure sum each year).
The conservative approach to investing
Lee is a big fan of small-cap shares, and many of his investments are listed on Aim, London’s junior market. His ideal company is “one that is registered in Britain, but sells to customers around the world”. After all, “most of the world’s growth is coming from emerging markets”. While he accepts that many Aim stocks are “hope-and-a-prayer” companies, he believes that if you look out for good management, and avoid certain sectors (such as biotech, mining and oil exploration), you can find hidden gems.
As an income investor, Lee places great store in a firm’s track record of growing dividends. Why is he such a fan of dividends? Firstly, they prove that a company’s stated results are “genuine… they have the cash to pay the dividend”. Secondly, they “give you an indication of what management expects, because only a stupid board will announce dividends that it can’t maintain”. Finally, dividends also “give a certain support to the share price… making it easier for investors to keep investing, even during bear markets”.
Lee particularly likes what he terms “proprietorial companies”, where an individual family owns a large number of shares. Because many of the extended family members rely on dividends from the firm for their income, the family will put the management team under pressure to ensure that they can not only pay regular dividends, “but also keep increasing them”. He also wants the management to own, and hold, a significant number of shares, so they have an incentive to focus on the long term.
Lee recommends attending annual general meetings as a good way for small-company shareholders to get an idea of the quality of the management team.
The main speeches “are not very illuminating”, he admits. But you can learn a lot by chatting to directors and managers during the breaks and at any post-meeting social events. At the very least, it “should give you a feel for what sort of people they are”.
When to sell
Knowing when to sell is almost as important as deciding when to buy. While Lee initially shunned the idea of stop-losses (a level at which you automatically sell a share), experience has taught him that it is a good way to limit your risk. Still, he cautions against setting it too tightly. In his view, it makes sense to have a looser stop-loss set at least 20% below your purchase price, especially for smaller companies.
Otherwise you “can end up selling due to some market turbulence”. He also likes the idea of taking a small initial stake in a company and then increasing it if it does well. However, overall, “the trick is to know a company and to have faith in it”.
He’s also not a fan of selling a company because it appears to have become “overvalued”. While he has occasionally sold companies that have, in his opinion, risen too much, he prefers to reduce his stake, rather than dump all his shares. “The idea of selling in order to buy a share back more cheaply has never appealed to me and has never really worked.” He approvingly quotes the American saying that “you make your money sitting on your ass”. The only thing that will cause him to rethink an investment is if there is a big decline in a firm’s operations.
Lee’s patient attitude has brought him some impressive individual successes, including several “ten-baggers”. In 2005 he invested in the manufacturing firm Treatt, which makes ingredients for the global fragrance and consumer-goods sectors. Having increased his stake several times, it now accounts for around a third of his portfolio. Over the past 13 years, Treatt’s share price has risen from 45p to 415p, a return of just under 20% a year. Another winner has been industrial laser firm Gooch & Housego, which he bought at the start of 2000 for around 85p a share, and that is now priced at £14.
Everyone should own some shares
Despite his natural optimism, Lee admits that it “looks like we’re entering a more negative phase” when it comes to the current market. He’s also worried that the rules exempting most Aim shares from inheritance tax if you hold them for more than two years could be modified, even if there isn’t a change in government. Since the fact that they are “pregnant with tax relief” is a big part of their attraction, then there could be a big sell-off if such changes do take place. Indeed, he reckons “they could end up falling by a third” if such a change materialised.
However, “as long as I’ve got a flow of dividends I’m happy, and willing to take the long-term view”. Lee is also an evangelist for direct share ownership. He believes that everyone should own some shares, and is sceptical about the idea of delegating investment choices to the fund-management industry, which he views as being poor value for money. Given his own success, there’s perhaps little surprise in that, and it’s certainly not a view we’d disagree with here at MoneyWeek – if Lee can inspire just a few other potential investors to embark on the road to becoming Isa millionaires, it can only be a good thing.
A life in politics
John Lee was born in 1942. After entering Parliament as a Conservative MP in 1979, he became minister for defence procurement in 1983, minister for employment in 1986 and minister for tourism in 1987. He left the Conservatives in 2001 to join the Liberal Democrats.
He was made a life peer as Baron Lee of Trafford in 2006 and has served on a number of committees in the Lords.