Colin McLean is Managing Director of Scottish Value Management, an Edinburgh-based investment management group established in 1990. SVM manages portfolios for US and European institutions, in addition to the SVM Highlander Fund, a Europe long/short hedge fund, five investment trusts and a range of offshore funds. Funds under management exceed 1bn.
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Find your own zone of comfort - and stick to it.
Buy stocks you can live with, and structure portfolios to keep you comfortable with the risks. If you cannot stand day-to-day share price volatility, you will only end up selling out a stock at the worst time and lowest price.
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Share prices are not so smart.
Share prices will not tell you what real risks a company is running, or how good it is. Shares with low volatility can suddenly change their pattern, or even steadily destroy value in the long term . A fall in the share price does not mean it is now cheap; a rising share price does not make a company good.
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Focus on the stocks you own.
With hundreds of companies on the stockmarket to choose from, half of which will outperform, you can afford to miss out on a lot of winners. Focus on the stocks you hold that might turn out to be losers, rather than worrying about missing out on performing stocks you don't own.
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Not all sales are created equal.
A low market capitalisation relative to sales is not necessarily cheap. Some industries will never earn more than 2% on sales, others 30%. Some will generate free cash flow from sales, others can fail to make a satisfactory return on the working capital involved. Lots of sales are not the same as value - look at operating profit.
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Buy smaller companies for growth.
Given the lower liquidity and more limited research coverage, it is dangerous to buy small companies unless they are likely to become big ones. Companies moving up into the next stockmarket division, such as from small cap to the FTSE Mid 250, often attract new investors. It is the key way in which liquidity in smaller and medium sized companies can improve, and a re-rating be achieved.
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Be wary of companies with large convertible issues.
This often indicates that a company cannot issue further equity, possibly because its shares are below the price of the last issue, or does not have a satisfactory bond rating. Also, companies offering shares as deferred consideration on a takeover believe it is a cheap way of buying businesses. But if their share price falls , meeting these obligations can prove very expensive.
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Watch executive share sales.
Director buying is a less useful guide as boards often try to emphasise this signal. However, selling by chief executives or finance directors still works well as a warning. Striking share options early is also a danger signal.
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Read the annual accounts.
Beware of unconventional accounting practice or overdesigned accounts. Some companies can try too hard to impress investors. If you have questions, write to the chairman before the AGM.
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Don't use earnings per share to determine growth rates.
Establish the underlying real growth of companies by looking at growth in turnover , volume or customer numbers .
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Establish the business drivers and value catalysts.
Understand the business model, and the key factors involved in a company making money. Check for specific evidence of success of this. Think like a trade investor. Identify the catalyst that is likely to see value recognised by the stockmarket or a bidder.