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Jim Slater: my seven rules for a successful share portfolio
There’s a lot more to investing than just picking the right shares. The investing veteran explains how he does it
For readers who invest in shares, here are a few suggestions to help you to improve the management of your portfolio:
1. Find your niche
First, I recommend that you try to develop a speciality of your own and then determine the method you will use for selecting your investments. For example, you could concentrate on leading stocks in say the FTSE 250 index or you might prefer smaller, relatively under-researched growth companies. There are many possibilities, including firms where assets are the primary attraction, companies with high dividend yields (especially if you need the income) or managed funds. A mixture can also be a good plan – for example, 65pc in smaller growth stocks with 35pc in the leaders – as shares in larger firms are easier to sell.
2. Develop your investment rules
Whatever your speciality you will need to establish your method – the criteria you will use to select shares for your portfolio.
With growth shares I suggest that your criteria should include a consistent record of earnings growth with forecast growth in earnings per share greater than the p/e ratio.
For example, a company growing at say 18pc with a p/e ratio of 14 would have strong potential to be one of your selections. However, in addition to earnings growth you will also need to establish some protective criteria such as making sure that the balance sheet and cash flow are strong, there has been no recent substantial selling by directors (directors buying is an obvious plus) and the shares are acting reasonably well in relation to the market.
If asset situations become your thing, you should search for companies with shares priced at a discount to their net asset values. Keep an eye on directors’ buying and the recent relative strength of the shares against the market – they can at times indicate that a takeover bid is imminent or there is about to be a significant management change.
You should also make yourself aware of pension fund deficits, which are sometimes mammoth and can make a future bid much less likely.
Whatever your preference you need to establish your key criteria. Once you have your method working well, improvements come from experience and practice – learning from the successes and failures of each and every investment you make. Gary Player, the famous golfer, put it well when he said: “The harder I practise, the luckier I get.”
3. Diversify – but not too much
Your portfolio should contain no fewer than 10 shares, and you could put 10pc of your money in each of your top selections – which many brokers and banks call “conviction buys”. If you have minor reservations, 5pc might be more comfortable. It is always possible to top up the holding later, if and when you become completely confident in your choice.
Diversification is absolutely essential to reduce risk. But too much of it can hinder performance
Diversification is absolutely essential to reduce risk. However, too much of it can hinder performance. Remember that your first selection would be the number one conviction buy in your portfolio. Your 10th would be considerably less attractive and your 30th would not be in the same league as either of them. Too much diversification can be better described as “diworsification”.
4. Keep checking progress
It is essential to monitor the progress of the shares in your portfolio. A good broker will usually keep you informed about trading updates and results and any other important announcements.
I find the online service Digital Look excellent to monitor share price changes, past and present announcements and results, key fundamentals and forecasts, the number of brokers recommending the shares etc.
To give me further details I use Company REFS, which I helped to devise. There is a full page for every company and there are tables highlighting those that possess the statistics I am always searching for. Directors’ dealings and consensus forecast changes are covered comprehensively.
You need to keep a close eye on the City pages of the newspapers. I also recommend the Investors Chronicle, which reviews company results weekly and makes buy, sell and hold recommendations, together with interesting articles on investment methods and the like.
On my website (jimslater.org.uk) I recommend a few investment books at primer, intermediate and advanced levels. If you read just one of them, it should give you some good ideas and help to improve your selection technique.
5. Know when to sell – and when not to
A key factor in effective portfolio management is to run profits and cut losses. This is counter-intuitive for most people because it is natural to want to grab a profit and rather unpleasant to realise a loss. There is however no doubt that if you run your profits they can become very big and if you cut your losses they will always be relatively small – so much better than the alternative.
To understand this approach better, assume that you are a racehorse owner with 10 yearlings which cost £25,000 each. Seven prove to be hopeless, two are quite promising and the remaining one has won two races and is a potential star. Imagine that you have to cut down on training and stabling expenses and raise some capital. Which horses should you sell?
The hopeless seven of course, followed if necessary by the promising two. You should run your profit on the star which could make you a fortune in prize money and stud fees.
My son Mark, who manages the MFM Slater Growth fund, is far better than me at running profits. He has demonstrated this well with his fund’s investment in Hutchison China Meditech, which he bought at 185p a share in 2010. The shares are now £17 and for several years have been his fund’s largest holding. They are still going strong, helped in April by heavy buying by Hutchison’s executive chairman.
My friend Terry Smith of Fundsmith, which has also performed exceptionally well, has only 27 shares in his portfolio, which is now worth about £4bn. Since he started the fund in November 2010, he has sold very few shares. So when do you sell? Terry would say almost never, provided that the shares continue to meet his fund’s demanding criteria, especially his personal favourite – a high return on capital employed.
Remember that there are always three distinct options – buy, sell and hold. Really strong growth shares often become a little overpriced because there are so few of them. At this point they usually become a hold.
If a share is massively overpriced (like Asos in my view), it becomes a sell. However, once you have found a truly great growth share there is little point in trading in it unless the story has changed substantially, the share has become massively overpriced or you really need the money for personal reasons or to invest in a much better opportunity.
6. Make sure you have some 'liquid’ shares
You should always keep an eye on the “liquidity” – the ease with which you can trade – of your portfolio. If you are invested mainly in FTSE 250 stocks you will have little trouble going into cash if necessary. However, if you have focused on smaller growth shares I recommend having at least say 20pc of your portfolio in large companies such as Disney, Home Depot and ITV, all of which I have previously recommended in this column.
This kind of share can if necessary be turned into cash instantly and provide some comfort if the market as a whole turns ugly. The potential gains on very large companies are not likely to be as substantial as those from smaller growth companies, but they can often do well enough to give you a warm feeling. For example, I recommended ITV at 203p in October last year and they are now at 267p – and still look attractive with hopes of a bid and extra transmission fees.
7. Use your Isas
One further vitally important point is to take up as much as you can afford of your Isa allowance every year (currently £15,240). If married, your spouse should do the same. Together with annual increments and tax-free capital and income gains, you can quickly build your Isas to become a very attractive tax-free pool of money.
Good luck!
I hope you will find these few suggestions helpful to your future portfolio management. I must say that I thoroughly enjoy investing in the stock market and feel very lucky that with today’s technology and a good broker it is so easy to manage your money effectively from the comfort of your home.
Investing does of course have its ups and downs but most of the time it makes my day.
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