part0025

Daily, weekly and monthly reading is an important aid to the effective management of any portfolio. The bare minimum for serious investors is the Financial Times every day, at least one other good daily, one leading Sunday paper and the Investors Chronicle every week.

In addition to daily papers, technical and trade magazines in the areas in which you specialise, or have an interest, can often give you an edge over other investors.

It is obviously desirable to read as much as possible about investment, but most investors have restricted budgets. The size of your budget will be determined by the size of your portfolio but be prepared to spend more than you might at first think is sensible. The right information will repay the original cost many times over.

During the last two decades, the market as a whole has risen on average by well over 12% per annum excluding dividends. Although only a very small number of professional fund managers seem to be able to beat the market on a regular basis, I believe that doubling the market’s performance is a sensible target for private investors. You only need to study the results of the back-test REFS made on shares with low PEGs, high relative strength and strong cash flow to see that on average the market’s performance was more than trebled. Of course, the back-tests need to be made over a much longer period, but logic dictates that shares with a proven record growing their EPS at a much faster rate than the average, coupled with better cash flow and better relative strength, should continue to outperform the market by a wide margin.

It is, of course, possible to ask your broker to provide you with lists of shares that fulfil these and other criteria. The right broker will be able to do this with ease. If, however, you prefer to select your own shares, REFS is the obvious answer.

If an investor could double the performance of the market by using REFS and other investment aids, then on a £100,000 portfolio an extra £10,00-worth of capital profits could be generated in an average year (For the 10 years ended 31 December 1993, for example, the market enjoyed an average annual return of 18.8% including dividends. In an average year, 10% excluding dividends therefore seems to me a reasonable and conservative basis to work on). Capital gains tax would, of course, need to be deducted for any gains outside PEPs and the tax-free allowance. However, it is conservative to assume that one-fifth of the extra 10% performance – two per cent of the portfolio value – should be set aside for investment aids if the money being spent helps to produce the improved results and continues to do so.

Two per cent of a portfolio worth £25,000 would allow £500 total expenditure, which easily affords a quarterly copy of REFS with £250 to spare for other products. On a £50,000 portfolio about £1,000 is the right amount and on £100,000 about £2,000. With a portfolio of between £40,000 and £100,000 it would be worthwhile to switch to the monthly version of REFS. The extra benefits should more than compensate for the extra cost.

With portfolios of between £100,000 and £500,000, I suggest about 0.5% on the excess over £100,000 should be added to the £2,000 yearly sum. On a portfolio of £300,000, this would mean spending about £3,000 and on £500,000 about £4,000. For portfolios of above £500,000 the relative cost of supplementary investment aids is no longer an important factor – if they help, buy them.

An easy way to afford more investment aids than would be justified by an individual’s portfolio is to join a well-run investment club with a sizeable portfolio. Together, the members should easily be able to afford products like REFS and Techinvest . It would also be a very good idea for the club to found an investment library. To get it started, all members could contribute a book that they have already read, and subsequently new ones could be bought using the club’s funds.

Bearing budgets in mind, I have set out below my suggestions for additional reading and information in an order loosely based on the improvement to investment performance each is likely to provide. The subscription prices mentioned are those prevailing in June 1996.

Company REFS is the full name of the product; the acronym REFS stands for Really Essential Financial Statistics. The publication is available both monthly and quarterly and provides private and institutional investors with the financial statistics and other information about companies that they really need to know. There is a full-page entry for all quoted UK companies other than investment trusts, and a half-page entry for all AIM companies. The full-page entry includes the rolling twelve months ahead PER, dividend yield, growth rate and PEG, the return on capital employed, margin, price-to-sales ratio, price-to-cash flow, price-to-research and development ratio, price-to-book value and gearing. There are also five-year details of normalised EPS, FRS3, EPS, tax rates, cash flow per share, capital expenditure, dividends per share, sales per share, margin, ROCE, depreciation and interest.

Another panel shows the normalised EPS consensus forecast, together with details of the individual brokers’ contributions to it and their buy, sell or hold recommendations. A further panel analyses the company’s gearing in detail and shows interest and dividend cover together with the quick and current ratios. Share capital is set out clearly, together with details of the directors’ holdings and an indication of whether they have sold or bought during the last six months. There is also a chart of the share price, relative strength and EPS growth coupled with the share price’s highs and lows and the average PER turnover and profit both geographically and by activity and the outlook statement shows the last few price-sensitive comments by the chairman. There is also an extensive panel showing the pertinent points from newsflow over the previous year.

Although the company entry is comprehensive, REFS provides much more. A tables volume shows, index by index, the contenders for promotion and demotion, shares with the highest and lowest relative strength, highest yields, lowest PEGs, highest and lowest PERs, best price-to-book values and much more.

In addition, there is an analysis of each sector showing how the detailed statistics of each company compare with the other companies in its peer group and with the sector and the market averages. There are also details of the last six months of directors’ dealings showing the shares bought or sold together with the position of the director in question and his or her residual shareholding. Another section shows CEO changes during the preceding twelve months and another shows index by index, monthly changes to brokers’ consensus forecasts in order of magnitude.

I could go on and on but, as I devised the product and have an ongoing influence on its design and content, I have to admit that I am very biased indeed. REFS has transformed my own investment performance and the original publisher Hemmington Scott received scores of unsolicited testimonials from private investors who are delighted with it. If you want to obtain the details, go to www.companyrefs.com , telephone 0207 324 5419, or email via subs@capitalideasplc.com .

Techninvest is a monthly investment newsletter which concentrates on high-technology companies. The track record of its average recommendation is excellent and its model portfolios have performed extremely well. Most of its investment recommendations are for small to medium-sized companies, but a few reach into the Mid-250 index. The annual subscription is £259, or £518 for two years. The publisher’s address is Techinvest Ltd., Merchants House, 27/30 Merchants Quay, Dublin 8, Ireland.

The Small Company Sharewatch is well worth the annual subscription of £119.50 (for a limited period, normally costs £149.50) The monthly issue contains profiles of attractive situations, updates and plenty of good ideas. The address for subscriptions is www.scsw.co.uk , or EquityLink Limited, P.O. Box 1015, Croydon, CR9 5DL (telephone: 020 8656 4648).

The Penny Share Guide is a monthly newsletter that concentrates on penny stocks. It can be very rewarding but penny stocks are often illiquid and the market-makers spread is very high when expressed as a percentage of the share price. The annual subscription is £25 in the first year rising to £59.50 in the next year (telephone 01932 354020).

These newsletters recommend and profile specific stocks. There are some other publications which help investors to have a better understanding of the forces that influence the market as a whole. For UK share investors the Financial Times is an absolute must every day except Sunday. Weekly magazines of excellent value are the Investors Chronicle , Money Week and Shares . All three include specific recommendations together with reflective articles.

For international Investors, I recommend the European version of the Wall Street Journal which is an excellent newspaper and Barrons which is a leading weekly publication. In particular, it has six monthly round table conferences with investors of the calibre of Jim Rogers and Marc Faber.

Investment is no different from cooking or gardening. If you wanted to be a better cook or a better gardener, you would not hesitate to read good books, written by the experts who have devoted their lives to those pursuits.

In the UK, there is beginning to be a growing choice of investment books by UK authors, but we still depend, to a large extent, on imports from America. When you consider that some of these books are written by investors of the stature of Peter Lynch, Kenneth Fisher and Martin Zweig, or are the detailed accounts of the lives and methods of investment giants like Warren Buffett, it is absurd that all aspiring investors do not drink deeply from the foundations of their expertise. In some cases, a lifetime’s experience is packed into a couple of books. The time spent reading them should be richly rewarded in superior investment performance in the years ahead.

Primers have already been recommended in Chapter 1. Further reading is listed below and has been classified into three grades: easy to understand post-primer, more advanced and expert only. All the prices mentioned are those prevailing in March 1996 and are for paperbacks, unless otherwise specified.