Lord Lee’s bottled wisdom is an unmissable treat
Book Review: How to Make a Million – Slowly
© John Lee 2014.
In almost any field of human endeavour, we do well by standing on the shoulders of those who have gone before us. This is true in the sciences, in the arts, and indeed in business. Learning from those who have already succeeded can help us to avoid mistakes, to focus our energies in a productive way, and make our own journey to wisdom that little bit faster.
John Lee made his first stock market investment about thirty years before I was born, and fifty years before I started transacting in shares. Some may think it a controversial point that investing principles formed decades ago might still be relevant today. However, I strongly believe this to be the case.
As the legendary American speculator Jesse Livermore said:
There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
He might have used the same words about the City of London. The personalities change and the technology we use improves, but the fundamentals of capitalism do not.
How to Make a Million – Slowly is a financial autobiography from the point of view of someone who has been there, done it, and has helped to educate the wider investing community along the way.
The book has everything you might hope for: a list of guiding principles, clear explanations of core concepts, some practical advice, anecdotes, and a frank discussion of mistakes along the way.
Keeping it Simple, Stupid
Lord Lee is a big believer in simplicity. Chapter 4 (Valuations) opens with the sentence: “I have always believed that most investors and analysts over-complicate matters.”
The chapter goes on to explain that there are really just a few metrics which matter, e.g. dividend yields and P/E ratios, for trading companies.
For what it’s worth, I have a theory as to why investors such as Lord Lee are comfortable taking a simple approach to the numbers. It seems to me that when one reaches a certain level of expertise (and/or experience), that’s when one becomes confident enough to use a simple approach. Those without the same level of understanding are more likely to substitute needless complexity for simpler but more effective forms of analysis.
As we learn in the book, Lord Lee is a qualified accountant who worked at a stockbroking firm before going on to be the co-founder of a small investment banking group and a bank. This suggests a level of financial expertise that is unfathomable to the layman.
And yet Lord Lee, with all of this expertise, likes to keep it simple. And if simplicity is good enough for him, it should be good enough for the layman, too! But it’s in the application of simple rules to reality that things start to get a little messy. That’s where expertise and hard-won experience counts.
I suspect that Lord Lee would feel that he is in the same camp as Charlie Munger, who said:
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Spying on the Company Car Park
The book includes a generous selection of Lord Lee’s articles for the Financial Times, along with practical tips for investing. Some of my favourite tips are those concerning the character of the executives with whom we are entrusting our funds.
He particularly likes “proprietorial” companies, owned and controlled by families with a strong sense of stewardship across the generations. On the other hand, he dislikes companies where the CEO doesn’t have a real stake in the business and is too obviously enjoying the glamour of the position.
For example, “the latest bright red Ferrari parked in prominent position outside the head office hardly inspires confidence.”
This theme is reiterated with a German flavour shortly afterwards:
“If he owns a flashy BMW with personalised number plates, drips with gold jewellery and has ambitions to own the local football club – bad news. But a conservative car, gentlemen’s shoes, love of cricket, faded regimental tie and membership of the local school board spell good news.”
Visiting companies, talking to management, and building a mental picture (a “jigsaw”) of the company as a whole – that’s the name of the game. We aren’t just shuffling bits of paper around, after all. We’re allocating capital to real-life businesses, so we need the appropriate mindset.
The Biggest Mistake of All – Selling a Good Company
We learn primarily from our own mistakes, but the benefit of studying a book such as this is that we can also learn from the painful mistakes of others. Lord Lee devotes an entire chapter to his mistakes, sorting them into two categories: stocks he sold too soon, and stocks he should not have owned. He writes: “it is the former category which has undoubtedly been the more costly”.
Examples include Bodycote (BOY), WPP (WPP) and Croda (CRDA), where in hindsight Lord Lee could have generated even better returns for his portfolio by holding onto them, rather than taking profits.
What’s interesting about this is that Lord Lee is undoubtedly a very patient, long-term investor, and a highly successful one at that. But he reports that his results would have been even better if he had been more patient, and that impatience was the source of his biggest mistakes! The rest of us must seem like day traders in comparison.
In a 2000 article reprinted in the book, he said that his worst mistake of all occurred in March 1998, when he took profits on half a dozen holdings. Subsequent performance would have been superb, had he not done so.
This is my main lesson from the book: patience is a virtue, especially when it comes to investing. And as investors, we must not confuse trading activity with productivity.
The real productivity is taking place at the companies we own, where (hopefully) competent and energetic people are working hard to grow the value of the business. We already did the hard work of finding the opportunity. Now we have to give them the time they need to succeed.
And when we do find a good business, there is absolutely nothing wrong with holding it indefinitely. Indeed, selling it could be our biggest mistake. PZ Cussons (PZC) has been generating wealth in Lord Lee’s high-performing portfolio since 1976, and continues to do so today.
These are priceless lessons, and so How to Make a Million – Slowly is a worthy addition to any investor’s bookshelf.