We asked three independent experts what they thought of Lord Lee’s investment methods:

Alex Wright, portfolio manager of Fidelity Special Values PLC

Lord Lee’s impressive results demonstrate the value of a patient and disciplined approach to investing in the stock market. While his returns are not far beyond what one would expect from a consistently well-managed portfolio of UK smaller companies invested over this period, they will certainly exceed those of most private investors who have “dabbled” in smaller companies shares in the hope of making big profits.

The appeal of investing in cheap shares with simple business models and strong financials is clear, and I apply some of these principles in my own approach to managing client’s assets. However, I think readers should consider that although Lord Lee’s formula may be relatively simple, this does not necessarily make it easy to execute with consistency.

First, there are psychological forces working against you that will require some effort to overcome. Often the best opportunities are available when everyone else is desperately selling their stock and prices are falling fast.

Second, not everybody has the time available to commit to thoroughly research and understand companies. Behind each investment I make on behalf of my clients, we have analysts performing detailed analysis of financial statements, hosting meetings with company management, and making calls with customers, suppliers and competitors.

Picking individual companies can be a laborious process, and sticking with them over the long term requires discipline in the face of adversity. For these reasons, and others, it is not for everyone.

Jason Butler, independent financial expert

Lord Lee is clearly a very smart guy but I just don’t see the need or desire to bust a gut trying to outwit the market to generate acceptable returns. The types of companies in his portfolio are generally higher risk. The empirical evidence shows that investors have in the past been well compensated for these risks, known as risk factor premiums.

This portfolio’s returns seem in line with what has been achieved by some major small-cap investment funds over the same timeframe. The MSCI UK Small Cap Index shows that £1m in December 2003 would be worth £3.62m by the end of Oct 2015, before costs. However, just moving the start date of the index to June 2003 changes the October 2015 terminal value to £4.49m, illustrating the sensitivity of the sequence of returns in these more volatile equities. Some of the best-performing small-cap funds have achieved significantly higher returns than the index or Lord Lee’s portfolio.

The real question for most readers is whether they can achieve sufficient investment returns to meet their life goals without taking uncomfortable risks — or spending lots of their precious time doing so. As far as I’m concerned I’ll stick with my “boring”, low-cost, fund of index funds which I know does not rely on anyone’s ability to pick “winners”, exposes me to acceptable risk and allows me to spend my time on the things that really matter to me (which I can’t outsource to someone else).

Charles Newsome, Investment Director at Investec Wealth & Investment

Lord Lee’s approach is very astute, primarily because it identifies companies with strong free cash flow that can afford to pay good and sustainable dividends; these can still be found. By looking for companies where the directors own a good amount of the equity, this ensures that the directors “eat their own cooking” alongside their shareholders. Such companies are likely to have a good capital allocation methodology, something that is sadly lacking in many management teams at times.

Lord Lee is clearly very passionate about investment. He spends a lot of time on research, which takes persistence and patience. The stock market is an mechanism for moving cash from the impatient to the patient, according to Warren Buffett. John is clearly in the latter camp. He also only invests in companies he understands and doesn’t do companies that have poor free cash flow, because of high capital investment requirements. I call this the “jam tomorrow” approach.

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