What words come to mind when you think of penny shares?
You might think of words like explosive… optimistic… dynamic… opportunity… or startup.
Penny shares are all about bright people coming together to create something new. (And investors making large amounts of money by going along with them!)
Now. If I were to think of the place that least embodies those words and those feelings… I’d be hard pressed to do better than the House of Lords.
Well, that’s exactly where I found myself this week.
Glenn Fisher and I were on a mission to meet Lord Lee, Baron of Trafford. Lord Lee is one of the canniest investors in the UK. He’s was Britain’s first ISA millionaire, and he’s surely Britain’s most famous penny share investor.
Glenn and I met him to talk penny shares. And I must say, I learned something new from him…
“I don’t look for small companies”
Despite being the most famous small company investor in the UK, it was interesting to learn that Lord Lee doesn’t actively seek out small companies. That was the most surprising thing I learned from him.
Instead of companies of a particular size, or in a particular sector, he looks for characteristics. If a company has the characteristics he’s after he’ll invest in it, regardless of whether it’s big or small.
Yet despite all that, his portfolio is stuffed with penny shares and small caps. Why? It’s simple: small companies happen to have the characteristics he’s looking for.
I must say I enjoyed hearing him say it, because that’s exactly my view too. The characteristics he’s after:
Pretty much precisely match up with the ones I screen for in The Penny Share Letter. We had a lot in common!
The three of us talked for a good while in his big office overlooking the river. We covered a lot of ground – too much to cover in this email! But I do want to expand on one important point he made.
Why family businesses out-perform
You don’t often hear investors talking about the importance of families. But it’s something Lord Lee brought up more than once. Why does he like to invest in family controlled companies?
He says it’s about “stewardship”. In a family-controlled company, the managers are more likely to steward the company in the best interests of the shareholders. That’s because their own wealth, and that of their family, is tied up in the business. And what’s more, family controlled companies are more likely to hand money back to shareholders in the form of dividends when, as Lord Lee put it, their “maiden aunts” are reliant on dividends for their income.
So investing in family controlled companies neatly sidesteps one of the biggest problems in investing – the problem of managers ignoring shareholder interests.
That’s not to say that investing in family-owned companies is the only way to go… But it does show you something important about investing in general. Watch the managers!
You might not be able to find a family owned business (those are pretty rare these days).
But if you can find a business with a good record of progressive dividends, whose managers own a big slice of the company, which doesn’t treat the stock market like an ATM machine by constantly issuing new shares, and which doesn’t “bet the house” on the next big scheme, you’re on to a winner.
There’re loads more pearls of wisdom from my meeting with Lord Lee. Tune in next week for part 2.