It was in a somewhat benign state of mind, he says, that he, along with the former Observer owner, David Astor, the former Really Useful Group chief executive, Brian Brolly, the co- founder of Sea Containers, Maurice Pinto, and some other friends set up Priory Investments in 1990 to take stakes in unquoted companies.
There were one or two curious investments at the start, including an Australian wine company, which was given support after an introduction from Hugh Johnson, the wine writer and a friend of Waterstone.
But a large write-down of the fund's investment in the publisher Sinclair-Stevenson in 1991 'brought us up short', Waterstone confesses.
Publishing is a field from which Waterstone seems unable to escape. His first novel, Lilley & Chase (just published by Headline), includes a satirical account of the book trade. When he was still running the bookshop chain he founded and eventually sold to W H Smith for a personal gain of pounds 9m, he had tried and failed to set up as a publisher himself.
Despite that, in 1990 Priory chose to back the well-known editor, Christopher Sinclair- Stevenson, to go it alone.
'The business devoured cash, the overheads were too high, the revenue didn't come through,' Waterstone says. Priory lost pounds 510,000 in 1991 after a write-down of pounds 489,000, mainly relating to Sinclair-Stevenson.
'We were fond of Christopher and of William (now Lord) Rees-Mogg, who was chairman. But I do not really like this business of investing in friends.'
Sinclair-Stevenson's company was eventually sold at a loss to the publishing giant Reed, but Waterstone had already realised that Priory had to change its approach. 'We are a business,' he says, adding hastily, 'but not brutal.'
Waterstone has 10 per cent of the pounds 5m or so invested in Priory, and another pounds 8m fund is being raised from new and existing investors. He chairs Priory when he is not involved with charities or writing to his target of two novels a year. 'After all, Sir Walter Scott managed over 70 in his life,' he says.
'I always wanted to write books. I was becoming obsessive about it. But investing like this is a pleasing process of professional expertise. I am working in a group of friends, which I like.'
These friends, he adds, are all in their 'deep fifties' with accumulated 'scar tissue' that allows them to judge younger people and their ideas.
None the less, Priory's record is a little mixed. The company aims to cover overhead with income, but has lost money every year until this one.
Lamancha Productions, a producer of videos from archive material, and owner of a vast stock of East European footage valued at nothing in the books, lost money last year but should be profitable in 1994.
Golden Rose Communications, owner of the JFM station, has attracted new investment but not as many listeners as it really needs.
'Jazz is difficult. There is nowhere in the world where (a pure jazz station) has been a tremendous success,' Waterstone says. There is 'some hope we may recoup 75 per cent' of the original investment, according to a report to Priory shareholders.
However, Helicon, publisher of the Hutchinson Encyclopedia, a concept ripe for exploitation in CD-ROM form, has performed well, as have several other investments in telecommunications, software publishing and elsewhere.
Westfield Medical, a maker of packaging for syringes and other medical supplies, bought by management out of Bowater for pounds 2m, has doubled profits to more than pounds 800,000, probably valuing it between pounds 5m and pounds 10m.
'There is quite a market for placing quickly and painlessly small divisions spun off by big companies with no negotiations and no merchant bankers,' Waterstone says.
He likes that kind of deal - as well he might, since it is an easy way to acquire an established business with respectable antecedents.
Waterstone's total investment in Priory of around pounds 500,000 may sound small as a proportion of his original pounds 9m from the sale of the bookshops, but is a rather larger proportion of his net worth. 'There was the Inland Revenue, and eight children, and children's trusts,' he points out, having been married three times.
But the Priory involvement has other uses. All the shareholders are getting copies of Lilley & Chase. 'Highly readable,' is the verdict of the chief executive, Maurice Pinto.
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