Diary of a private investor: Pick your profit out of this

What the private investor sees as a potential goldmine may well be a minefield
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The Independent Online
Avid readers of this column are no doubt anxious to know the outcome of last week's cliffhanger which left the destiny of Mr And Mrs Bond's ISA money unresolved. The story so far: a handful of shares have survived the strict criteria I apply to identify undervalued growth stocks. Each company has a good track record of at least five years.

Now it's personal preference. Do I understand what the company does? Is it in a sector unloved and unwanted, so the share price will languish no matter what? What are the analysts and the papers saying about it?

I am intrigued by the Internet so I try to check the company websites. Four out of the five are sorry but they have no website yet, though I am assured they are being built.

Only Amey, involved in construction and support services to the industry, has a site. Www.amey.co.uk is simple but impressive. Here is a feet-on- the-ground, well-managed company, adaptable, profitable and recently promoted to the FTSE 250 Index.

In another life, I worked for Wimpey so I call my contacts in the building business. Amey has a good reputation. I ring City friends. Analysts like Amey. I like Amey too, so they are going into my ISA.

The other company I am keen on is Bristol United Press. Trouble is the Daily Mail likes it too. While I dither, they buy the whole company. For a variety of reasons the three other companies are eliminated.

I still need an ISA for Mrs B. I turn to the file I keep, headed: "Shares I really, really, really like but don't own." There I find SFI, the group that operates pubs, hotels and restaurants, mainly in the South-east. I have been meaning to buy these shares again since I sold them 18 months ago. Then, after holding them for six months, I walked away with a 25 per cent profit.

I re-examine the fundamentals and, if anything, SFI is even stronger than when I first chose it for my portfolio. Again, I talk to people and there is universal approval for SFI. Coffee shops and sandwich bars have been added to the Litten Tree pubs. The Bar Med operation is so strong they charge for entrance and premium-price the drinks. Brokers like SFI and forecast profits are rosy.

Chairman Tony Hill has recently bought a further 10,000 shares at market price. The clincher is that management has committed itself to a target 35 per cent annual growth rate. SFI is now in Mrs B's ISA.

BACK TO school. I have spent a day at a desk in a Dusseldorf classroom with a dozen private investors from Europe. We wrestled with share selection and the criteria we should tell investors to use to identify companies with a proven pedigree.

The Belgians insist on following the American system, five years of historical figures and graphs. The Dutch prefer at least 10 years of data, projected for at least four years. The Germans are worried the whole thing is getting too complicated for the novice investor. I agree with the Germans.

These differences, combined with the fact that national information providers do not present company facts in a standard format, mean we are unlikely to find a formula which suits everyone.

But there are four matters of principle on which we members of the World Federation of Investors do concur.

n Buy shares in companies with a proven success record and growth potential. You seek shares your research shows are companies you will be happy to own for at least five years, barring accidents.

n Invest regularly and ignore market volatility. If you invest what you can afford at regular intervals you are bound to benefit. Long-term, the overall trend is up.

n Reinvest all dividends. The beauty of investing in a successful company is that usually you benefit from two sources - your capital increases in value as the price rises, and successful and profitable companies pay you a dividend. Always buy more shares with that. You will be amazed at the difference it makes to your profits.

n Diversify your portfolio. Despite the most diligent research not every share you choose will be a winner. You cannot guarantee which stock will perform better, so you have to spread risk and opportunity. Diversify in company size and market sector. This means lower risk.

Responsible investors should avoid high-risk stocks. Often, risk is interpreted as a synonym for small companies and it is one of the reasons why companies with a market capitalisation of less than pounds 100m have trouble attracting private investor support.

But when I look at the recent history of my trading portfolio - that's the dozen or so "special situation" shares I check several times a day with an eye on actual profit rather than a paper one - the real winners have been small stocks. Rage, SR Pharma and The Money Channel have ensured a happy Christmas at Chez Bond.

Statistics from the Alternative Investment Market prove money is to be made. In the first 11 months of the year, the FTSE AIM Index has risen by a mind-boggling 90 per cent, overshadowing the still-decent increases of its big brothers, the FTSE 100 and the FTSE All-share. The institutions and other big fundholders have ignored the smaller end of the company market and this presents excellent opportunities for the private investor.

But AIM can be a minefield as well as a goldmine. The small, aspiring companies, relatively new to the market, are usually relying on promises rather than a strong financial history. It is difficult to cherry-pick when you are basing investment decisions on facts rather than a good story.

I ask AIM companies for original prospectuses, which attracted the first investors. It is interesting to see how vision matches reality.

The writer is a private investor with a substantial portfolio involved principally in British and American equities. He is also a director of ProShare (UK) Ltd, the organisation which looks after the interests of the investor in the corridors of power

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