Glenn Martin, author of the new book ?How to Value Shares and Outperform the Market? talks to Trading Diary about investing in the FTSE 100.
1. Who are you?
I spent my employed career of 34 years working in Financial Services. The latter part of my career was in Investment Banking, where I was Chief Information Officer for several investment banks.
I have always been a private investor in equities. In 1994 I developed my own system for valuing the FTSE100 and individual UK shares. I was inspired to do this by studying the famous Black-Scholes system for valuing equity options (I was Chief Operating Officer for an equity derivatives house at the time). The Black-Scholes system is complex but entirely logical. I thought a similar logical approach could be used for valuing the underlying cash equities.
I retired from my last employed position (JP Morgan Cazenove CIO) in 2005. As the valuations from my system had repeatedly proved to be correct (e.g. it exposed the dot.com boom to be a bubble ready to pop), I set up ShareMaestro Limited to package and market the system (www.sharemaestro.co.uk). The system has received very positive reviews in the main financial journals (e.g. Investors Chronicle, Daily Telegraph, Shares magazine). ShareMaestro valuations are being used in the IC roadshows which are being held this week.
I am also the Chairman of my local tennis club, which is another limited company and effectively another business, as we have to recruit enough members to cover our costs.
2. What is your new book ?How to Value Shares and Outperform the Market? about?
The book is about how to use my value-investing systems and strategies to achieve successful long-term investment in UK equities. It explains how private investors can manage their own equity funds and avoid the huge destruction of value which the fees of commercial fund management will bring.
At the heart of the book are instructions on how to build two spreadsheets for valuing the FTSE100 and individual UK shares. These systems are based on the ShareMaestro software. The book then provides strategies for using the systems together with the detailed long-term (27 year) track records. For example the book shows how a 20-year old could enjoy a pension 8 times larger through using these strategies than he could get from the median-performing commercial UK equity fund/annuity approach.
Finally, as I want this book to be a one-stop shop for UK equity investors, I have included all the practical information needed to manage your own UKequity fund (e.g. best service-providers, tax breaks, risk controls etc.)
3. Why did you write this book?
I was asked to write this book by Harriman House after they had read an article which I wrote for the Investors Chronicle.
I decided to write about how private investors can manage their own UK equity funds as I strongly believe that they should. My father was a great believer in unit trusts and I inherited quite a few from him. I experienced first hand the dismal performance which most of these commercial funds deliver (the median real return of commercial UK equity funds over the last 10 years has been just 1.2%).
4. Can you tell us a bit about your system for investing in the FTSE 100?
In simplified form, the system calculates the current value of the FTSE100 in 7 steps. It:
Projects the value of the FTSE100 dividend in 5 years time by applying a growth factor to the current dividend.
Calculates the projected FTSE100 dividend yield in 5 years time by reference to the market?s expectations of inflation in 5 years time.
Projects the FTSE100 price in 5 years time from 1 and 2.
Adds the value of reinvested dividends over the 5 years to project a total investment value.
Reduces this investment value by the Risk Premium (to compensate for the greater risk of holding equities than cash.
Discounts 5 for 5 years back to today?s value by using the gross redemption yield for 5-year gilts.
Expresses this current FTSE100 value as a percentage of the current market price. Over 100% is good value, under 100% is poor value. The greater the gap above or below 100%, the greater the extent of over or under-pricing of the market price.
5. What skills do you need to successfully invest in FTSE 100 companies?
Inquisitiveness as to how companies generate profits. If you like Dragon?s Den, this is a good sign.
Emotional detachment ?the ability to ditch shares when they become poor value, even if the price is less than you paid.
Discipline to stick to a preferred strategy.
6. With the current Eurozone crisis (November 2011), is now a good time to buy FTSE 100 shares?
The most critical factor in my valuation system is the assumed rate of dividend growth, which heavily depends on earnings growth. From a long-term perspective many FTSE100 share prices offer very good value. However, if the Euro collapses, earnings and dividend growth are likely to be severely impacted, thereby changing the values. With my system, you can easily stress test to see the impact of your worst case scenario on any current share valuation.
7. What is the ShareMaestro software?
The ShareMaestro software includes FTSE100 and share valuation systems similar to the one included in the book. As the software is packaged, it includes a lot of added value features such as indexed databases for the valuations, help buttons on each input and results field etc. Most importantly ShareMaestro subscribers can import a data file which we produce in association with ShareScope. The enables valuations of all the shares in the FTSE100 (and of the FTSE100 itself) to be produced in a matter of seconds. The facility to export bulk valuation runs to Excel means, for example, that all the shares can be ranked from highest to lowest valuation (or vice-versa). More information is available from our website www.sharemaestro.co.uk.
8. Apart from the FTSE 100 what else do you invest in?
Apart from the FTSE100, I invest in:
Individual UK shares.
A smaller companies fund (smaller companies have the greatest potential for long-term growth and the smaller companies funds have had the best returns of UK commercial funds over the last decade). To avoid the high fees, I would prefer to invest in a low-cost UK smaller companies ETF but one does not exist!
Fixed-interest cash deposits (not gilts, which are due for a crash when interest rates rise).
Wherever possible, I hold my investments in tax-free wrappers (ISAs and a SIPP for my money-purchase pensions). Where not, I use the tax-saving measures which I describe in my book.
9. In this time of economic uncertainty what should people be doing to improve their finances?
Employ a three step plan:
Reduce your annual living costs. I wrote a book in 1992, the Personal Prosperity Plan, about how you can do this. Now sites such as moneysavingexpert.com give all the information you need.
Determine according to your personal circumstances how much money you should set aside for an emergency fund. I would opt for 2 years of living expenses. Put this money in easy-access cash deposits, finding the best rates from moneyfacts.co.uk.
When you have got your emergency fund to the size you need, use the strategies in How to Value? to maximise the value of your long-term savings. If you are risk averse, stick to the medium-risk FTSE100/cash strategy.
10. What other authors do you admire?
Some of the investment books which I like are:
Smarter Stock Picking (David Stevenson). This features a section on ShareMaestro.
Simple but not Easy (Richard Oldfield). Full of common sense and has a great chapter demolishing the myth of hedge funds.
The Naked Trader and The Naked Trader?s guide to Spread-betting (Robbie Burns). Both very readable and very shrewd.
I am about to read The Long and the Short of It by John Kay. I think I will enjoy this as, like me, Kay has highlights the high costs of investing through commercial funds.
Glenn Martin?s book ?How to Value Shares and Outperform the Market? is available now on Amazon.