Book Review - The Defensive Value Investor by John Kingham
This recently published book is by John Kingham who also publishes a newsletter, and a blog (see http://www.ukvalueinvestor.com ). John is an experienced private investor and he has developed a certain style which is different to many others you might come across. In essence, and as the title of the book suggests, he takes a very conservative approach to investing based on a very thorough financial analysis of companies over the long term. That means over 10 years in practice so you won't find any "shooting stars" being recommended by his system and small cap stocks are not likely to be included either. So you might say he is focussed on managing a portfolio with few buy or sell decisions, indeed he limits himself to one of those per month, and with a good dividend yield so it's a focus on getting rich slowly rather than quickly in essence.
He clearly has learned from experience that one of the keys to successful investing is to avoid major losses on individual stocks so his focus is on selecting stocks that have long track records of paying dividends and of positive earnings (10 years in both cases) with good dividend cover. But he is also looking for growth. He uses various formula to weed out the inadequate companies using various "rules of thumb" - so for example one rule is that one should only invest in a company if its growth rate is above 2% (combining revenue, earnings and dividend growth).
Another aspect he looks at is profitability in terms of return on capital employed and shows how he prefers to calculate that. And he also looks at whether the company is "conservatively financed" - in other words it is not over reliant on debt - and the size of its pension liabilities (a topical subject at present of course)
The author demonstrates how all the required ratios he thinks are important can be calculated and then adds some valuation limits (a long term p/e ratio and dividend cover) and how stocks can then be ranked on a final "defensive value" score to pick out companies worthy of more examination.
So at this point one might think that this is solely a "financial scoring" system. But he also looks at "qualitative factors" and suggests the reader asks a number of questions to determine whether the business is a "value trap", has competent and consistent management, is risky because of exposure to large projects or is driven by acquisitions, whether it is exposed to changes in market demand or commodity prices and a number of other similar issues that need to be examined. Indeed his checklists of aspects to look at should be in the minds of all investors even if you don't have the patience to work through all the financial analysis he advocates.
He then goes on to make some practical suggestions about how to build a portfolio with reasonable diversification using his approach which appears to be very sound in essence. And he also covers when to buy and sell stocks in a very specific way so as to minimise over trading. This is very sound material for the new investor.
Clearly a lot of experience is behind the system that the author is advocating and although he makes no specific claims about its performance in practice, it would certainly seem likely to protect investors against many mistakes that the inexperienced make. If you wish to develop a portfolio of larger cap stocks that are "defensive" in nature and are likely to give consistent returns in the future, this is a book you should read.
It will therefore be added to the ShareSoc Recommended Reading List.
Roger Lawson 10/05/2016 © ShareSoc