Colin McLean's value investing tips to generate superior returns

Colin McLean, FSIP, is founder and CEO at SVM Asset Management, an independent Edinburgh-based fund management group.

He is a member of CFA Institute and was elected to the Board of Governors in 2012. McLean is a fellow of the Institute and Faculty of Actuaries and a chartered fellow of the Chartered Institute for Securities & Investment.

In 2012, McLean was appointed an honorary professor at Heriot-Watt University, lecturing in behavioral finance. He is a regular contributor to financial publications and has been a guest on Bloomberg TV & Radio, CNBC, BBC TV and Radio. McLean is also a frequent conference speaker on investment, hedge funds and behavioral finance.

McLean wrote a few value investing tips, which can help investors amass superior returns

McLean says investors should buy stocks they can live with, and structure portfolios to keep them comfortable with the risks.

"If you cannot stand day-to-day share price volatility, you will only end up selling out a stock at the worst time and lowest price," he says.

McLean says share prices will not tell investors what real risks a company is running, or how good it is.

"Shares with low volatility can suddenly change their pattern, or even steadily destroy value in the long term. A fall in the share price does not mean it is now cheap; a rising share price does not make a company good," he says.

McLean says with hundreds of companies on the stock market to choose from, half of which will outperform, investors can afford to miss out on a lot of winners.

"Focus on the stocks you hold that might turn out to be losers, rather than worrying about missing out on performing stocks you don’t own," he says.

McLean says a low market capitalisation relative to sales is not necessarily cheap.

"Some industries will never earn more than 2% on sales, others 30%. Some will generate free cash flow from sales, others can fail to make a satisfactory return on the working capital involved. Lots of sales are not the same as value - look at operating profit," he says.

McLean says given the lower liquidity and more limited research coverage, it is dangerous to buy small companies unless they are likely to become big ones.

"Companies moving up into the next stock market division, such as from small cap to the FTSE Mid 250, often attract new investors. It is the key way in which liquidity in smaller and medium-sized companies can improve, and a re-rating be achieved," he says.

McLean says a company cannot issue further equity, possibly because its shares are below the price of the last issue, or does not have a satisfactory bond rating.

"Also, companies offering shares as deferred consideration on a takeover believe it is a cheap way of buying businesses. But if their share price falls, meeting these obligations can prove very expensive," he says.

McLean says director buying is a less useful guide as boards often try to emphasise this signal.

"However, selling by chief executives or finance directors still works well as a warning. Striking share options early is also a danger signal," he says.

McLean says investors should be beware of unconventional accounting practice or overdesigned accounts.

McLean says investors should establish the underlying real growth of companies by looking at growth in turnover, volume or customer numbers.

McLean says investors should understand the business model, and the key factors involved in a company making money."Check for specific evidence of success of this. Think like a trade investor. Identify the catalyst that is likely to see value recognised by the stock market or a bidder," he says.(Disclaimer: This article is based on Colin McLean's various interviews and speeches)