I was hopeless at buying shares – until I hit on a new approach - Sunday Times

Treat stockpicking as you would any investment in a business: ask questions and then back your judgment

There was a time when I’d have actively dissuaded you from taking my advice. If you want your company to grow or need guidance on a business conundrum, then yes, my door is always open. But if you had wanted to know which listed company to invest in, flipping a coin would have been as useful as listening to me.

Over my 40 years in business, I’ve largely been a failure at picking shares. Though it’s only been on a small scale, I’ve rarely covered myself in investment glory. For all the companies that have done well, I have had just as many that did badly and cancelled out my gains.

We’ve all been there, which is why I’ve always loved Warren Buffett’s cast-iron rules for picking stocks: “Rule 1: never lose money. Rule 2: don’t forget Rule 1.” If only it were that easy. However, a recent experience made me realise that the answers to my woes — and perhaps yours too — have been staring me in the face for years, yet I’ve ignored them.

About a year ago, flush with money from my HomeServe sale, I went looking for a small, undervalued “sleeping giant” to invest in — one that had real potential for growth, and where the founder could benefit from recruiting a proven chief executive.

As soon as I found a target, I embarked on some “mystery shopper” research, looking at every element through a consumer’s eyes. Then, after exhaustive due diligence, I met the chief executive for lunch, sharing my thoughts — to which he enthusiastically responded and, without him divulging any confidential information, I proceeded to buy 11 per cent of the stock.

And that’s when I realised something wasn’t right. When I arranged to meet other large shareholders to exchange viewpoints on the business we were now jointly invested in, I was shocked to find that some big institutional investors, who were using other people’s money, knew very little about the company, and in some cases hadn’t even visited a store. They also seemed quite happy to sit back and accept an average performance from the business.

I’m no activist investor. In fact, my career purpose is to inspire breakthroughs by supporting great entrepreneurs, rather than telling founders, chief executives and boards what to do or go up against them. So, I ducked out of what could have been an activist-style tussle, sold all my shares for the price I paid for them (ironically, to an activist investor), and wished everyone good luck. I didn’t lose a penny — but what I gained was wisdom.

My method had been to ask multiple questions and make instinctive judgments before investing — the same questions and judgements I asked and made every day in my former career as a chief executive, and now as an investor backing entrepreneurs running high-growth private businesses.

I’ve distilled those learnings into a series of rules for entrepreneurs seeking inspiration and growth. However, only now do I realise that my “Eight Secrets To Building A Billion-Pound Business” are just as applicable to buying and selling shares, because they focus on ensuring that the right pieces are in place for sustained success.

If you’re investing in the stock market, have you gone to great lengths to find out about the company? If not, test the product or service and get under the skin of the business to assess whether it’s going to be a high-growth operation that will deliver a significant return.

Next, what’s the quality of the leader, their track record? Is he or she an entrepreneur with humility and energy who will focus on growing the core model, rather than constantly be seduced by new ideas and approaches?

Has he or she hired great management that is delivering the day-to-day — a proven team that wants to keep things simple and is rigorous in deciding what not to do?

Does the business have a viable approach that combines digital with bricks-and-mortar? Is the plan for the company to engage in big and high-risk acquisitions, eschewing a more measured evolutionary process for a more unpredictable, revolutionary one? Companies that don’t change too radically can be great investments.

Is there an international expansion opportunity? Don’t feel you need to stick with companies that only perform well in the UK. We’re a small country and there are far bigger opportunities beyond these shores. So, what’s the ambition for going global? Can the model be grown? Is there already evidence of the company successfully expanding in a disciplined way that isn’t stretching assets too thinly?

If you are dabbling in the stock market, ask these questions, and look for investment funds that do so too — those with a policy of backing private companies and are ready to make that step-change from medium-sized to large organisations. And remember Buffett’s other great insight: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” Investment is about long-term ambitions, not chopping and changing too hastily.

There’s no foolproof way to navigate the highs and lows of the stock market, but if you want to minimise the risk of investing large amounts of money, do all you can to look under the bonnet in the same way I do with my mystery shopper expeditions, and ask if your target company is following these rules of business growth.

It’s good advice. If only it hadn’t taken me until this year to follow it.

Richard Harpin is founder and chairman of HomeServe and Growth Partner, and owner of Business Leader magazine