Diary Of A Private Investor: Nice and PC does it

ISAs are not an ideal tax-free investment, but while your computer sieves out the white elephants you are free to fine-tune performance

It is ISA time at Chez Bond. I confess to being a laggard over this form of tax-free investing (Individual Savings Accounts have been around since April), probably because they are not as good as the PEPs (Personal Equity Plans) they replaced.

With our combined PEPs Mrs B and I could buy pounds 18,000 of equities every year and never have to pay tax on the capital gains. The ISA rules mean we're down to pounds 14,000 this year and in the next tax year it will be pounds 10,000.

However, let's be thankful for small mercies and, hey, we have still got those PEPs, one a year since 1987. We can continue to trade within those although, because of the high commission charges for swapping stocks, I rarely change my original choices.

What we want for the ISAs are low-risk shares, preferably under-valued, that are going to grow over the long term.

I'm not too good at sums so to help me reach a decision I turn to my faithful CD in drive A of the computer which I have pre-programmed with a series of "sieves". These are designed to reduce the field of 2,700 runners quoted on the London Stock Exchange - down to a handful of potential winners.

The sieves I use are fairly standard and were developed with the help of my friend and mentor, Jim Slater. Let me outline the approach. First I check the PEG factor. The `P' stands for price, the `E' for earnings and the `G' for growth. You take the current share price, divide it by the latest earnings-per-share, then divide that by the estimated future growth rate of earnings-per-share. It sounds rather complicated, but if the resulting figure is below one it is a fair indication that the price is reasonable.

Next I try to eliminate slow-growing shares by ensuring that the earnings- per-share figure is rising by at least 20 per cent. And, to make sure the directors are looking after and business and keeping the shareholders happy, I want to see a cashflow-per-share at least equal to the earnings- per-share. To select those shares that are performing well, the sieve insists on positive relative strength.

Finally, my trusty CD makes sure our short list includes only those stocks where profit margins have been increasing in recent years and the companies haven't got unacceptably high short-term borrowings.

My sieves have narrowed the field down to 10 shares. In no particular order they are: Springwood, Merchant Retail, LPA, Interlink Foods, IS Solutions, Bristol United Press, Bensons Crisps, Amey, Fitness First and Ask Central.

What a mixed bag! I weed out the minnows, anything with a market capitalisation of less that pounds 50m, and I'm left with Springwood, Merchant Retail, Bristol United Press, Amey, and Fitness First.

Now it is down to personal preference. What does each company do or make? Do I understand it? No use buying into a business that is too technical for my simple mind, as I will not be able to use common sense when I make my decision.

There is still a lot more homework to do. Obtain the latest annual report from the relevant registrars. Check to see whether the companies have websites, and if so is the information useful or just dressed-up advertising? Are directors buying or selling? Have the institutions got substantial holdings?

Finally, I comb the archives to see whether the companies have been getting good or bad press coverage. All this takes time and suddenly there are no more days left this week. Never mind, we're going to invest pounds 14,000 so there is no point in rushing. It could be that none of the shares on my short list satisfy my criteria, in which case it will be back to the drawing board. I will let you know the outcome in next week's column.

PS. This week Postman Pat brings me a unique communication: a welcome pack from a company whose shares I recently bought. There's a chatty letter from the chief executive and details of the company's history and its products, latest press releases and biographies of top managers. A simple bit of public relations, it reinforces my interest and makes me feel part of a shareholder club.

I hope to buy around 60 new shares a year, and this is the first time any company has said thanks for investing. Trouble is it's a Canadian outfit, High point Telecommunications, quoted on the Alberta Exchange.

Terry Bond has been a newspaper journalist, broadcaster and author, business partner of the round-the-world sailor Sir Chay Blyth, owner of an international public relations business and a European property company and sales and marketing director of a major PLC.

Now he 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.