Share Club: The nuts and bolts of success

Our regular series following the fortunes of the Reservoir Dogs share club, a London-based group of friends who meet every month to buy and manage a portfolio of shares.

Our debate about which new shares to buy was long and detailed (see box at the bottom of the page for more on our existing portfolio). Eventually we decided to buy into three new companies.

The first was engineer Transtec; our last investment in a cheap, good- value engineer was Jones and Shipman, which was almost immediately taken over, leaving us with a tidy gain.

Transtec (30.5p) is on a ridiculously low rating with a big dividend and a strong customer base. It has been growing in size fast and although it issued a profit warning last year, its directors have been buying the shares. Its founder may also be about to make a return: ever heard of Geoffrey Robertson, ex-Paymaster General and good friend of Peter Mandelson? He built up Transtec and would appear to have a bit more time on his hands now.

We also decided to buy a rather peculiar form of investment called warrants (see box below for more on this). Skye-Pharma is a fast-growing and well- respected biotech company about to make the hugely lucrative transition into a drugs company. A while ago it issued warrants that allowed holders to buy ordinary shares once they went over 40p. For this privilege you in effect pay 67.5p at current prices. You make big profits as soon as the ordinary share price goes above 107.5p (40p exercise price plus the cost of the warrant shares, 67.5p). As this option exists until well into 2001, you have a long time to wait for the share price to rise. If the share price doubles then you make a big, big profit.

We also like Savills - one of Britain's largest surveyors/ estate agents with a fast-growing financial services division. It is a well-run company with a great record of growth and some nice shareholdings in niche companies like stockbrokers Killik. It also pays a handy dividend and offers a real bet on lower interest rates kick-starting the property markets. We probably won't buy as long as the shares remain above 120p, but any fall below that price represents a buying opportunity.

One member advocated buying government securities - gilts - as a safe, secure home for our money. The idea of buying gilts is a way of expressing real fear about the safety of investing in shares. As the stock market hits record highs and the US markets shrug off fears about hi-tech wonder stocks, there seems to be no hint of panic. But we're still not sure. We have plenty of cash and will probably keep it that way. But the problem with keeping your money in cash is that interest rates are plummeting. The yields on gilts are also at all-time lows at around 4 per cent. Not exactly a get-rich formula there, either.

The interest may not be great but it sure beats a huge drop in share prices, so we are going to investigate gilts as a home for some of our cash.

The safest bet for the bulk of our investment seems to be to track down small and medium-sized companies which can afford to pay solid dividend yields above 5 per cent as well as building profits over a five-year term. Beware of companies which don't have enough profits to cover their dividends. Equally, look out for companies that have been badly dumped on by the City simply because they've had a small hiccup in profits. If the long- term record is good then it won't take much to return to long-term trend.