The most important thing every investor needs to ask

If you get sufficiently interested in investment to want to do it for yourself, you can end up knowing a bit about an awful lot of subjects. Stick at it long enough and you might even learn a decent amount about one of the most important: what kind of investor are you?

It has taken me a long time to realise how central this question is. There are plenty of investment styles, two of the major ones being “value” (buying unloved stocks you judge to be cheap and waiting for them to perk up), and “growth investing,” which means buying companies with rapidly-increasing revenues and, ideally, profits. How readily you take to either of these styles, or any other, depends a lot on your personality.

I am at best an uneasy growth investor because I find it very difficult to get comfortable paying high prices for “growth companies.” This is a fundamental barrier to success since these companies never look cheap relative to most others because investors prize rapid growth above most other attributes. Some people are temperamentally equipped to pay up. Others aren’t.

Back in 2012, I remember taking a good look at a small company listed on the Alternative Investment Market, called Advanced Medical Solutions (AMS). It seemed a very good business in a highly specialised niche (it makes a variety of products including specialist glues used in woundcare) with revenues growing at more than 10 per cent a year in its main markets. At the time, the share price was around 60p, representing about 20 times its earnings per share for 2011 of 3.1p. Paying 20 times historic earnings made it uncomfortably expensive in my book and despite the obvious strengths of its business, I could not bring myself to cough up.

Having reached that conclusion, I moved on and did not bother to track its progress. It was only recently, nearly six years later, that I happened to look at it again, and immediately wished that I hadn’t.

In mid-March this year, AMS announced its results for 2017. These showed it was still growing strongly—its earnings per share jumped 27 per cent last year to 9.4p—and the share price is now comfortably above 300p, five times the price I balked at paying in 2012.

Even more galling, looking back I can see that during 2012, AMS increased its earnings per share by more than 50 per cent. The price that seemed too expensive to me based on a multiple of AMS’s earnings for 2011, was in fact perfectly reasonable based on the results it was about to achieve for the year then in progress. Since then, AMS has become yet more expensive as its record of growth won it more support among investors—it now trades at well over 30 times its earnings per share for 2017, far above the price I thought too expensive six years ago.

What seemed to me a company that was uncomfortably expensive is now a business with a market value of about £700m that has turned out to be a stellar performer. For me, it has provided both regrets and an important lesson—you can only be the sort of investor your temperament will allow you to be.