I?ve spent two weeks in the company of twelve highly successful investors. The only thing that connects them is they?ve made a lot of money over a long period of time, enabling them to give up their jobs. And they?re the subjects of Free Capital, a book by Guy Thomas, an investor and former actuary.
It?s been a rejuvenating experience.
Reviewing Free Capital is tricky. Each investor is different so there is no easy way to summarise it except to say that what?s true of Thomas? twelve is also true of all investors. We?re all different. And a book that reveals the strategies, explains the technicalities, and shows us how twelve investors think is likely to give a truer picture of what investment is, what investors do, and how and why they do it, than any one view.
The twelve have diverse backgrounds but for most of them, even their earliest years seem to have determined the investors they became. Vince, who suffered from tuberculosis for five years as a child needed to find a way of being self sufficient even if he became incapacitated. Nigel, who studied psychology at Harvard and spent the first three decades of his career in shipping finance catches cyclical upswings in markets like shipping, mining and property.
Everyone is a genius in a bull market ? so find a bull market?
?is his mantra
Sushil perhaps goes further than some of the others in the extent of his self reliance, doing everything himself including his dealings with the tax and law, but his observation that successful investors have:
a psychological predilection toward figuring things out for themselves?
?is borne out by the testimonies in this book. Even the (relatively) famous FT columnist and former MP, John Lee, one of only two of the twelve identified by his true name (the other is Peter Gyllenhammar), says investment advice is a ?bit of a con?. It?s the search for the truth that attracts contrarian investor, Vernon, to investing, unlike say in politics, business, or law, where you are more likely to be searching for reasons to support a pre-existing point of view.
They don?t even seem to have much regard for other people?s theories. Despite three having worked in investment banking, none calculate intrinsic value as analyst might, and although many use the basic financial ratios, PEs or dividend yields, few recommend the books or glorify the investors who pioneered them. I didn?t read one mention of Warren Buffett, although for former engineer Bill, Benjamin Grahams ?Intelligent Investor? was an epiphany.
Vernon, a contrarian investor who ?buys the glitch? made 25 times his stake on QXL Ricardo, an Internet auctioneer that crashed along with most dot.com companies and then recovered. It helped make him an ISA millionaire, one of Thomas? benchmarks for success. Sushil made ten times his money in the dot.com bubble, and was, like Lee an ISA millionaire by 2003. Taylor is described as a ?plunger?, running very concentrated portfolios and Luke made a big bet on 42 bagger Soco International.
Thomas, and the twelve, recognise luck plays a role in investment. But those that seem to have had a lucky break, an investment that went much better than they could have imagined, have augmented their good fortune. Even Khalid, the lone day trader, has prospered for ten years. I?d like to believe, as Thomas clearly does, their success is partly down to lack of leverage. Only Khalid uses it extensively.
I found Vernon very compelling:
Time is a limited resource with strongly diminishing returns. The first hour you spend researching a company is much more important than the tenth hour. Some private investors are management groupies ? they spend too much time on their favourite companies, posting on bulletin boards and going to AGMs and all the rest of it. They are squandering time which would be better spent looking for new ideas.
Vernon?s brevity, he writes a core thesis in one or two sentences and lists six or seven secondary (positive) and hygiene (negative) factors reminds me of Peter Lynch?s ?three minute monologues?. Any more factors, Vernon thinks, may actually degrade decisions.
Bill explains the limits of the basic ratios he uses so succinctly you might not even realise you?ve learned something new:
The asset vale of a bank is always suspect because it is the small difference between two large numbers. And the price-earning ratio of a bank is suspect because it is so cyclical.
The author says Free Capital is not a ?how to book?, but I think that?s because there can be no such thing. Investors are so different there can only really be ?how I books?. This book, therefore, is twelve small books for the price of one. The benefit in reading it goes beyond inspiration, reading it invites comparison between the investors? methodologies and your own.
Luke surprised me by coming up with a good reason to read an analysts report:
Not for new ideas, but to see the extent to which the market is already discounting my ideas.
And Sushil keeps a little ?black book?, actually a computer file, listing directors he thinks are crooks. I?d like to see that.
This book is the best of a small breed of books about investors because Thomas really understands investing, avoids hyperbole and tells it how it is. He also makes his own contribution, not in the form of a chapter on himself, but by explaining the technicalities discussed by each investor in boxes embedded within theirs. This is his succinct explanation of why stop losses are illogical for value investors.
Stop loss orders represent an intention to sell based purely on price, with no new info or insights. They represent implicit acceptance that the market knows more than you know about the share. This acceptance seems difficult to reconcile with the expectation. That you will make money out of the market in the long.term.
I love books like this. I loved the American version, The Warren Buffetts Next Door, I loved writing about successful investors when I did it. I loved the spirit the book is written in, Guy Thomas is giving all the royalties to charity, partly to show he didn?t need to write the book for the money.
Most of all he unabashedly champions the notion that private investors can be professional, and can beat the professionals, and that?s excellent because it is both true and not a message you hear very often. There?s a whole industry telling you otherwise.
When he reviewed the book, veteran stock picker and Investors Chronicle columnist Alistair Blair said:
This is definitely the best investment book that has crossed my desk for some time. Now, I?m off to read it again.
I?m not going to let Guy Thomas off the hook that easily. I want him to find twelve more successful private investors, and interview them.
Free Capital is available in our bookshop. I recommend it.