Fans of stock market investing literature will know that, unfortunately, many of the best books are American. While a lot of what’s discussed in “John Neff on Investing” or "How to Make Money in Stocks" is universal, those of us deploying our capital on this side of the pond can’t help hankering for something a bit more.. well, British frankly. Jonathan Davis’s Money Makers does give a good account of Anthony Bolton and other institutional gurus but still, wouldn’t it be nice to read something closer to the prosaic day to day realities of UK PI investing?
As it happens, help is now at hand with the arrival of Guy Thomas’ excellent new book, Free Capital. Thomas is an investor and former academic actuary who has painstakingly chronicled how 12 UK private investors accumulated sufficient "free capital" to dedicate themselves full-time to their portfolios. Each has made £1m or more - in most cases considerably more – from investing.
With some similarities to Money Makers or Jack Schwager’s Market Wizards series, the book covers these investors’ backgrounds, how they made their fortunes, and how they spend their days now. For those interested in the UK investing space, it is highly recommended reading for a wide range of insights on successful strategies and approaches.
Most of the investors interviewed by the author are only identified using pseudonyms but some profiles will be familiar to users of this site (wink, wink); they apparently also include some of the most prolific posters on bulletinboards like TMF & ADVFN. The divergence in background is striking. Some have several academic degrees or strong City backgrounds; others left school with few qualifications and are entirely self-taught as investors. They also have very different styles. Some invest most of their money in a small number of shares and hold them for years at a time; others make dozens of trades every day, and hold them for at most a few hours. Some are inveterate networkers, who spend their day talking to managers at companies in which they invest; for others a share is just a symbol on a screen.
While no approach emerges as clearly superior to the others, interestingly, Guy Thomas classifies eight of the twelve investors as ‘surveyors’ – who start bottom-up with the company, its balance sheet and its prospects – while only two are ‘geographers’ – i.e. top down thinkers starting from the overall investment landscape. In most cases, he indicates that there were clear links between the investor’s personality or career background and the successful investment approach he had developed. This suggests that finding an approach which matches your personality and skills is probably more productive than looking for one true Holy Grail.
Without wanting to be a spoiler, the final chapter does identify some characteristics the investors in the book share. Interestingly, one such characteristic seems to be an interest in smaller company investing, with all but one of the investors focusing wholly or significantly on small caps. Some of the stocks mentioned include SOCO International (LON:SIA) (which, as many on this site may know, was a 42-bagger in the decade to December 2009), Pz Cussons (LON:PZC), Trafficmaster (LON:TFC), Advanced Power Components (LON:APC), Telford Homes (LON:TEF), Kbc Advanced Technologies (LON:KBC), Erinaceous (LON:ERG), and Haynes Publishing (LON:HYNS).
To find out more about the book, the motivations behind it and the lessons learnt, we spoke to the author, Guy Thomas earlier.
So, tell us more, how did this book come about?
As a full-time investor myself, I have long been curious about other investors’ methods, literally what they do all day. How much of their time do they spend reading company reports as opposed to talking to company managers or looking at charts? For many years I hoped that somebody else would write a book like this. Nobody did, so eventually I decided to write it myself.
How did you decide who to interview? And who are they really?
I promised the ten unidentified participants that I would protect their anonymity (this was very important in getting them to talk). I have heard quite a few guesses, but I neither confirm nor deny anything!
To find them, I posted descriptions of the project on investment bulletin boards; I asked stockbrokers, CFD providers and spread bet firms for introductions to their most successful clients; I asked friends and friends of friends. I wanted to include a variety of personality and career backgrounds and investment styles. In general terms, around one-third of the interviewees are ex-City professionals; one-third are other degree-educated professionals; and one-third left school at or before age 18.
Exponents of market efficiency might argue that, if you have enough people flipping coins, you will see long patterns of people producing a consistent runs of 'heads'. Is there anything to suggest that these investors were anything other than just lucky?
Well I’ve been an actuary and an academic, so I’m familiar with the nihilistic view. Yes, the facts are consistent with the possibility that we have 12 lucky coin-flippers. That interpretation can never be completely excluded. However, the facts are also consistent with other explanations. And I think lucky coin-flippers would struggle to give coherent explanations of what they’re doing. Everyone in the book was able to explain his success in ways which I found compelling. And a minority of them have been known to me for some years, and have remained consistently successful through varying market conditions, long after I first identified them as exceptional investors. My other comment on the luck v. skill debate is that given facts which are consistent with a range of beliefs, my philosophy is one of pragmatism: I choose the beliefs I find most helpful. If you want academic respectability, then nihilistic scepticism is the easy choice – the pose of faux sophistication. But if you want to make money, a more positive – and perhaps slightly naïve – attitude to towards the possibility of investment skill is helpful. As one of my interviewees said: a little naivety can sometimes be a strength, if it frees you to do the right thing.
One gets the impression that, if this were America, some of these investors would be self-promoting their success. Were you surprised that these investors wanted to remain anonymous?
I think reticence about financial success is a very British cultural trait. Given this cultural background – which I agree is very different from America – the preference for anonymity was more a confirmation of the investor’s suitability for the book than a surprise. I would have been more surprised if a potential interviewee had been insistent about publicity – and suspicious that they hoped to use the interview to sell investment advice or tips or services of some sort. This would have disqualified them in my mind, because people who have genuinely made millions from investment don’t need to sell their services. They don’t need any publicity.
Were the investors generally more growth or value investors? Was there evidence of them following particular investment philosophies, e.g. Warren Buffett or Jim Slater?
They generally identified more as value investors. It was slightly surprising that none explicitly embraced a growth philosophy. But I would not read to too much into this – as Buffett himself has said, to the sophisticated investor “growth and value investing are joined at the hip." The interviewees certainly made many allusions to the ideas of well-known investors like Buffett or Slater. But nobody self-identified as a slavish disciple of the true creed of any particular guru. As sophisticated investors, they’re quite eclectic, drawing on a variety of influences rather than a single guru. They have benefited from lots of temporary edges and heuristics, not a single timeless formula.
Most of the investors seemed to be focused on small-caps. Do you think this is because there's less research/media that it makes it easier for private investors to compete in this space?
Yes, the focus on small-caps is very much because of the lack of institutional attention to this part of the market creates inefficiencies. It’s definitely an attention effect rather than a size effect – the belief that at any time, some small-caps are cheap, rather than a belief that small-caps in general are cheap. Several people in the book talked explicitly about this idea of institutional neglect creating opportunities. Owen attributed his success in the split capital investment trust sector to the small scale of the sector – too small for most institutional smart money. Vince said that a lot of success comes from the transient absence of competition. Sushil talked about the conundrum of both sides of a trade thinking they are the better informed about a company; he found the idea of his being better informed implausible in relation to a widely researched large-cap, but more plausible in relation to a neglected small-cap.
There's a lot of discussion about the lack of a level playing field between retail investors and institutional investors here in the UK, compared to the US post Regulation Fair Disclosure. However, this group of private investors seemed to flourish despite these issues?
The investors did encounter some of those frustrations, and they developed work-arounds and coping strategies. For example Eric, whom I labelled the networker, speaks to company directors almost every day; he puts a lot more effort than most private investors into developing and maintaining those relationships, often over many months or even years. So when there is some news which requires discussion, he’ll often already have a warm contact. With some small companies, I think Eric might well have better access than institutions, simply because he’s always asking questions and the institutions aren’t. Some success in life is just a matter of turning up.So yes I do think the investors have some grievances about the ways of the City. But their response is to try make the best of their circumstances and work around the system, rather than to attribute their failures to the system.
What role did technology and the Internet play in their success? Did the investors you spoke tend to use the same tools?
It’s hard to overstate the positive difference which technology has made to the world of the private investor. Despite the issues of unequal access to company management and so on, things are just so much better than they were. Barely 15 years ago, real-time news and price feeds cost a four-figure sum per annum; now they are effectively free. Commissions were up to 3% or more for every ‘round trip’; now you can pay a flat £20. Short selling used to be impossible for most private investors; now any spread bet firm will oblige. So in all these areas there have been massive improvements. Several of the investors highlighted these changes, and I suspect that without them, some people in the book – particularly those without City backgrounds – would never have become full-time investors. Although technology in the basic sense of a broadband connection is critical to almost all the investors, there wasn’t a single favoured website or software system. For access to prices and news, one had a Bloomberg terminal – but at over £20,000 per annum, that’s a bit beyond the reach of most private investors. The rest used their brokers’ or spread bet firms’ price feeds, or else free sites like Stockopedia.
It was noticeable that many of them seemed to use bulletin boards to share/research ideas - do you think that this was simply because of the way you sourced the interview candidates or is there something else going on?
Bulletin boards were very important to many of the investors. Yes, to a certain extent this reflects the fact that I recruited partly via bulletin boards. But the 12 interviewees are not a self-referential in-group of users who post messages to each other all day. Some of the most interesting interviewees very seldom post, and wouldn’t be recognised on the boards if they did. But they’re still heavy users – they do an awful lot of reading.
Why do you think you were you not able to find more than one successful female investor to interview for the book?
In principle, investing seems a good activity for women who need to prioritise caring for children or elderly parents – it’s flexible, home-based and there’s probably less scope for sexist prejudice than in many activities and occupations. I also expected to find widows or divorcees managing their own money. I was surprised not to find more candidates like this.
This book may encourage more people to take up self-directed investing. Is that a good thing given that these returns are so exceptional and given that investing is overall a zero-sum game?
I think exposure to the possibility of a better life – and some role models and hints on how to attain it – are definitely a good thing. I would have loved to read a book like this 15 years ago, when I was a young academic, trying to figure out if spending time on investment was a good choice in life. At the same time, I do agree that the results in the book are exceptional. The book makes no claim that what the investors have done is easy, or that there are simple recipes whereby anyone can do this. When the book was being finalised, the sub-title originally suggested for maximum sales appeal was “How 12 ordinary people made millions in the stock market.” I vetoed ordinary people, because I don’t think the investors in the book are ordinary people.
Thanks for your time, Guy. You can buy a copy of Free Capital here (the author’s royalties will be given to charity).