Free Capital: How 12 Private Investors Made Millions in the Stock Market

[charlie]

Latest intelligence on Amazon delivery: someone who previously received an email saying "estimated delivery 20 April" yesterday received an update saying "estimated delivery 11 April". So looks like the supply bottleneck has been resolved.

 

Paperback is now £9.59 on Amazon UK. Kindle £9.11.

[lupercal]

I'll buy this. I would like to ask if there is there any plan to interview unsuccessful investors and gain knowledge from that.

 

Does anyone remember the Derren Brown trick when he predicted the winners of horse races. Starting with a large amount of people, He made a prediction that each horse in a race would be a winner to at least one person. Most were wrong but a few won. By the end of three races a small number of people were convinced he had a secret formula for wealth .

 

How does this book avoid such selection bias.

[charlie]

 

How does this book avoid such selection bias.

 

Hi,

 

The short answer is that it probably doesn't. This is discussed a little in the book's first chapter (linked above).

"Hearing that I was writing about successful investors, a sceptical friend pressed the point about luck by asking if the book would include an equivalent sample of unsuccessful investors? The short answer is that it does not, although it does include unvarnished accounts of setbacks: Peter Gyllenhammar went bust twice earlier in his investment career. But this book is a work of observation; it makes no claim that what the investors have done is easy, or that there are simple recipes whereby anyone can do this. There must also be people who have lost fortunes as private investors; there may be an interesting book which can be written about them, if they can be persuaded to tell their stories; but it is a different book to this one. "

 

The bold is an important obstacle, to which I would add "if it is saleable to a publisher". A sensationalistic book about "great investment disasters"? Probably yes, but of limited applicability to everyday decisions. A book of miserable small-time losers making boring everyday mistakes? Less marketable. It may be easier to persuade a publisher if this first one sells well.

 

But in principle you are right that that studying mistakes is at least as useful as studying successes. This is discussed in chapter 7 (Vernon), with an extract here http://guythomas.org.uk/blog/?e=9.

 

I do it myself. When a stock goes spectacularly bust, read and take notes on the ADVFN thread in the week before the end. Sort of corporate autopsy.

[drbubb]

But in principle you are right that that studying mistakes is at least as useful as studying successes. This is discussed in chapter 7 (Vernon), with an extract here http://guythomas.org.uk/blog/?e=9.

 

I do it myself. When a stock goes spectacularly bust, read and take notes on the ADVFN thread in the week before the end. Sort of corporate autopsy.

Can you give us a little summary of what you have learned from such an autopsy ?

[charlie]

Can you give us a little summary of what you have learned from such an autopsy ?

 

The most general lesson is that frauds rarely appear out of the blue. There are usually plenty of clues for people who look.

 

A classic exaample was the Langbar fraud http://en.wikipedia.org/wiki/Langbar_International. Langbar was previously Crown Corporation, and its fraudulent nature was explained in exquisite detail in the first post of this thread, many months before the shares were suspended

 

http://www.advfn.com/cmn/fbb/thread.php3?id=8724327

 

I'm sorry for anyone who lost money, but there was no excuse for anyone to be in Langbar. This applies to many, perhaps most, frauds.

[drbubb]

I'm sorry for anyone who lost money, but there was no excuse for anyone to be in Langbar. This applies to many, perhaps most, frauds.

Like Madoff's... where the returns were truly "too good to be true", unless he was front running some clients.

And many probably were thinking they were benefiting from his defrauding of others

 

The final result provided a sort of ironic return

 

I invite readers to post questions for Charlie, which they might put to him, if they had the chance.

 

Here are some of my own:

========================

 

1/ When you started the book, you must have had some ideas of the techniques that successful investors were using to make their returns? What were the biggest surprises for you?

 

2/ Do you think successful investors enjoyed "long periods of good fortune", where their techniques worked, and that those would be followed by periods where they would not - Or are most in your book consistently successful over time? Are there some techniques employed that appear more consistent than others?

 

3/ Do you have to be an optimist (about something - even a "bearish" commodity like gold) to be a successful investor?

[charlie]

ANother thing which the autopsy on failed companies brings out is that prominent, respected and seemingly well-informed people often don't have a clue.

 

For example in the Madoff case, here is the funds-of-fund manager Nicola Horlick in the Financial Times earlier in 2008, speaking of the 10% of her funds invested with Madoff:

 

"He [Madoff] is someone who is very, very good at calling the US equity market," she said.

She added: "This guy has managed to return 1% -1.2% per month, year after year after year."

[charlie]

 

1/ When you started the book, you must have had some ideas of the techniques that successful investors were using to make their returns? What were the biggest surprises for you?

 

 

My prior prejudices favoured smallcap stock-picking, spending many hours every day on fundamental analysis and reading bulletin boards. Surprise: some people in the book don't know much about company fundamentals. Some never look at bulletin boards. I was forced to accept that very different approaches can work.

 

 

2/ Do you think successful investors enjoyed "long periods of good fortune", where their techniques worked, and that those would be followed by periods where they would not - Or are most in your book consistently successful over time? Are there some techniques employed that appear more consistent than others?

 

 

 

Most had a long period of little success, until they figured out something which worked. Once they got successful, they tended to stay successful. If conditions changed, they changed their approach. For example some stockpickers became moe macro traders in 2007-09.

 

 

3/ Do you have to be an optimist (about something - even a "bearish" commodity like gold) to be a successful investor?

 

Optimism - with the implication of looking on the bright side - is not a universal trait of these investors. But it also doesn't help to be completely jaded, thinking nothing will work, it's not worth trying because markets are efficient, etc. There is a sort of optimal level of naivety.

[jsr]

Hi Charlie

 

I look forward to reading the book.

 

1. When interviewing the investors, did you notice a single personality trait which was common to all?

 

2. Did you get a sense that the investors seemed less attached to material items than your average joe?

[No6]

Probably worth interviewing for Frisby's Bulls and Bears surely?

 

Interesting that 6 of the contributions made their million using ISA's. That takes some doing when you consider that the option of shorting within an ISA is almost impossible, for the most part you have to be long. Secondly, you have to use the cash in your ISA's to actually buy shares, you cannot use options, CFD's or spread betting to multiply your capital in play. This does show however that if you manage your ISA's well, you can build up a large tax free sum over a relatively short period of time, assuming you also have a good trading/investing system in place.

 

Also worth noting the contributions from this book go to charity.

 

My motives for writing Free Capital were confused (that’s another, longer post), but making money was never one of them. So I decided at an early stage to undermine the above critique by a sort of reductio ad absurdum: I would give all royalties to charity.

 

My chosen charity is the United Nations Stop Tuberculosis Partnership. I’ll publish their letters of acknowledgement on this site in due course.

 

I chose this cause and this organisation because they have a top rating for effectiveness from both Givewell and Giving What We Can.

 

http://guythomas.org.uk/blog/

[crushtherents]

I want to buy the book but 10 quid is a lot of money to me. will it come down in price if i wait a bit?

[crushtherents]

 

Also worth noting the contributions from this book go to charity.

i feel bad now for penny pinching

[drbubb]

I want to buy the book but 10 quid is a lot of money to me. will it come down in price if i wait a bit?

Ask Geoff for a Tip, or ask him to buy the book, and lend it to you.

(Or start posting Useful Questions here under one of your other identities)

== ==

 

OTHER QUESTIONS:

=====

4/

Do you believe that markets are efficient?

If not, what in the book would be evidence of inefficiency?

 

5/

Do you think that Successful investing can be taught?

If so, which successful systems are easiest to teach, and what would be the best method of teaching?

Do you think universities, or business schools could do a better job of teaching? If so, how?

Could successful investing be taught in a follow-up book? Or on GEI?

 

6/

If many people used the techniques employed, would the opportunities go away?

Probably worth interviewing for Frisby's Bulls and Bears surely?

That is "in the works", I believe.

And some questions asked here might be used in the interview.

[crushtherents]

(Or start posting Useful Questions here under one of your other identities)

whats that about.

 

geoff is a good idea he would be interested.

[drbubb]

whats that about.

geoff is a good idea he would be interested.

Your posting behaviour here suggests a multiple identity. I am not the only one who has noticed it.

 

I may delete this exchange from an otherwise nicely-developing thread, if you fail to come up with a genuine and useful question for Guy.

 

Perhaps, you should ask him if there will be a free chapter or two on his Blog website

[crushtherents]

haha the book price is going up!! I should have invested in the kindle version today except i don't have a kindle. i heard i can get a kindle for my phone for free from the aps store. i need to do it quick b4 i get priced out!

[charlie]

haha the book price is going up!!

 

The Amazon price seems to change by pennies quite frequently. This is interesting. Is it demand-related (eg how many books they sold the previous day)? Or seasonal (eg raise the price at weekends / evenings?). Could be, but I think the most likely is they have a web crawler watching other vendors' prices and they aim to match the best including postage.

[Erewhon888]

 

1 item will be delivered from Amazon EU Sàrl. Estimated delivery 23 April 2011 - 27 April 2011

 

Actual date of delivery: 14 April

[charlie]

When interviewing the investors, did you notice a single personality trait which was common to all?

The last chapter in the book focuses on what they have in common and where they’re different. The most fundamental thing they have in common is what psychologists call a future time perspective.

 

Time perspective is about how you parcel personal experience and consciousness into a past, present and future, and how much attention you give to each. Do you think a lot about the past, and explain your lot in life by reference your past? That’s a past time perspective. Do you live mainly for the moment? You have a present time perspective. Do you spend most of your time thinking about the future? You have a future time perspective.

 

The people in the book tended to have a strong future time perspective from an early age, long before they ever thought about investing. They weren’t all teenage money-makers (some were), but they have all lived their whole lives mainly in their own futures.

 

This has drawbacks as well as benefits. A strong future time perspective won't make you the life and soul of any party. The people in the book don't care.

 

Did you get a sense that the investors seemed less attached to material items than your average joe?

 

They are certainly not very attached to things their millions could buy. There is a paragraph in the conclusion about this...

"A common trait for all interviewees is the attitude that investment represents first and foremost a source of quiet freedom, rather than a source of ostentatious spending power. Most interviewees appear to live modest lifestyles relative to their accumulated wealth. Sushil and Nigel explicitly identified reducing wants rather than increasing assets as a way of gaining freedom. Others are less ascetic, but still seemed to lack the urge of many high earners to spend to the limits of their resources every year. This restraint in spending may be one of the mechanisms by which an investment fortune is accumulated. "

 

Do you believe that markets are efficent?

As a global explanation, market efficiency is a good first approximation. But there are local inefficiencies, and if you want to make money from the markets, you need to spend most of your time thinking about them.

 

Or put it another way, beliefs are true if they are useful. If you want to explain or understand the whole world at a high level, “markets are broadly efficient” is a good start. (If you don’t believe this, why do you believe in capitalism?) But if you want to make money from the markets, it isn't useful to focus much on this belief (except as a reminder that making money isn't easy – and why should it be?)

 

Do you think that Successful investing can be taught?

I think it can be learnt. I’m not sure it can be taught. One common trait emphasised in the conclusion is the investors’ intellectual independence, and unusual antipathy towards the unremarkable and everyday notion of taking expert advice: they tend to have "a psychological predilection for self-reliance and figuring things out for themselves."

 

If you’re the sort of person who needs / expects to be taught stuff in a structured way, rather than preferring to figure it out for yourself, you’re not like most of these investors.

 

If many people used the techniques employed, would the opportunities go away?

 

Yes, measured against the benchmark of average investor returns, portfolio investment must be largely a zero sum game. (This is not market efficiency, it’s mere arithmetic.)

 

But as in an earlier answer, it isn’t useful to spend much time thinking about this – except as a reminder that the game isn’t easy.

[drbubb]

The Amazon price seems to change by pennies quite frequently. This is interesting. Is it demand-related (eg how many books they sold the previous day)? Or seasonal (eg raise the price at weekends / evenings?). Could be, but I think the most likely is they have a web crawler watching other vendors' prices and they aim to match the best including postage.

My guess is that it is due to changing exchange rates, from a US dollar base

[drbubb]

... from the BLOG ABOUT THE BOOK:

 

== == QUOTE == ==

From the concluding chapter of Free Capital:

 

“A consensus of expert opinion is often not useful in finance, because of its self-negating property: if something is widely anticipated, it is already in the price. But the investors’ antipathy towards the concept of taking advice sometimes seemed to go beyond recognition of this point. John expressed the view that “authorised investment advice is a bit of a con”; Sushil said that he placed “almost no reliance on advisors”; Peter remarked that a small company where the management relied heavily on advisors displayed “a typical big-company mentality” (which was not a compliment).”

 

I’ve written a longer article developing this idea...

 

On The Value of Not Taking Advice

 

SUMMARY Conventional wisdom commonly exhorts non-experts to take expert advice when dealing with specialist fields. This works well in relation to the physical or biological world, because theories of these worlds are generally neutral: popular acceptance of a theory does not change the phenomena it describes. In contrast, theories of social phenomena such as finance are often reflexive: popular acceptance of a theory does change the phenomena it describes. Reflexive theories can be either self-fulfilling or self-negating. Advice based on self-negating theories is not likely to be useful. Expert advice is therefore less useful in fields such as investment, which are dominated by self-negating theories.

 

/see: http://guythomas.org.uk/blog/

== == UNQUOTE == ==

 

Yeah.

Opinions "widely held by experts" - tend to get reflected in stock prices. And the stocks that are widely favored by "experts" tend to get overvalued.

 

It pays to be a contrarian. But you'd better have a notion about why "the experts are wrong", such as the FEARS have become excessive.

 

On GEI, we are talking about investing in Uranium stocks. That is a good example of how an event (a nuclear accident in Japan) has knocked down the price of a certain type of stock. Many experts would advise you to stay away, but there are also many "experts" who already had positions in the stocks, that might be advising you to "buy while they are cheap", and so which sort of person, the buyer or the seller, is the true contrarian.

 

A better contrarian move might be to buy cheap-and-out-favor natural gas stocks, on the theory that they will benefit from expensive crude, and a slowdown in the building of nuclear plants.

[charlie]

so which sort of person, the buyer or the seller, is the true contrarian.

 

Page 233 says something about that conundrum...

 

"Contrarianism in investment is like originality in art: all serious artists think they are original, and all serious investors think they are contrarian. But for most this is an affectation: conscious that being original or contrarian is often admired, they assure themselves and others that they are. To identify real contrarians, it helps to look at behaviour outside the investment arena: is the investor willing to hold unpopular beliefs in other fields?"

 

...But I am not sure about this "look at behaviour outside the investment arena" meme. Contrarianism is not quite the same as eccentricity (which the quote seems to be saying).

 

And anyway, who cares whether you're "contrarian"? All that matters is whether you're right.

[drbubb]

Page 233 says something about that conundrum...

 

"Contrarianism in investment is like originality in art: all serious artists think they are original, and all serious investors think they are contrarian. But for most this is an affectation: conscious that being original or contrarian is often admired, they assure themselves and others that they are. To identify real contrarians, it helps to look at behaviour outside the investment arena: is the investor willing to hold unpopular beliefs in other fields?"

I think it is pretty clear that many views on GEI are "non-mainstream."

 

But I cannot see any point in embracing views, just because they are unpopular. I suppose the point is to find opportunities to BUY, that are cheap because they are unpopular, and that the reasons for the unpopularity are fading, or becoming less relevant.

[AceofKY]

Interesting thread. Charlie, you mentioned that some of the investors weren't particularly good at analyzing fundamentals. Did any of the investors achieve their wealth via technical analysis of equities or markets in general?

[drbubb]

Interesting thread. Charlie, you mentioned that some of the investors weren't particularly good at analyzing fundamentals.

Did any of the investors achieve their wealth via technical analysis of equities or markets in general?

I hope you do not mind me jumping in here, Ace and Charlie.

 

I think this might go some of the way in answering the question.

 

There was an interesting interview this weekend by Jim Puplava with a professional trader:

 

Peter L Brandt, Diary of a Professional Commodity Trader

MP3 : http://www.netcastdaily.com/broadcast/fsn2011-0413-1.mp3

 

One interesting point that he made was: He only expects to make money on 30-40% of his trades.

 

"My job is risk management: Cutting off the losses on the trades that are not working.

... I sell when they 'turn red' and let the profits take care of themselves."

 

(I know what he means: Many of my trades use options, and the structure of options limits my losses.

When it comes to trading juniors: I am to "get bulletproof" on my trades as soon as possible, and then ride the potential gains, using my profits and warrants to "stay long" with limited risk. And it helps greatly to be in a long term Bull Trend.)

 

Here are two more questions for Charlie:

===========================

 

A/ Do you see any advantages or disadvantages in trading in the UK market in comparison with other markets, such as the US, Canada, or Hong kong - for example ?

 

B/ Once enough people have bought the book and read it, do you think you might be able to accept QUESTIONS here for any of the individuals who were profiled in the book?