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charlie

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

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Bold,

Do you honestly think there are 10 hugely undervalued picks out there right now? Finding one idea is hard enough and you want 10 ! ;)

I struggle now to find anything that I think is very cheap.

I have been buying a few shares, but they mostly have "defensive characteristics."

 

(Most of what I have been buying are Canadian shares, and I think it would be pointless to mention them here.)

 

The best strategy now is to hold plenty of cash, and await a better buying opportunity.

 

I did put together a portfolio of shares that I bought in March 2009, and posted over the next few weeks, as I sold down the portfolio. I did outperform the (rising) market, but not by a huge amount.

 

BTW, I realise that if the dollar begins to collapse, sliding below USD-70, then the suggestion to "hold cash" will likely prove wrong. But there is no such thing as a riskfree trading strategy these days, since even "sitting with cash" carries risk.

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Here's a statement that I would like to explore here:

"THE KEY to successful investing is spotting asymetrical risk opportunities."

 

What do I mean by this?

I touched on it a bit on the Reframing Risk thread started by Positive Deviant:

GRisk and DRisk ?

where:

 

GRisk is the possible/ or expected upside gain,

and

DRisk is the possible/ or expected downside loss.

 

Some "risk experts", will tell you they are the same thing - But are they really?

 

I want as much GRisk as possible, with as little DRisk as I must accept.

 

Most who write about Risk confuse the two, and let those who understand them better force them to take too much Drisk in their pursuit of GRisk.

 

Example: Markets are usually loaded with GRisk when they are cheap because of fears of DRisk.

 

In the current stock market with its ultra-bullish sentiment, I believe there is little GRisk, and plenty of DRisk.

 

People are thinking little of the DRisk they must take, and you can see that blindness in:

+ VIX / Volatility measures - which are very low historically, and

+ Sentiment measures - which are highly bullish in a historical context

 

Guy Thomas has said almost the same thing as I was getting at. On pg. 94 of Free Capital - in the chapter about Sushil:

 

"Conventional financial theory explains diversification as a means of reducing idiosyncratic risk: that is the risks specific to each individual company, leaving the portfolio with only 'market risk.' Sushil finds this concept unhelpful - 'I want a portfolio with large idiosyncratic risks, provided they are mispriced.' Rather than reducing idiosyncrtic risk, he finds it more helpful to think of diversification as a means of increasing liquidity in hos portfolio, and hence increasing options to change his mind as prices and expectations change."

 

Now I might put this slightly different, using my own terms : An investor wants as much GRisk as he can get, provided it does not come with too much DRisk.

 

This is why wise investors may buy small cap shares trading below NAV. The NAV is a measure of valuation that a company might achieve if it were liquidated. Whilst this is not truly a "safe" measure - since historical accounting values may over-state or under-state realisable values in a liquidation. Nevertheless, for a company that is not depleting its NAV through ongoing losses, it is a sort of measure, which can be refined by looking into more detail of what sorts of assets they hold.

 

Thus, a company which is making a profit (or only nominal losses), and is trading below NAV may have little DRisk. In fact, it may have more GRisk, if an investor can identify things which can turn it around, than it has DRisk - in other words, it is "mispriced" and has a favorable ratio of potential reward to potential risk.

 

So why do shares get under underpriced?

 

There may be a number of reasons why this happens:

 

+ Stock prices may slide to "cheap" levels in a general bear market decline, as in 2008, or

 

+ After a period of losses, or an extended time of unfavorable share price performance, investors may get fed up with a particular stock and decided to sell. If they are large holders, with significant positions, it may take a long time to exit. And they may go on on selling even as the share slides below NAV. For some, once they have decided "to get out", they may not care what the price is. Those making such an exit may create and opportunity for new investors, by pushing the value down too far, to a point where it is "mispriced."

 

+ Another similar undervalued opportunity may be created, if an institution decides to sell because "the company's Market Cap is too small - it is against our policy to hold shares with a market cap below GBP 10 million" - or whatever the cutoff may be.

 

I think this type of opportunity - "mispriced" stocks trading below GBP 20 million, or GBP 10 million - might have been at the core of many successful investors profiled in Free Capital.

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Why don't you hold your cash in gold or GLD ?

"I struggle now to find anything that I think is very cheap."

That includes GLD/Gold.

i have been saying that for almost a year. It was Feb.2010 when I last bought Gold aggressively.

 

Since then I have traded successfully in and out of:

 

+ Swiss Francs

+ GLD / Gold Wheaton

+ DBA & JJG / Grain-related etfs

 

I think the HK$ is cheap (& I own it in size), but I have no idea when it will decouple from the US$

 

I am tempted by some Natgas stocks, and have begun to nibble in that sector. Some Uranium stocks look cheap, but they may stay there for some time.

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"I struggle now to find anything that I think is very cheap."

That includes GLD/Gold.

i have been saying that for almost a year. It was Feb.2010 when I last bought Gold aggressively.

 

Since then I have traded successfully in and out of:

 

+ Swiss Francs

+ GLD / Gold Wheaton

+ DBA & JJG / Grain-related etfs

 

I think the HK$ is cheap (& I own it in size), but I have no idea when it will decouple from the US$

 

I am tempted by some Natgas stocks, and have begun to nibble in that sector. Some Uranium stocks look cheap, but they may stay there for some time.

I am not talking about your trading though. I am talking about your cash.

 

Gold isn't cheap, but it's in a bull market. There is a deliberate policy to devalue the dollar pursued by the very people who issue it. The dollar is in a bear market. Gold is clearly going to be higher a year from now and the dollar, at best, somewhere near where it is. Why not hold your cash in gold?

 

I'm not saying buy it aggressively either. I'm saying hold it. Don't try and catch a 5% swing. Just hold gold. Bull market's not over. Anyone can see that. Monetary system cannot survive in its current form. Gold will benefit.

 

If there is disclosure of aliens, or the world ends, or we get more earthquakes, gold will benefit more than US$.

 

Holding your cash in gold is still a contrarian trade. It may not be contrarian here, it may not be as contrarian as it once was, but it is still the contrarian trade. Holding your cash in US$ is what 95% or more of people who are 'in cash' do. Makes no sense, given what policy-makers doing. How many people actually keep their cash as gold? Hardly anyone. Even stupid gold mining companies don't. I can find two that do. And one of them has been told to shut up about gold by his Vancouver IR people. Bunch of idiots! They're playing the precious metals story but they don't get it themselves because they're all tied up in banks.

 

People like Keith Neumeyer - who got into silver because he understands what was going to happen and deliberately left his lead and zinc tailings untapped, letting a few $ profit go, to keep FR as a pure silver play - are rare.

 

I agree dollar could easily bounce from $71-72. Long dollar vs yen makes sense. Long dollar vs euro, there's an argument for it. All trades with an argument for them. But your cash ... got to be gold, hasn't it?

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If you look back at the 1980 peak, the gold stocks had their own peak practically years after the actual peak of bullion, so the best is yet to come especially for the juniors.

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Gold isn't cheap, but it's in a bull market. There is a deliberate policy to devalue the dollar pursued by the very people who issue it. The dollar is in a bear market. Gold is clearly going to be higher a year from now and the dollar, at best, somewhere near where it is. Why not hold your cash in gold?

Gold and Gold shares were cheap back in 2001 when I sold my London property to buy gold shares - when gold was below $300.

It is not cheap now.

 

It was cheap in late 2008, after a big deleveraging selloff.

 

I also did some buying near $1300 in February this year, after a selloff.

 

And I hope to have cash in hand to buy it next time it is cheap again. But I am focussing my research effort elsewhere now - and I suppose that makes me a contrarian here on the GEI website.

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TWO MORE QUESTIONS, Charlie - Choose one, maybe?

 

+ Has writing the book changed your own investing sytle? And, if so, how?

 

+ If you had to scrap your own way of investing, and try to copy that of one of the investors in the book, whose would that be?

(Do you think that style would work well for the average private investor?)

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TWO MORE QUESTIONS, Charlie - Choose one, maybe?

 

+ If you had to scrap your own way of investing, and try to copy that of one of the investors in the book, whose would that be?

(Do you think that style would work well for the average private investor?)

If I had the discipline, I would copy Owen, the closed-end funds activist. Exceptionally good results from a relatively narrow focus, which makes him very time-efficient. From page 179 :

 

"His approach is focused and opportunistic, concentrating on situations where activism can release value in a time frame of a few months. This focus helps him to be unusually efficient. Because of this economical use of time, his approach is the one in this book which I most wish I could emulate."

 

To be honest I don't believe this would work well for the average private investor. There is no reason why it shouldn't. But few ordinary private investors would have the ruthless focus and discipline which Owen has. Look at what he actually does...

 

(page 177) "Owen keeps most of his notes in electronic files. In terms of information sources, he looks at the RNS and annual accounts for the companies which attract his interest. For closed-end funds, he checks the listing documents and the company’s articles of association, taking particular note of the management fee, any discount protection mechanism, and winding-up provisions. He spends no time reading bulletin boards, and only a little discussing possible investments with other investors. He rarely meets with company management. All this probably makes him unusually efficient compared to other investors in this book."

 

...Checking listing documents and articles of association? No bulletin boards? No talking to management? It ain't a bundle of laughs. But by having the discipline to work like this, with none of the fun bits, Owen has a lot of time to play golf.

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Do you find chatboards useful too... ?

 

Lupu_and_Virtuosos_b.jpg

 

Journeymen to Virtuosos ... using Bulletin Boards

 

(Here's an excerpt from a Review of the book written by: Alistair Blair):

 

...You could learn a lot from this dazzling dozen and Guy Thomas (himself a private investor on a par with his subjects) sets out the lessons very clearly. And lesson number one is small caps.

 

All but one of the dazzling dozen focus wholly or significantly on small caps (the twelfth is a day-trader of the FTSE350). You should not need to read this book to learn what smallcaps have to offer, starting out with the fact that they are overlooked by institutions. Nevertheless, you will find the comprehensive reprise of their investment virtues spread through this book a valuable master class.

Lesson number two is hard work and professionalism. These people all take their investments very, very seriously. Most of them get up early to read the market news, then spend up to 14 hours studying their existing investments and looking for potential new ones. And most of them do not need to do this. They do it because they enjoy it, revelling not in their wealth (many live modestly – another vital contributor to "free capital", although one runs a 70 foot yacht), but in their ability to generate wealth.

 

They do this in very different ways. Two have each made over 30,000 bulletin board posts (often a means of gaining knowledge as well as displaying it). A couple keenly attend company meetings, call directors on the phone (we are in the realm of investors who routinely own several per cent of the - small - companies in which they invest) and go to great lengths to obtain quality scuttlebutt. Most read annual reports very carefully but some only casually. Eight of the 12 are what Guy Thomas calls "surveyors" - that is, their starting point is the company, its balance sheet and its prospects, but two are "geographers" who identify attractive secular trends before they look for the shares most likely to be swept forward by these trends. Half have very focused portfolios with fewer than ten main holdings. Only two have over 50 holdings. Guy Thomas has interesting views about how many shares you should hold - see his "gems vs flower bulbs" posting at guythomas.org.uk/blog.

 

Six have a typical holding period which runs to years. Two often hold shares for only a few weeks. However on one key aspect of investing they are all in agreement: they barely use leverage.

 

Although ten of the 12 investors are not identified (the other two are well known), a central virtue of the book is that it sketches in the career and personal character of each subject. This helps the reader understand the diverse investing styles and encouragingly illustrates how the investors progressed from journeymen to virtuosos

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Do you find chatboards useful too... ?

 

Well the book has a tentative theory about that ...on page 44...

 

"Bottom-up surveyors focus on hard financial facts about particular companies, which can best be obtained directly from company accounts and news announcements. Top-down geographers, on the other hand, focus on changes in market sentiment, which cannot be discerned from company accounts or news announcements. For this reason, insights into sentiment from bulletin boards are probably a more important input for geographers than for surveyors."

 

...but I am not very confident about this theory. There may be other explanations.

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Well the book has a tentative theory about that ...on page 44...

 

"Bottom-up surveyors focus on hard financial facts about particular companies, which can best be obtained directly from company accounts and news announcements. Top-down geographers, on the other hand, focus on changes in market sentiment, which cannot be discerned from company accounts or news announcements. For this reason, insights into sentiment from bulletin boards are probably a more important input for geographers than for surveyors."

 

...but I am not very confident about this theory. There may be other explanations.

I think it is a useful source of confirmation.

 

For example, I try to keep an even-handed debate going here about the merits of holding precious metals.

 

When prices are rising at the steadfast bulls are aggressively abusing the even-handed comments, it is often a sign of an approaching top. The ever-useful Fitkid has been a good bellwether in this regard.

 

Here's an example of the sort of comment that appeared on my thread about a $50 Top In Silver:

 

I truly think this top guessing game is pointless though, as the only ones who will be trying to do it are those without silver looking for an entry point. Those who have bought silver over the last few years hold it very tightly as they realise the fundamental reasons for it going up, which are far from over. The best entry point was handed to everyone on a plate in October '08 by JPM, those that missed out are always going to be looking for tops.

. . .

I expect silver to be going through $100 over the next couple of years and will hold mine extremely tightly even if we get a temporary pullback.

 

Not truly aggressive towards the others, but it does show an unshakable complacency, quite clearly.

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This was from yesterday's Motley Fool email.

 

Twelve millionaire private investors reveal their secrets.

 

Books that focus on UK investors are relatively rare, so Guy Thomas's Free Capital should be well received.

 

Indeed, he has comfortably exceeded his goal of writing a 'journalistic profile of the working lives of a few full-time investors' by including regular, well researched and presented sections to explain some of the more esoteric terms and techniques used by the twelve private investors profiled in the book.

 

Through the window

 

It's natural for any active private investor to be curious about the lives and techniques of those that have succeeded in a big way, and on that count, this book doesn't disappoint. It describes itself as a window into the world of twelve highly successful private investors who have accumulated £1m or more from investing -- in most cases, considerably more with typical compounded returns of around 30% a year.

 

They remain anonymous apart from the well-known Peter Gyllenhammar who often has notifiable interests in smaller companies, and John Lee, the Liberal Democrat peer, who is known for his investment writings in the Financial Times, and his former activities as a Tory MP and minister. However, a few of the twelve post on our discussion boards, so some of our regulars may well be able to guess their identities.

 

All twelve have made their investment fortunes in their own unique way. Indeed, there are multiple methods, lifestyles, education levels and personalities featured in the book, which is organised into separate chapters for each investor. At the end of each chapter, a useful summary box that features the insights and advice that can be gleaned from each investor's story is included.

 

http://www.fool.co.uk/news/investing/2011/05/04/how-to-make-a-million.aspx?source=ufwflwlnk0000001

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This book is excellent. I'm 1/3 of the way through and learning about a whole new world. My next step is to raise the free capital. It seems the subject had some sort of windfall (through their own efforts) to get started and built on it.I hope theres a rags to riches story in there.

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had some sort of windfall (through their own efforts) to get started and built on it.

 

Yes. Quite a few had some sort of windfall - usually after some years of investing. But none of them spent the windfall on cars / houses / yachts. Now I come to think of it, none of them even alluded to the idea that they could have spent the windfall. Just not on their radar. Future time perspective (page 250).

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Yes. Quite a few had some sort of windfall - usually after some years of investing. But none of them spent the windfall on cars / houses / yachts. Now I come to think of it, none of them even alluded to the idea that they could have spent the windfall.

... Certainly not even on houses.

Which were overvalued and way too popular (at least compared to Gold mining shares.)

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Yes. Quite a few had some sort of windfall - usually after some years of investing. But none of them spent the windfall on cars / houses / yachts. Now I come to think of it, none of them even alluded to the idea that they could have spent the windfall. Just not on their radar. Future time perspective (page 250).

 

Theres a guy in there who had no windfall and explained this meant he took more risks and the risks he took. It's a very good book.

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Just bumping this thread. Charlie said he is going to the September London pub meeting.

<a href="http://www.greenenergyinvestors.com/index.php?showtopic=7656&hl=" target="_blank">http://www.greenenergyinvestors.com/index....ic=7656&hl=</a>

I hope you guys have a nice meeting.

We may have another before the end of May (2011)

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My copy of the book came yesterday.

Im looking forward to reading, iv had a flick at it and read some little bits and from what iv seen i will be picking up some great ideas and info from it.

Thanks very much.

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Comments on STRATEGIES in the book are welcome here - positive or negative.

 

At least two of the private investors interviewed post here

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Charlie - if you are still around. Have put your book on my "to do" list - will get hold of it someday as it sounds interesting. Am kinda intregued as to who the GEI successes are, although I could probably guess (wrongly).

 

Question if I may - one of the best things in Talib's Black Swann (I think) is the "Ludic Fallacy" - Fat Tony vs Dr John comparison (see link below) which I brutally round down to the wiseguy vs the scientific approach. For me it was a bit of a wakeup call as an investor.

 

Does your book in detailing the characters of the various investors deal with any any of these personality traits? If not are you able to comment at all?

 

I guess the chartists would be coming more from the wiseguy approach (no insult intended to chartists.......... or wiseguys). I guess the GEI posters may also be wiseguys compared to the wider world!

 

Cheers

 

Dave

 

 

 

http://www.fooledbyrandomness.com/LudicFallacy.pdf

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I thought Buffet was famous for not having a computer, he would just read annual reports, and work out if they where undervalued or not compared his projected earnings calcualtions.

 

 

Just linking this to something found by Guy Thomas

 

Meeting management

If you need to, you shouldn’t hold the stock

..... recent CNBC interview with Warren Buffett:

 

“In fact, they call me - some of the things we own, they call me and they want to come from thousands of miles away to talk to me. And I say listen, if I need to talk to you, I shouldn't own your stock. I mean, I don't - I don't need to be schmoozed, you know?”

 

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

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I just signed in THREE NEW MEMBERS - who came here through reading the book (I believe)

 

Maybe one of them would like to comment

 

Also, I think we may now have more than two "chapters" amongst our members. But I do not know who they are after the first two.

 

I wonder how many (beyond the obvious two) would "own up to it"?

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