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

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(I just spotted this interview from March 2012):

 

How To Become An ISA Millionaire - 19 March 2012

 

In this week’s episode:

 

David Kuo chats with Guy Thomas, author of Free Capital, which is about 12 private investors who have accumulated £1m or more mainly from stock market investments. They investigate how two investors in particular have done so in a tax-free Individual Savings Account (ISA), which, Thomas claims, is arithmetically impossible without exceptional returns. A transcript of this podcast is also available.

 

/transcript: http://www.fool.co.uk/news/investing/2012/03/19/transcript-how-to-become-an-isa-millionaire.aspx

 

EXCERPTS

=====

David:

Now, the thing is, in earlier podcasts, I have spoken to hedge fund managers who once told me that, if you want to be successful, you need an edge. Did you identify any edges in these kind of people? Did they have an edge over the average investor, in order to amass this one million pounds?

 

Guy:

I think all of them have an edge, and it's more or less 12 different edges. The edge comes from, in every case, from previous experiences and from your own sort of temperament and psychology and marrying that up to an appropriate investment process. That's one of the big lessons of the book, that you need to find an investment style which matches your own skills and your own personality.

 

David:

Okay, now I'd like to go from edge to luck, because you mentioned the word 'luck' in relation to the success of these investors. What do you understand by 'luck in investing'?

 

Guy:

Before I answer that question, I think it's just appropriate to acknowledge that there is an element of luck in achieving these sort of results. Everyone in the book has been lucky. They've reached middle-age with better results than they expected, at least in a financial sense...

 

(2)

David:

So what kind of advice would you have for our listeners? I suppose what I'm hearing from you is that, if you are a private investor, it is very important to know yourself before you actually start knowing stocks.

 

Guy:

That is really the key lesson of the book. It's not spelt out in large print, but it's the lesson I want people to draw from the book. There are 12 very different people here, with different backgrounds. Those backgrounds have been set out in the book in a certain amount of detail, which is not there just for fun, or just for padding. It is there so people can see what type of person becomes each type of investor, and to look for the one which they can model themselves on, given their own background and their own personality.

 

David:

And that precisely, Guy, is what I took away from that book, because when I read that book, I tried to identify myself amongst those 12 people to say, "which one am I out of those 12?" I'm not going to tell you which one I am – you're going to have to guess for yourself, and that is why I do recommend anybody who's listening to this podcast to try and get hold of a copy of this book and read it, because it will tell you an awful lot about yourself, your style of investing, and what you can do to be successful when you are buying shares

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Sold about 5,000 copies in first year.

 

To the best of my knowledge all 12 investors are still prospering, 2-3 years after my original interviews. No detail on performance, but I think I would have heard if one of them had had to go back to employed work or similar!

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Most of these requirements can be met by free software. Siites running on proprietary software don't significantly improve the user experience, which has not changed much in the past ten years. Improving the user interface of bulletin boards is hard design problem.

 

 

I think the above quote is still true three years after I wrote it, and I find it quite strange.

 

Anyone who can achieve some step-change in the useability of bulletin boards will make a big difference to many people (although I'm not sure they'd make any money from it).

 

One idea for such a step-change is the solar magnitude forum desccribed by Philip Greenspun. Briefly: a planet can appear big either (1) because it big, or (2) because it's nearby. So the solar magnitude forum preferentially shows each user a custom set of topics which are either (1) objectively big, or (2) close to that user's interests.

 

But that page describing the solar magnitude forum has been there for 5 years. There are no other discussions about it, and I haven't seen any BB which implements it.

 

So presumably the problem is hard.

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(although I'm not sure they'd make any money from it).

And BOOM! goes the dynamite!

 

So presumably the problem is hard.

I think the problem is that no-one has clearly defined what the problem is. One person's gripe is another person's favourite feature.

Perhaps that's why some berks paid north of $40 for FaceBook stock.

Perhaps that's why there's a vocal outcry from people who need to get out more every time there is a slight design change made by FaceBook engineers.

Perhaps that's why the Google+ social network hasn't seemed to set the world on fire, or why Microsoft is dipping it's toe into the arena ( http://www.so.cl/ )

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Re: Chatboard Comments

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

 

1/ If I was more of a techie, I might take a stab and solving some of the obvious and less obvious problems on GEI

 

2/ I have been surprised at the Huge popularity of Blogs, in contrast with the limited popularity of chatboards.

I think the Democracy which exists on a chatboard should be a big advantage. But for some reason, people do not see it that way.

 

3/ The Diaries and Journals here (my own, Van's, PD's, etc) are like Blogs, and they have some popularity, but they have been less popular than I might have guessed. I suppose one useful feature would be to give the Blog/Journal writer more control of what is posted on his thread. (Had I been able to do that, I suppose that Goldfinger might still be posting here.)

 

4/ I wonder if Charlie could be persuaded to start a Blog/Journal here. It would be a different and complimentary voice to the others here already - even if it just captured the comments from his own site. If people could respond to it here, and he read the comments, it might prove very useful and also appeal to those who have read the book and also read or post on GEI.

 

I welcome any thoughts on the above

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Sold about 5,000 copies in first year.

 

To the best of my knowledge all 12 investors are still prospering, 2-3 years after my original interviews. No detail on performance, but I think I would have heard if one of them had had to go back to employed work or similar!

Congratulations, I am one of the 5,000 after reading about it through there (bought my copy as a Kindle edition), although I would have thought you would sold more copies than that.

 

Do you mind me asking, has writing the book opened any doors for you, as you're hardly rolling in the dough from sales? I have been thinking of doing something similar, many as a way of boosting my profile more than anything.

 

Cheers!

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Do you mind me asking, has writing the book opened any doors for you, as you're hardly rolling in the dough from sales? I have been thinking of doing something similar, many as a way of boosting my profile more than anything.

 

Cheers!

 

Not really. But I wasn't really trying to any open doors, and perhaps one could with a more promotional approach.

 

For example the author's biography in the book is deliberately minimalist, wasn't placed on the cover, no picture, no claims about my own investment returns, etc.

 

If there was some indication that I was looking for offers - of work, speaking engagements, or whatever - that might be different.

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Charlie,

If you do an edition #2, you could add a woman or two,

and do a new chapter on "further lessons", updating some of the ideas from Edition #1

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PSYCHOPATHOLOGY ?  OR LUCK?

Anyone who can do this without business success, inherited wealth or a lottery win is a person who has made some unusual and effective choices in life, and is interesting for that reason. It would be possible to pathologise these choices, to suggest that there is a price to be paid for the investors’ success, and there were faint hints at what this might be in some interviews: for example, Vernon noted that “investing is not a team sport”, and both he and Sushil used the word “misanthrope” about themselves.

But in the end, it seems absurd to suggest that a youngish person with assets of several million pounds accumulated through his own decisions, who spends most of his time doing what he likes, is afflicted or dysfunctional compared with the general population. The straightforward view is that these are successful people living in relative happiness, and compared to the venality of many City high earners, perhaps even a degree of grace.

The role of luck
A more challenging critique than the absence of psychopathology is the pervasiveness of luck. This is a book about lucky people. Contrary to general human experience, they have reached middle age with lives which have turned out rather better than they expected, at least in a financial dimension. Some (not all) of the investors had thought carefully about this, and were anxious to highlight the role of luck in their own investment records. / UNQUOTE

> from Guy Thomas > http://www.guythomas.org.uk/investment/freecap.php

His Blog : http://www.guythomas.org.uk/blog/

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Option prices: Why calls trade cheap and puts trade dear

First, I need to be clear what I mean by “cheap” and “dear”. In this blog, I characterise an option as cheap (dear) if its price today is below (above) its expected value at maturity, discounted at the risk-free rate back to today. The expected value at maturity is calculated using a reasonable assumption for the underlying asset’s risk premium. I am not saying that I wish to buy or sell the options I label cheap or dear (I may wish to with some of them, but the label says nothing definite about that.) 

In a recent paper on equity release mortgages, Tony Jeffery and Andrew Smith note that the Black- Scholes formula gives prices for call options which are cheap (and put options dear), in the sense above.  They note that this raises a puzzle: why should there be willing buyers for put options at prices which are expected to lose money?  Their answer is that put options are a form of insurance, held in conjunction with other assets, which can substantially reduce losses in adverse conditions. So the investor’s reservation price – the highest price he is prepared to pay – is above expected value, at a level which implies a negative expected return on the put option in isolation. This is acceptable to the investor in the context of a reduction in the risk of the portfolio as a whole.

An analogous argument can be made for the buyer of a call option, who is increasing the risk of his portfolio by adding the option, and so requires a positive expected return to justify this increase in risk. This rationalises the buyer having a reservation price somewhat below the expected value of the call option.

The above explanations focus on the demand for options. This blog focuses on the supply of options, and in particular the asymmetric practical impact of margin requirements on sellers of calls and puts.

The supply side: margin requirements

If Black-Scholes prices for puts are typically above expected values, can we make money by selling puts at these prices?  There are academic studies which suggest that excess returns are available from doing precisely this: selling out of the money short-term index put options (which are generally priced closed to Black-Scholes).  But no, I do not do this. The obstacle is margin requirements, a practical matter which academic studies usually overlook.

Buyers of options pay a premium at outset, but thereafter have no further potential liabilities. Sellers receive a premium, but also have to deposit initial margin with their broker, and then variation margin as the price moves against them. This seems likely to have asymmetric effects on the reservation prices at which sellers are willing to offer calls and puts, as follows:

-         The seller of a call suffers margin calls as the index rises. When the index is rising, credit is likely to be easy; the rest of the seller’s portfolio is probably rising and saleable; and his increasing wealth implies declining marginal utility. The margin calls are not a problem.

-         The seller of a put suffers margin calls as the index falls. When the index is falling – and especially when it is crashing – credit is likely to be difficult, the rest of the seller’s portfolio may be unsaleable, and declining wealth implies increasing marginal utility. The margin calls may be very difficult.

Margin issues are difficult to quantity. But papers which attempt to do so find that when margin issues are allowed for, the apparent attraction of selling index puts largely disappears.

This asymmetry – margin calls are easier to manage for sellers of calls than for sellers of puts – may help to explain why calls are supplied cheap and puts dear. But as with Jeffrey and Smith’s demand-side argument, this is only directional, not quantitative. It doesn’t show that the discrepancy between Black-Scholes prices and expected values represents fair compensation for margin issues; it only notes that the observed discrepancies – puts priced higher relative to their expected values than calls – are in directions consistent with margin considerations.

If call options are cheap relative to expected values, can we make money by buying call options? If long-dated equity options were offered for sale priced on Black-Scholes, then maybe yes; this looks like it could be a low-cost form of non-recourse leverage, so I might buy some.  But as they don’t seem to be offered, I haven’t.  (Historically I did occasionally buy investment trust warrants; these were like call options with terms up to a few years, and sometimes very cheap.)

> from Guy Thomas Blog: http://www.guythomas.org.uk/blog/

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On 9/12/2019 at 5:34 AM, drbubb said:

PSYCHOPATHOLOGY ?  OR LUCK?

Anyone who can do this without business success, inherited wealth or a lottery win is a person who has made some unusual and effective choices in life, and is interesting for that reason. It would be possible to pathologise these choices, to suggest that there is a price to be paid for the investors’ success, and there were faint hints at what this might be in some interviews: for example, Vernon noted that “investing is not a team sport”, and both he and Sushil used the word “misanthrope” about themselves.

But in the end, it seems absurd to suggest that a youngish person with assets of several million pounds accumulated through his own decisions, who spends most of his time doing what he likes, is afflicted or dysfunctional compared with the general population. The straightforward view is that these are successful people living in relative happiness, and compared to the venality of many City high earners, perhaps even a degree of grace.

The role of luck
A more challenging critique than the absence of psychopathology is the pervasiveness of luck. This is a book about lucky people. Contrary to general human experience, they have reached middle age with lives which have turned out rather better than they expected, at least in a financial dimension. Some (not all) of the investors had thought carefully about this, and were anxious to highlight the role of luck in their own investment records. / UNQUOTE

> from Guy Thomas > http://www.guythomas.org.uk/investment/freecap.php

His Blog : http://www.guythomas.org.uk/blog/

Nigel seems to make his own luck? Right 😉

I’ve commented before, so I’ll not add much more, Free Capital is an interesting read, with some good lessons. Not all trading styles can possibly be relevant to each and every reader but there is something for all to take away from reading the book.

I’ve recommended it to others several times.

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"Nigel seems to make his own luck? Right"

Haha.

It is amazing how lucky you can get when you add deep analysis to some careful technical analysis

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7 hours ago, drbubb said:

"Nigel seems to make his own luck? Right"

Haha.

It is amazing how lucky you can get when you add deep analysis to some careful technical analysis

I’ve just re-read Guy’s comments from 2013 on Value Investing from his blog (a bit further down the page to the excerpt on Options).

Somewhat reminds me of my own mindset, without as much thought or analysis of Guy. Generally I fairly certain I too, swerve crowded plays, or wait for the herd then sell.

Guy’s concluding comments are very apt. In particular this line “My aim in  investing is to make money, not to burnish a personal narrative or sense of identity as any particular “type “ of investor “

Wondering why Guy decided to start his blog again?

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2 hours ago, jerpy said:

Wondering why Guy decided to start his blog again?

Another Book coming maybe?

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