Free Capital – amazing journey of some private investors

Private capital

I learnt about this book through Rohit Chauhan’s tweet. What makes this book interesting is that, most of these investors are a) full time investors managing their own money b) Started with small capital base and now are c) Independently wealthy. I found many of these investors faced the same challenge which any new full-time investor would face.  In most of the investment books, you would never get to read about these problems.

Let me clarify that the book has details of investors with various investment style right from traders who hold stock for less than few hours to investors who believe in buy and hold for ULTRA LONG TERM and in between investing style.

Whether to post on bulletin boards or not depend on your investment style

Some of our surveyors (the bottom-up type of investors) read boards but seldom post, and others never even look at bulletin boards. This variation is in part a matter of individual personalities and different routes to becoming a full-time investor. But it also reflects a basic difference in thinking between geographers and surveyors. 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.

Bulletin board commentary can be (and often is) dismissed as a waste of time, the babble of uninformed amateurs. The quality of bulletin board discussion varies enormously, and the median is of low quality; but for an experienced skimmer who knows where to look, the median is beside the point. Finding one or two useful ideas often takes a few hours’ reading, but it can sometimes make or save the investor tens of thousands of pounds. As Luke puts it: “I am not saying that most bulletin boards are useful, just that a few are. The boards which are most useful change over time.  

Luke posts on many subjects and companies, but intriguingly even when he states clear views, he may not back them with his own cash. He prefers to bet only on his strongest views.

Reflecting his [Bill] reliance on a few key posters he often prefers to monitor bulletin board discussions by searching on a poster’s name, rather than on a company name or a topic. “For a few people, I want to read everything they write. It has taken me years to identify these people.” Bill’s willingness to tail-coat on others’ expertise wherever it helps recalls a maxim of the professional investor Nils Taube (1925-2008): “use your eyes and plagiarise!”

He [Sushil] does not post much on bulletin boards, unless he wants to pose a specific question; but he does spend a great deal of time reading them. “Of course there is a lot of nonsense on bulletin boards, but there is also stuff I can’t ignore: comments from industry experts, suppliers, customers, disgruntled employees. I would never buy a stock without checking what has been said about it recently on ADVFN.

Some people seem to post on public bulletin boards to show off how clever they are. I don’t see the point of that. I try to speak to people who are cleverer or more sophisticated than me. I try to give them something useful and I hope they will give something back to me.

Return per unit of time invested

The scarcest resource for successful investors is not money but attention: how to manage the trade-off between time and rationality to best effect. There is not time in life to find out everything about every potential investment. Investment skill consists not in knowing everything, but in judicious neglect: making wise choices about what to overlook.

American philosopher William James: “the art of being wise is knowing what to overlook.”

Another investor insist on focusing only on “Knowable state of Change’, which in essence also means not wasting time in UNKNOWABLE THINGS.

Focus on Knowable change in state

Buying in anticipation of what he calls a “knowable change in state”. It highlights that you don’t need to know everything about a company, and don’t need an absolute valuation of a company – you just need to focus on a knowable change in state.” He finds this emphasis on ‘knowability’ a useful way of directing research effort: “Focus on things which are knowable – that is, things where research can plausibly give you superior insight – for example, the microeconomic advantages of a particular company. Ignore things which are not knowable, for example, general macroeconomic predictions.” This emphasis on knowable ideas has led him to focus largely on small companies, or situations where a seller is motivated by factors such as his tax situation or an urgent need to raise funds. “I am always conscious that when I trade, I think I have superior information, but there is usually a counterparty who thinks he does. It is not plausible that I will on average be better informed than the dozens of analysts looking at any large company. So I never even look at large companies – I hold nothing in the FTSE350. But for small companies, where there may be hardly anyone following the company, it is more plausible that I may sometimes be better informed.”

 I want to be a full-time investor, any tips?

This is one of the most often asked question to me over last one year. In fact, I received so many mails that I drafted a standard response and now I just copy and past that. If anyone is interested, you can read here

Few dependents

Several investors escaped from wage slavery to become full-time investors at early ages. All these individuals were unmarried at the time they gave up employment. Becoming a full -time investor at an early age is a risky decision; a lack of family financial responsibilities makes the decision easier, and so does not having to justify one’s eccentricity to a spouse. Although they didn’t hate their jobs, there is little evidence that interviewees gave up glittering careers to concentrate on investment. The lack of high-flying careers means that most interviewees had never spent much time thinking about organisational politics or how to progress in a hierarchy. They lack these skills for the happy reason that they have never needed them.

No Overnight success

Most interviewees went through a long initial period in which they were largely unsuccessful investors . They either broke even or regularly lost small amounts of money, but not enough to deter them from trying again. Bill, Khalid, Nigel, Sushil and Vince all resorted to credit cards to finance investments and keep themselves afloat during this period. We cannot infer that persistence always pays off, because we cannot observe other amateur investors who may have been equally persistent but never became successful. But we can say that an initial period of indifferent results is common, it may last for several years, and it is not inconsistent with eventual success as a full-time investor.

Not team players

The investors all work alone. They make their own decisions, and they appear to be little influenced by any form of group affiliation. Their mentality is captured by something Warren Buffett wrote about his investor friend Walter Schloss: “I don’t seem to have very much influence on Walter. That’s one of his strengths: nobody seems to have much influence on him.”

And finally one is well served to remember Basant Maheshwari advice

The path to financial freedom is not an investor’s personal journey. He has to get his immediate family which includes his spouse and other active members in to the process. The process of an investor postponing immediately comforts for the benefit of future luxuries is a family decision and not an individual one.

Think for reasons not to buy a company

It is always easy to think of reasons to buy a company. That is what most tipsters do. To make good decisions, you need to look actively for reasons not to buy a company. And then invest only in those where you can live with those reasons. – Bill

Notes help in structured thinking

After making notes, in many cases he [Bill] may never read them again, but nevertheless he feels that the process of making notes helps his thinking. Bill stressed the importance of this spreadsheet in structuring his thoughts – “it is overwhelmingly valuable to me.” Because of the importance of the spreadsheet, a back-up copy is emailed every few days to a remote storage location.

For organising his work he [Vernon] keeps a file on each holding, and writes lots of notes, which he keeps mainly electronically . “The notes are not important in themselves, but they help me to maintain mental consistency over time. They are a stabilising influence when some news comes out which might tempt me to trade impulsively.”

If you are convinced of making notes, I will suggest you to make mindmaps. Being crisp, mindmaps forces you to be more specific and one can create a standard mindmap, which will serve as checklist too.

Most hold concentrated portfolios

Most of the investors hold concentrated portfolios, sometimes of fewer than ten shares (Luke, Owen and Taylor). Others such as Eric, John Lee, Peter Gyllenhammar and Sushil hold up to 60 shares, but this total may be misleading: for example Sushil mentioned that nearly half his portfolio is in his top six holdings. To the extent that portfolios are diversified, this tends to be driven by practical liquidity considerations coupled with the investor’s large total funds, rather than a principled desire for more diversification.

I was surprised to learn that Khalid, whose holding period is generally into hours, generated his wealth by holding a concentrated portfolio. “I don’t aim to have 50 positions and make money on 30 of them. I would prefer to have ten positions and make money on eight of them.”

Read this blog post at MicroCapClub, which is one of the BEST AND MOST BALANCED DISCUSSION on capital allocation I have read till date. In one line this post insist capital allocation depends on your PERSONALITY AND INVESTMENT STYLE. Few extract from MicroCapClub post

It makes more sense to me to be concentrated because the central tenet to my investing style is to “know thy company”. I just don’t have time to get to know/keep up with a dozen companies in the manner that would make me comfortable. In regards to Schloss or “quantitative value” guys like Greenblatt’s Magic Formula. Since you don’t get to know the business investing like them, you need to have more diversification for smoothing tendencies.

Over the last two years, I realized that my approach is ““know thy company” and I am not comfortable in investing on BORROWED CONVICTION. For this reason, I have moved from extreme diversification [< 3% in each position] to much more concentrated portfolio. [> 50% in less than five stocks]. I have still less than 3 yrs of experience in markets as full time investor. To protect myself against any STUPID MISTAKE of an amateur investor, I have decided to do TIME DIVERSIFICATION, by spreading my overall allocation to equities over next 3-4 years. But remember PORTFOLIO CONCENTRATION IS NOT FOR EVERYONE. 

What to do when management refuse to answer any queries?

When directors are unresponsive or unhelpful to a private investor making such persistent enquiries, does this put him off investing in the company? “Not necessarily. I try to understand the history which has led to that. Quite often they are family companies which just happen to be listed. Directors being unhelpful to me personally doesn’t always mean it’s a bad company.” Sometimes he finds that directors who were initially unhelpful to his enquiries become comfortable over a period as he gains their trust.

Basant Maheshwari in his excellent book “The Thoughtful Investor” discussed case of Hawkins Cookers. At the time of purchase 1) Management refused to share past annual reports 2) Refused to discuss anything over phone or email, saying that they answer questions only at AGM 3) Even at AGM, after answering a couple of questions, they refused to answer more questions. But Basant Maheswari, decided to continue to hold the stock because of high dividend yield and conviction in the business of Hawkins Cookers.

Monitoring Market psychology

Monitoring changes in market psychology helps in understanding where you are in the cycle. “A market doesn’t peak until the majority is convinced it is going to move higher, and it doesn’t bottom until the majority believes it must go lower.”

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5 Responses to Free Capital – amazing journey of some private investors

  1. I never heard of this book before, so thanks for the post on it.


  2. Pingback: Return Per Unit of Time Invested | ContrarianValue Edge

  3. Pingback: Book Review: Free Capital by Guy Thomas | MicroCapClub

  4. It is a good book. Lot of learning for private investors. It also gives you the confidence that it is possible to survive as full time investor and if you are good then you can even thrive and amass millions.
    I recommend another book in same genre- “Why you Win or Lose: The psychology of speculation” By Fred Kelly. The book was written in 1930 but still very valid. Fred was a magazine writer who became contrarian fundamental investor to augment his income. He ended up becoming very rich and happy man.


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