Free Capital Book Review

Free Capital

How 12 Private Investors Made Millions in the Stock Market

Wouldn't life be better if you were free of the daily grind - the conventional job and boss - and instead succeeded or failed purely on the merits of your own investment choices? My new book Free Capital: How 12 Private Investors Made Millions in the Stock Market offers an insight into this life.

Based on a series of interviews, the book profiles 12 highly successful private investors.  How did these people originally get interested in investment? How did the interest progress to the point where they were able to give up their day job? How do they spend their time now?

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 18.  Most gave up all employed work in their 30s or 40s to become full-time investors.

Geographers, surveyors, activists and eclectics

The book presents the investors in four groups.

Geographers have a top-down focus, starting from the overall investment landscape, and focusing first on broad trends and macroeconomic conditions. 

Surveyors have a bottom-up focus, starting from the individual elements of the landscape, focusing first on the idiosyncrasies of particular companies.

Activists seek to influence company managers’ decisions in line with their own views – by dialogue and persuasion, by using the votes on their shares, and if necessary by publicity.  Most investors seek to avoid companies where management changes are required, that is they do not go looking for trouble. The activists are investors who do go looking for trouble.

Eclectics are a residual category. One eclectic is a day trader who trades partly on short-term news flow, and partly on technical analysis.  Another is a fundamental investor who draws on both top-down and bottom-up analysis. 

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How do we know these investors are any good?

Six of the investors are ‘ISA millionaires’ who have accumulated over £1m in PEPs and ISAs. Four of these – including Financial Times ‘My Portfolio’ columnist John Lee – had reached the £1m milestone by 2003 or earlier, and another two in 2005 and 2006.  Given the inability to borrow, and low contribution limits in PEPs and ISAs, these results are arithmetically impossible without exceptional investment returns.

For some of the investors, the regulatory requirement to declare publicly any major shareholdings above 3% of a quoted company gives further evidence of their substantial wealth. For example the Swedish micro-cap investor Peter Gyllenhammar – profiled in chapter 10 of the book – is named in many major shareholding announcements every year.

Characteristics of the free capitalists

The final chapter of the book identifies similarities and differences between the 12 investors’ stories. Some of the similarities are as follows.

Future time perspective Time perspective is a psychological concept which describes how an individual parcels consciousness into a past, present and future, and how much attention they give to each. The investors have a future time perspective. Their habitual focus on the future is not a duty or a chore – they seem to prefer perceiving the world through this perspective.

It is unsurprising that investors should focus mainly on the future when thinking about investments. But it was more interesting to see signs that they had had this perspective from a young age, well before they ever thought about investing.  Individuals with a present time perspective – those who focus more on living for the moment – may tend to spend rather than save any increase in income, and so never get started as investors.

No overnight success Most interviewees initially spent several years following the typical pattern of a novice investor – neither making any real money, nor losing enough to put them out the game.  This pattern did not seem to be inconsistent with eventual success as an investor.

Mainly smaller companies Most interviewees invest mainly in smaller companies. They rarely hold shares in the FTSE350 index. In other words, they ignore the top 90% of the stock market by market capitalisation.

Low appetite for leverage Most of the investors use little leverage or debt of any kind in their investments. Some had spread bet accounts, but this appeared to be motivated mainly by tax considerations rather than a desire for leverage.

Money for freedom, not for spending The interviewees appear to live modest lifestyles relative to their accumulated wealth. Investment for them represents first and foremost a source of quiet freedom, rather than a source of ostentatious spending power.

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.

A craft, not a science The investors use relatively simple analysis and heuristics.  None relies on modern portfolio theory as understood in the academic world (“like learning Physics to play snooker” said one interviewee), or on any other sophisticated quantitative analysis. This is despite the fact that several do have strong quantitative or business school backgrounds.

Guy Thomas

The contents and first chapter of Free Capital are available FREE here. 
The book is available (usually priced around £10) as a paperback or e-book from Amazon, the publishers Harriman House and many other booksellers.
All author royalties will go to charity.