Reading list
May 23, 2011
Richard Beddard
8 Comments

Thomas’ Twelve

FreeCapI’ve spent two weeks in the company of twelve highly successful investors. The only thing that connects them is they’ve made a lot of money over a long period of time, enabling them to give up their jobs. And they’re the subjects of Free Capital, a book by Guy Thomas, an investor and former actuary.

It’s been a rejuvenating experience.

Reviewing Free Capital is tricky. Each investor is different so there is no easy way to summarise it except to say that what’s true of Thomas’ twelve is also true of all investors. We’re all different. And  a book that reveals the strategies, explains the technicalities, and shows us how twelve investors think is likely to give a truer picture of what investment is, what investors do, and how and why they do it, than any one view.

The twelve have diverse backgrounds but for most of them, even their earliest years seem to have determined the investors they became. Vince, who suffered from tuberculosis for five years as a child needed to find a way of being self sufficient even if he became incapacitated. Nigel, who studied psychology at Harvard and spent the first three decades of his career in shipping finance catches cyclical upswings in markets like shipping, mining and property.

Everyone is a genius in a bull market – so find a bull market…

…is his mantra

Sushil perhaps goes further than some of the others in the extent of his self reliance, doing everything himself including his dealings with the tax and law, but his observation that successful investors have:

a psychological predilection toward figuring things out for themselves…

…is borne out by the testimonies in this book. Even the (relatively) famous FT columnist and former MP, John Lee, one of only two of the twelve identified by his true name (the other is Peter Gyllenhammar), says investment advice is a “bit of a con”. It’s the search for the truth that attracts contrarian investor, Vernon, to investing, unlike say in politics, business, or law, where you are more likely to be searching for reasons to support a pre-existing point of view.

They don’t even seem to have much regard for other people’s theories. Despite three having worked in investment banking, none calculate intrinsic value as analyst might, and although many use the basic financial ratios, PEs or dividend yields, few recommend the books or glorify the investors who pioneered them. I didn’t read one mention of Warren Buffett, although for former engineer Bill, Benjamin Grahams ‘Intelligent Investor’ was an epiphany.

Vernon, a contrarian investor who “buys the glitch” made 25 times his stake on QXL Ricardo, an Internet auctioneer that crashed along with most dot.com companies and then recovered. It helped make him an ISA millionaire, one of Thomas’ benchmarks for success. Sushil made ten times his money in the dot.com bubble, and was, like Lee an ISA millionaire by 2003. Taylor is described as a “plunger”, running very concentrated portfolios and Luke made a big bet on 42 bagger Soco International.

Thomas, and the twelve, recognise luck plays a role in investment. But those that seem to have had a lucky break, an investment that went much better than they could have imagined, have augmented their good fortune. Even Khalid, the lone day trader, has prospered for ten years. I’d like to believe, as Thomas clearly does, their success is partly down to lack of leverage. Only Khalid uses it extensively.

I found Vernon very compelling:

Time is a limited resource with strongly diminishing returns. The first hour you spend researching a company is much more important than the tenth hour. Some private investors are management groupies – they spend too much time on their favourite companies, posting on bulletin boards and going to AGMs and all the rest of it. They are squandering time which would be better spent looking for new ideas.

Vernon’s brevity, he writes a core thesis in one or two sentences and lists six or seven secondary (positive) and hygiene (negative) factors reminds me of Peter Lynch’s ‘three minute monologues’. Any more factors, Vernon thinks, may actually degrade decisions.

Bill explains the limits of the basic ratios he uses so succinctly you might not even realise you’ve learned something new:

The asset vale of a bank is always suspect because it is the small difference between two large numbers. And the price-earning ratio of a bank is suspect because it is so cyclical.

The author says Free Capital is not a “how to book”, but I think that’s because there can be no such thing. Investors are so different there can only really be “how I books”. This book, therefore, is twelve small books for the price of one. The benefit in reading it goes beyond inspiration, reading it invites comparison between the investors’ methodologies and your own.

Luke surprised me by coming up with a good reason to read an analysts report:

Not for new ideas, but to see the extent to which the market is already discounting my ideas.

And Sushil keeps a little ‘black book’, actually a computer file, listing directors he thinks are crooks. I’d like to see that.

This book is the best of a small breed of books about investors because Thomas really understands investing, avoids hyperbole and tells it how it is. He also makes his own contribution, not in the form of a chapter on himself, but by explaining the technicalities discussed by each investor in boxes embedded within theirs. This is his succinct explanation of why stop losses are illogical for value investors.

Stop loss orders represent an intention to sell based purely on price, with no new info or insights. They represent implicit acceptance that the market knows more than you know about the share. This acceptance seems difficult to reconcile with the expectation. That you will make money out of the market in the long.term.

I love books like this. I loved the American version, The Warren Buffetts Next Door, I loved writing about successful investors when I did it. I loved the spirit the book is written in, Guy Thomas is giving all the royalties to charity, partly to show he didn’t need to write the book for the money.

Most of all he unabashedly champions the notion that private investors can be professional, and can beat the professionals, and that’s excellent because it is both true and not a message you hear very often. There’s a whole industry telling you otherwise.

When he reviewed the book, veteran stock picker and Investors Chronicle columnist Alistair Blair said:

This is definitely the best investment book that has crossed my desk for some time. Now, I’m off to read it again.

I’m not going to let Guy Thomas off the hook that easily. I want him to find twelve more successful private investors, and interview them.

Free Capital is available in our bookshop. I recommend it.

8 Comments

  • Guy Thomas May 23, 2011 at 8:32 pm

    Thanks for a thoughtful review, which has highlighted a few subtleties (eg about time / self-reliance / stop losses / bank ratios) so far missed in other reviews (there are lots more of these subtleties!!).

    It’s not quite true that Buffett is never mentioned – he is obliquely referenced several times. But it is absolutely true that no interviewee self-presented as a fawning admirer or groupie of Buffett (or of any other famous investor).

    Here is what I said about this in another interview about the book:

    “…nobody self-identified as a slavish disciple of the true creed of any particular guru. As sophisticated investors, they’re quite eclectic, drawing on a variety of influences rather than a single guru. They have benefited from lots of temporary edges and heuristics, not a single timeless formula.”

    Reply
  • Guy Thomas May 23, 2011 at 8:41 pm

    Page 255 puts my point above in a slightly different way:

    “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.” ”

    This “little influenced by group affiliation” may actually be quite an unusual mental characteristic – and one which is NOT helpful in many non-investment contexts (business, politics, sport etc).

    This is a more general point: the mental characteristics which are helpful in investment are not necessarily helpful for anything else. As elaborated here: http://guythomas.org.uk/blog/?e=10

    Reply
    • Richard Beddard May 23, 2011 at 10:16 pm

      “This is a more general point: the mental characteristics which are helpful in investment are not necessarily helpful for anything else.”

      Well, there’s a cheery thought for those of use who identify with their mentality! I agree, your book is full of insights into the way investors think and that really is the most important thing.

      Thanks again for a great book.

      Reply
  • blippy May 24, 2011 at 12:08 pm

    I ordered the book a few days ago, I’ve heard good things about it, so I’m very much looking forward to reading it. I would like to get very much better at investing. After having done eye-poppingly well in 2009, things have slowed down for me. What I now realise is that 2009 was exactly the right environment for the kind of stockpicking strategy I usually go for, rather than superior investment skill on my part.

    “Luke surprised me by coming up with a good reason to read an analysts report: Not for new ideas, but to see the extent to which the market is already discounting my ideas.”

    I read a post on the Motley Fool that supports that. He said that some of his best investments were originally “holds”, but were then upgraded to “buys”.

    One of the problems with many commentators – and I’m not levelling it against this book since I haven’t read it – is that they miss out on some context and specifics which vitally affects one’s understanding of their strategy. For example, Buffett has been quoted as saying that if he was starting over now (I think it was 1993) he would largely be doing the same as in the 50′s, looking for “wrinkles”. The problem is that it’s not very helpful. Anyone can go to a screener that gives you low PTB stocks, etc.. If you concentrate on about 3 stocks, as Buffett did, most people are likely to cause themselves a lot of damage. An investor needs more contextual information: what was it about those particular 3 stocks that made them sure things amongst a litter of pups? How did he know the stocks would recover, as opposed to languish? Was he only interested in holding for a very short period, flipping them after small gains to give a high overall compound rate of return, or did he intend to hold them for longer, but for more significant gains? These kinds of details matter A LOT.

    Another story I heard was how Buffett made a lot of money from buying preferreds in some company or another. What’s missing is the context! I’ve since learned that what was likely going on was that Buffett was buying specially-issued preferential stocks as part of privately-negotiated bailout packages; with warrants attached. I read that, and then I thought, “well, that certainly puts a different complexion on things”. So, if you or I started hunting around the preferreds, thinking we’re emulating Buffett, then there’s no way that we’d be able to do nearly as well as him.

    Reply
    • Richard Beddard May 24, 2011 at 4:30 pm

      I know what you mean, and I wonder if investors even realise why they make the decisions they do. We pick on some big obvious theme like JD and its operating leases but underneath it all I’m prejudiced against retailers any way, and also big, famous companies, so perhaps I went looking for a flaw and gave them more weight.

      One of the lessons in the book is these guys didn’t get rich emulating anyone. They were surely influenced, but followed their own paths based on where they started. The real lesson is keep persevering, use whatever talents you have (maybe for judging people, or balance sheets) or can learn, and develop a niche in your kind of investing. Value is a good place to start because we know it works, but you can’t be too dogmatic about it – you have to be prepared to look for value where you’re not expecting it.

      Buffett often follows a similar tack when he comments about being a ‘learning machine’. That’s what’s so interesting, but also challenging about investing. You’re in a kind of informational arms race.

      Reply
  • Steve Baines May 25, 2011 at 7:17 pm

    Good review. I’ll certainly add the book to my things-to-read list. Hopefully I’ll qualify as a potential interviewee for a future edition too!

    Reply
    • Richard Beddard May 26, 2011 at 9:43 am

      If you do, just remember who your friends were back in 2011 :-)

      Reply
  • Weekend reading: Investing amnesia May 28, 2011 at 12:38 pm

    [...] A review of the excellent Free Capital by Guy Thomas – iii blog [...]

    Reply

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