Free Capital by Guy Thomas

Free Capital: How 12 private investors made millions in the stock market by Guy Thomas

I read this book in early 2014. It was one of the dozen books on investing that I read during a short three month window. It gave me a good overview of the different ways people invest and how people’s personality came into the mix. When I read this book I actually resonated a ton with many of the profiles. So much of their thinking I loved. Super counter-intuitive, independent and against the grain.


Geographers: top-down approach, looks at macro trends. e.g. George Soros, John Templeton

Surveyors: bottom-up approach, looks at individual companies and then research upwards. e.g. Warren Buffett, Peter Lynch

Activists: Active investment, joins board, uses votes and investment to change management. e.g. Carl Icahn

Eclectics: A mix of all three, or none.

“Man is least himself when he talks in his own person. Give him a mask, and he will tell you the truth.” – Oscar Wilde

“in the fields of observation, chance favours the prepared mind.” – Louis Pasteur

Two types of luck: Pasteur luck and Lottery luck.

Chapter 1: Luke Big Picture

In careers or in investment, it helps enormously to pick the right train – choose a field with long-term secular growth.

Investment skill comes not in knowing everything, but in judicious neglect; making wise choices about what to overlook.

It is the quality of your decisions, not the quantity that matters.

You only need to find one or two good investment decisions to change your life.

Don’t chase the next new hot stock.

d investment decisions to change your life. Don’t chase the next new hot stock. (Nigel’s board)

Bulletin boards are like filing systems for him, to record his notes.

Be happy doing nothing.

Use analyst’s research as an index of cnsensus.  

Chapter 2: Nigel Swing

“Everyone is a genius in a bull market – so find a bull market!”
Cyclicality does not necessarily imply regularity – the length of any market is uncertain and variable.

Combine the concept of periodic cycles with the concept of monitoring market sentiment. Monitoring changes in market psychology helps indicate 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 believe it must go lower.”

When it doubles sell half. However, pay attention to volume. “If volume is still strong, I might hold on even when a share has doubled. But if a stock is hitting new highs and volume is falling, I will often reduce my position.”

Cross-market intelligence: compare markets that share similar economic drivers. They should move in tandem, if they don’t it may be a warning that a reversal is imminent.

“The market rewards humility and punishes hubris.”

Use bulletin boards as sentiment indicators, one can usually see irrational exuberance or irrational pessimism. (Think: /r/bitcoin “To the Moon” vs. “Suicide Hotline”).

Chapter 3: Bill Just the Facts

“The art of being wise is knowing what to overlook.”

You can lose money on a growing company with good prospects if you pay too much for the growth.

The annual reports of a company are PR reports – tread with caution.
Be on bulletin boards and tail coat other private investors that you trust. Read all their posts.

Instead of looking for reasons to buy a company, look for reasons not to buy a company, then if you can live with those reasons – buy the company.

What are your limitations?

Investment is a field where knowing your limitations is more important then stretching to surpass them.

Chapter 4: John Lee DVD

When a stock seems cheap one should buy and ignore whether the general market movements might make it 10% cheaper next week.

Small companies are more likely to be proprietorial, less well researched, more likely to be takeover targets and directors are more accessible.

DVD investing: Defensive value and Dividends. Large part of their value covered by net assets and they have a long history of paying dividends. 7%+

Chapter 5: Sushil

“The main benefit of money is freedom. There are two ways of gaining freedom: increase your assets or reduce your wants. I have always tried to use both approaches.”

There was an unjustifiable bubble in technology shares from the middle of the year onwards. But once prices become detached from the anchor of fundamentals, riding a speculative bubble can be rational. I was quite conscious of what I was doing.”

I want a portfolio with large idiosyncratic risks, provided they are mispriced.
Sushil follows a knowability strategy. Investment as applied epistemology. He focuses entirely on research that he can objectively know. For example, the microeconomic advantages of a particular company (knowable) vs. the general macro economic predictions (unknowable).

For small companies, when there is hardly anyone following them, it is more plausible that I may sometimes be better informed.

Successful investors tend not to follow the orthodox paradigm of seeking advice about unfamiliar subjects but instead have a psychological predilection towards figuring things out for themselves.

When the market has fallen 40% in the past year, you want to be at your boldest.

Warren Buffett says 80% of his time is spent reading. For me, it’s probably 95%.
Investing is not Olympics diving. There are no marks for increased difficulty.

Chapter 6: Taylor The Autodidact

You can make a fortune in this game, if you get it right.

To make a large fortune from a small one, you need to be a plunger.

“The pious doctrine of broad diversification guarantees positive expectation, but also mediocrity.”

Lose your ego. It will help you change your mind quickly when new information comes about. Bad investors will re-frame negative news so that it minimises the impact. Lose your ego and avoid this.

The 20-hole punch card: Strive to make your investment decisions fewer in number and higher in quality.

“After spending many ears in Wall Street and after making and losing millions of dollars I want to tell you this: it was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money from it. Men who can be both right and sit tight are uncommon. I found it one of the hardest things to learn.”
– Jesse Livermore.

Book recommendations:
My Own Story – Bernard Baruch
The Battle for Investment Survival – Gerald Loeb
The Education of a Speculator – Victor Niederhoffer
Common Stocks and Uncommon Profits- Philip Fisher
Reminiscence of a Stock Operator – Edwin Lefevre 
The Money Masters – John Train
Zen in the Markets – Edward Allen Toppel
The Intuitive Trader – Robert Koppel
Investor Therapy – Richard Geist

Chapter 7: Vernon – Buying the Glitch

Time and compound growth: If you could compound your money at 30% growth, £1 spent foolishly now would cost you £200 in 20 years time.

Chance favours the prepared.

“Technical knowledge can help, but it is not a panacea, plenty of technical people are unsuccessful investors. Broad knowledge-gathering and being emotionally able to change your mind are more important than detailed technical knowledge.”

Keep several competing ideas or insights in your mind in parallel, accepting uncertainty for long periods and choosing between them at the last possible moment.

“The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”
– F. Scott Fitzgerald

Search for the truth. Investing is not a team sport. Do not focus on affiliation. Be indifferent to popularity. Lean against the crowd.

Contrary to the ease of online dealing, investing is a NEGATIVE SCORING ACTIVITY. (See below for definition).

Success in investing mainly consists of avoiding big mistakes.

Positive Scoring Activities:
Most sports
(Bravery, ‘having-a-go’, and risk taking are rewarded)

Negative Scoring Activities:
Driving a car
Piloting an aircraft
Anaesthetics in medicine
(Meticulous, never makes big mistakes, careful deliberation)

Systematically study other people’s mistakes.

Psychological research suggests that context decisions are best made with no more than five to seven points of information. Use time wisely.

The best decisions in the stock market attract no applause.

8: Eric the Networker (Activist)

Small companies are less researched and easier to research.

Telephone the business you are thinking about investing and pretend to be a potential customer.

“I’m doing a school project about businesses, do you mind if I ask you some questions?”

Success depends on the number of difficult conversations you are willing to have.

At AGMs, Eric asks lots of seemingly naive questions… but the naivety is an act, he really knows exactly what he is doing.”

Remains a low profile.

Chapter 9: Owen Efficiency and Opportunism

It is a mistake to think of holding cash a burning a hole in your pocket. When there are no good situations, stay in cash. Wait for great opportunities to show up.

Definition of a successful investor: a person for whom time has become a more binding constraint than money.

Look for obscure niches.

When you find a good opportunity that has the potential to make you lots of money you might want to go fast and rush in. But you have to be honest and admit that you don’t know everything. There are risks involved. You might have made a mistake.

What skill do you wish you had?
None! If there is a skill I want to have, I work hard on getting it.
Chapter 10: Peter Gyllenhamma

Went bust TWICE. Incredible self-belief.

“I find troubled companies intellectually more interesting. I enjoy restructuring and creating value.”

Judicious disregard for advice – often advice is simply rubber-stamping or box ticking with no real value input.

Institutional shareholders sometimes sell a company because it has become ‘too small.’ I.e. discounts might be available then.

Chapter 11: Khalid the Day Trader

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.
10,000 hours of practice.

False but useful metaphors – technical analysis might not be based on fundamentals, but they can make you money.

No stamp duty or CGT tax on CFD/spread betting.

Chapter 12: Vince the Tax Exile

Contrarianism in investment is like originality in art: all serious artists think they are original, and all serious investors think they are contrarian. But for most this is an affectation.

Look for situations with an absence of competition.

Profiling: studying past investments to infer a list of characteristics

Successful characteristics:
recent substantial director shares purchases
absence of large number of naively enthusiastic posters on bulletin boards
recent substantial share purchase by a commercial river (suggesting possibility of a takeover bid)
paucity of broker research coverage of the company

Unsuccessful characteristics:
the converse of most of the above
a personality cult around the CEO
a gimmicky annual report”flagpoles and fountains” (
glitzy company premises)

When you find a good idea, buy enough of it to make a difference. Diversifying away risk also means diversifying away profit.

It is not enough to be contrarian, one also needs to be right, but if one can be both, the payoff is more direct and reliable in investment than in almost any other field.

Conclusion: Characteristics of the Free Capitalists

A precocious interest in moneymaking is not essential, but a future-time perspective may be.

No overnight success.

Understanding how markets work is more important to an investor than understanding technology.

Money is about freedom, not consumption.

Most of these investors now carry on managing their own money because they enjoy investing, rather than from any financial necessity.

Not team players.

“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.” – Warren Buffett

Foxes, not hedgehogs.

The investors in this book largely ignore the top 90% of the stock market by market capitalisation.

Successful investing is a practical craft, not an academic discipline, and certainly not a science.


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