[1]Richard Farleigh has made a lot of money via the markets – tens of millions, maybe hundreds. This book doesn’t give a precise number, though we do learn that the Australian investor’s first ambition was to be a bushranger like Ned Kelly. (Think highwayman Dick Turpin with a bucket on his head. Not so far removed from some institutional investors, a cynic might suggest…)
Farleigh has also had two recent doses of TV fame – briefly as a moneyman from Monaco in Trouble at the Top, a business show that focused on the Home House members’ club in London he helped set up, and via a stint on the thinking man’s X Factor, BBC2’s Dragon’s Den.
In the modern world, of course, the TV outings outweigh self-made millions as a reason to get a book deal; Ant and Dec could probably release a best-selling book on money, if they weren’t so busy making it. And for his part, Farleigh has the boyish looks and the charm to give the boys from Byker’s Grove a run for their money.
With its cover length shot of the smiling author and a slightly dumbed-down title (it was originally released as Taming the Lion in 2005), it’s hard to not to open Farleigh’s 100 Secret Strategies for Successful Investing [2]
But that’d be unfair, and not only because Farleigh was by far the nicest investor ever to grace the Den.
Unlike the other dragons, who too often affect the air of being engaged in a trifling game of poker with some disagreeable nephew, Farleigh approached each would-be entrepreneur on Dragon’s Den with respect for their efforts and their dreams. His experience as a serial tech investor in the late ’90s surely helped him there.
Similarly, it’s hard not to be won over whilst reading 100 Secret Strategies, which has been informed by his time as an investor. Won over by Farleigh, that is, rather than be convinced by his so-called secret strategies.
The trend is your friend
For starters, there aren’t 100 strategies – it feels more like ‘100 Rather Random Sub Sections’. And as for secrets, Farleigh’s can be crudely boiled down to ‘buy what’s been going up for a while, especially if you’re feeling bullish as it’ll probably go up so more’. Hardly a secret technique, and too often a mug punter’s mantra.
In essence, Farleigh argues:
- Markets are usually efficient, so it’s best to assume the price of an asset is correct rather than seeking ‘cheap’ shares
- Instead, buy an asset when its price is rising
- Do (2) even if prices rise for ages, as you’ll be surprised how long an upturn can go on for (a fact easily agreed upon by anyone who has followed the British housing market)
- The best assets to own are ones which will benefit from prevailing economic conditions
- Sell if the upwards price ‘trend’ changes direction, or if the economic fundamentals change for the worst
Believing the market is usually right about the price it gives to things (anything, from shares to commodities to houses), Farleigh suggests a better route to fortune is to look for ‘big picture’ changes in the fundamentals that will move those prices more than the market currently expects. (Yes, that is a contradiction – his, not mine).
Examples from the past might include structural changes in interest rates, the coming of the Internet, or more recently the arrival of China as the world’s sweat(/er) shop. You survey the economic landscape using a simple checklist method, and assuming that’s positive you look for investment opportunities where prices have already started rising, and buy.
We’re into momentum investing territory here, or ‘trend trading’ in Farleigh’s parlance. Key to this method is the idea that trends are more likely to continue than to break (55% versus 45%, according to this book), and Farleigh claims to provide both evidence and a rationale for why this should be true.
He cautions though that if a trend reverses on you by more than a few per cent, you should sell:
“The way I trade, I will never have the satisfaction of getting the best price or the biggest possible profit. I always use this technique: if the fundamentals remain the same, wait for the trend to turn, before getting out of a winning position.”
Sounds reasonable, doesn’t it? The trouble is that shares and other assets don’t go up smoothly to a peak, before then gently sliding steadily back down again, enabling you to sacrifice 5% with a “ho hum” but getting rid of them before they really plunge.
Rather, prices jump all over the place, constantly forcing the active momentum trader to decide if the trend has broken, if he’s just looking at ‘noise’, or if he should instead go back to Benjamin Graham’s classic The Intelligent Investor [3]
Temporary price falls look like reversals, and vice-versa
To see how hard it is to spot changes in trends, consider the FTSE 100 mining company Anglo American, which I chose simply because it was near the top alphabetically when I loaded my share screener.
An excellent choice for anyone who foresaw the boom in commodities over the past few years, since 2004 Anglo American’s share price has nearly tripled. It looks like a perfect Farleigh fundamental-meets-trend play, except that there have been several times when anyone jumping out when the trend turned downwards more than 5% or even 10% would have missed out on subsequent huge gains.
Even in the past six months, selling out when the trend turned downwards would have meant forgoing big profits when the shares rose again, as this graph from Digital Look makes clear:
It looks easy to avoid the dips when you see what happened next, but imagine you were a momentum trader in late July. Look at the drop from 3300p to around 2500p. You’d surely have sold, and missed out on the subsequent rebound.
I could have picked almost any share to prove the same point: it sounds very simple to say ‘get in while the price is going up, and be sure to get out before it really goes down’ but actually doing so consistently is about as easy as getting the BBC’s Dragons to back your pet hamster rental scheme.
Self-evidently, virtually all trends will switch direction eventually, with widespread reversals often resulting in blowouts like the dotcom bust of the late ’90s. That was the last era in which momentum trading really caught the share punting public’s imagination, and it’s interesting to consider whether a return to ‘buy because the price is rising’ investing is imminent, marking perhaps the late stages of the bull market.
Of course, there’s a huge difference between buying profitless dotcoms as opposed to today’s cash-rich miners on reasonable price/earning ratios, which (a) suggests this particular big picture probably isn’t overbought yet, and (b) trend trading might be less prone to blow-ups if combined with a look at the share’s valuation.
Alas, Farleigh’s position is that it’s extremely hard to out-analyse the analysts, and he barely discusses conventional share investing ratios, although he does claim the high PE ratios of late ’90s tech shares were a sell signal he recognised.
And maybe he did – he didn’t get to be a multi-millionaire by reviewing investment books, after all. But this humble reviewer would submit that if trend trading is more than luck (i.e. not simply 50% of people trying it roughly ending up positive and proclaiming its virtues, and the other 50% losing money and moaning), then the difference probably can’t be spelled out in a book. Momentum traders are likely born rather than made – or else they happen to be in the right place at the right time (i.e. they’re lucky).
To his credit, Farleigh stresses that market efficiencies mean any obvious strategies will quickly be sniffed out and arbitraged away:
“As I look back […], it’s clear that a lot of the ways our trading room made money have simply disappeared. The markets have become relentlessly more sophisticated as the changes that started in the early ’80s have continued. Nowadays, everyone is extremely well qualified, there are computer programs everywhere and there are instant communications. The market has evolved, like bacteria against antibiotics, to beat out opportunities. This has happened as people have spotted opportunities and exploited them until they no longer exist.”
In light of this, Farleigh is surely right not to give readers some spurious technical rule about when to sell shares, say, although one suspects that’s what many readers will be expecting.
Rather, if you try to trade trends, you’ll have to develop a knack for it. You’ll soon find out if you’ve not got the nose (and precious few have) by the red all over your portfolio. Not for nothing is momentum investing ironically termed a Buy High and Sell Low strategy by wittier investment folk.
I think it’s also fair to point out that as best I can tell from this account, Farleigh hasn’t made his money by investing his savings in the markets. A professional fund manager typically skims off a few percent of any gains as his recompense for being right and/or lucky. If you’re managing tens or hundreds of millions, say, when you decide interest rates are going to fall, as Farleigh did in the ’80s, then you’re going to find it a lot easier to make huge sums than you or I would making the same call with a £7,000 ISA allowance.
The same could be said of any investment strategy, of course, but a Warren Buffet or Peter Lynch approach to buying good, cheap-looking companies and holding them for the long term, or at least until they’re either not looking good or cheap anymore, seems intellectually like a more practical and consistent way for a small investor to make money through investing, as opposed to surfing price trends like a holiday-starved hedge fund manager on the slopes at Courcheval.
Aussie rules
All that said, 100 Secret Strategies… is a sort of enjoyable book. Away from the silly title and its implicit promises, there’s plenty of good stuff here on diversification and negotiation, for instance, and particularly strong passages on evaluating the management of small companies.
Another standout section discusses the interaction of interest rates, inflation, and economic growth, which could be very pertinent as the ‘China effect’ wears off.
Trend setter: Richard Farleigh
Farleigh is at his very best when talking about his experiences, rather than trying to draw too much evidence from them. If you like reading how a super rich man brought himself up from very humble beginnings via a fascination with the markets that you probably share yourself, then you’ll be entertained and mildly educated by 100 Secret Strategies for Successful Investing. But buy it for secrets, or indeed strategies, and you may feel rather burned.