One of my favourite investing books is Free Capital
Free Capital is unusual in focussing on UK investors. Most investing books are about Americans. At a time when you’re more likely to meet someone in the pub who’d rather smash the system than buy shares in it, it’s nice to know you’re not the only optimistic nutter in the asylum.
As I said in my original review, Free Capital also appeals to me because I dream of achieving financial independence through investing, just like its subjects.
All the investors profiled live off their money. They are free to invest their capital how they like, but they are also free to take the day off to go to the zoo and see the monkeys. They need never do another day in the office, unless they want to.
Given that many people live paycheque-to-paycheque, are wilfully ignorant about managing their money, shun shares, and save little towards their retirement, this drive to achieve financial freedom through the stock market is far less common than it might seem to the typical Monevator reader.
DIY private investors
What else do the private investors in Free Capital have in common?
Most obviously: They made it.
The book’s author didn’t interview a dozen people who failed to invest their way to millions. Survivorship bias looms large.1
This is especially important here, because all the ‘free capitalists’ profiled are active investors, and the academic evidence is clear. Most active share traders will fail to beat the market, and would do better in index funds.
Were the stock pickers in Free Capital skilful or lucky to end up on the right side of the bell curve of returns? Let’s leave that for another day.
In this post I want to focus on the lifestyle choices that enabled them to amass their wealth, which are equally important.
Earning returns of 20% a year makes achieving financial freedom quicker and likelier, no doubt. But without the habit of socking away cash and risking the market’s ups and downs, you’ve got no chance, whether you’re in passive funds or Bolivian small caps.
All the private investors in Free Capital:
- Saved a large chunk of their income instead of spending it.
- Learned about investing and managing money – often via a painful apprenticeship period of losing it.
- Risked their funds in the stock market for superior long-term returns, compared to bonds or cash.
Those are the fundamentals, whether you’re a passive investor, an active investor, or like me some hybrid of the two.
As the Australians say, “You’ve got to be in it to win it!”
What else?
Guy Thomas, the author of Free Capital, says there is no single thread that we can replicate for success. No surprise there.
But there are things that most of his successful investors have in common.
1. Future time perspective
Psychologists have discovered we tend to see our experiences through a past, present, or future time perspective.
People with a present time perspective, for example, might be more interested in making a big salary now (and perhaps spending it!) than in seeking uncertain future gains from the compound interest on their capital.
Most of the successful investors in the book seem to have been born with a forward-looking mindset. Many got interested in making money at an early age. None had big debts to pay off or other bad financial decisions to undo before they started investing
2. Few responsibilities or dependents
Several of the investors achieved financial freedom before they got married or had children. That’s no mean feat given the sums involved, and the fact that people typically pile on responsibility in their 20s and 30s.
I noticed several of the investors remained unmarried, too, even after achieving success.
Children and a non-working spouse are a big drain on anyone’s financial resources, which means less money to invest and compound.
There’s surely also a freedom in being unanswerable to a long-term partner. Given how weird dedicated stock market investing seems to many people these days, the chances of you marrying a like-minded soul are slim.
I’ve seen friends make money despite marrying at an early age and having kids, but invariably it’s been through career success (albeit with some carefully judged risks, including starting their own business).
I suspect throwing your life into your job is more socially acceptable than saving 50% of your income and investing it in the stock market.
3. Not career-minded
One advantage these investors had is they weren’t turning their backs on a great career to start investing.
Just as I wouldn’t say anyone should avoid kids to become rich – not if you really want them – I don’t think anyone who loves their job should quit for investing. (Especially as the evidence is most would do better putting money into a passive portfolio, leaving plenty of time for even the most demanding career).
But how many of us really feel a vocation when the alarm goes off in the morning?
If active investing was a skill you could definitively learn and profit from, I think many would prefer it to the 9-5.
4. Invest for freedom, not consumption
Most investors in Free Capital live unflashy lives. Like a Zen martial artist on the fringes of a Saturday night brawl, they could show off if they wanted to, but they prefer self-determination to sports cars and bling.
It’s important to be honest with yourself. I recently realised that if I made a great deal of money, I’d probably buy a fancier property than I once thought. But otherwise I’m certain I wouldn’t start throwing money about.
Anyone wanting to flash the cash will likely prefer the quick hit of a big salary. Investing your way to £1 million takes time – unless you start with £2 million!
Once you’ve made money the slow way, you’ll probably find spending it is more of a challenge than a temptation.
5. Avoid borrowing to invest
Virtually all the investors profiled avoid leverage – that is borrowing to invest. Even those who use spreadbetting do it without gearing up much.
Again, this is a small sample set, but I’d argue survivorship bias actually teaches us something here. Using debt in volatile markets works until the market turns down and takes all your geared-up capital with it. One severe dislocation can lose you more than you started with, which can’t happen unless you borrow to invest.
There’s a case for running a mortgage alongside a share portfolio. Otherwise I’d avoid borrowing like an England football team avoids World Cup glory.
6. Not team players
All the investors in Free Capital work alone. No great shock. Most people who want to be in with the crowd wouldn’t even think about investing in shares.
The only time investing has been popular in my lifetime was during the Dotcom boom. That it ended with a bust should tell you all you need to know about seeking comfort from others in the stock market.
As Steve Jobs said, “Better to be a pirate than join the navy.”
7. They enjoy investing
Everyone profiled in Free Capital clearly enjoys investing. Some – those spouses you need to avoid, for instance – might even say they’re addicted.
All the featured investors could put their fortunes into passive portfolios and spend their time doing whatever they wanted. However it’s pretty obvious that being in the thick of the markets is exactly where they want to be!
It’s like when people ask why billionaire entrepreneurs keep on working despite having all the money they need. The answer is they weren’t doing it primarily for the money. That’s just a way of keeping score.
I’ve mentioned before that “because I love it” comes far above “because I might make better returns” on the list of reasons why I pick shares rather than solely investing through trackers.
Yet spend time with Monevator’s passive fund hound The Accumulator, and it’s obvious he’s almost as gaga for investing as I am – even though he hands his money over to an index-tracking computer every month.
I can’t tell you to love investing if you don’t, and happily it’s not a prerequisite. By regular investing a chunk of your earnings into a well-diversified portfolio, you should do fine.
However there’s no doubt that loving it makes it easier.
I’ll happily read company reports on my iPad all day, turn to the Business section first in The Sunday Times, and I actually look forward to bear markets for the thrill of securing cheaper bargains.
I could – and do – tell people I invest because it’s intellectually stimulating, and it keeps me engaged with science, technology, and other developments.
But the truth is it’s not even a chore, because I love it.
You can learn more about successful private investors by reading their full profiles in Free Capital
- Survivorship bias is the error and consequence of focussing on winners because the losers are not so visible. For instance, you might go into Waterstones and see thousands of novels available, and conclude it is easy to write a novel and get it published. You are forgetting the hundreds of thousands of rejected novels lying around forgotten in bedroom drawers or on hard drives, because you cannot see them. Also remember that the range of novels in a bookshop is the cream of at least 200 years of novelist output! [↩]
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Interesting book and case studies. Your post is rather timely, as I’ve just penned my thoughts on the attitude a successful investor ought to cultivate – one where they’re able to distinguish between the factors they can control, and the factors they can’t.
Good summary of the useful habits. I found the last habit to be the one I can understand the most. There is a sense of thrill and excitement to investing. Not only that, it is also fun when you get company updates by emails, wondering if it going to be bad or good news.
Curiously enough, I would say that blogs did bring about a change in understanding investing. There are many blogs about index investing, dividend investing to name the few. That can have great impacts, you may work alone but there are still lot of communication and discussions about investing on the web.
Excellent article and advice – thank you.
It’s a pity more people aren’t so enlightened!
Fantastic post. It shows why people living off investment capital are rare though. And I look forward to TI featuring in a future version of the book, in, say, 2020, when you finally get off the fence on the active/passive side. It is the unusualness of successful active investors’ life choices that is probably the reason that for the vast majority of people passive works better in the round 😉 If you want extraordinary results you usually need to be extraordinary in some way, be that sport, a craft or investing.
I don’t personally claim to be the Right Stuff there, though it’s heartening to see I could claim a win on 1,3,4,5 and a half on 2 and 6. It’s also really heartening to see that this is one area where team playing counts for aught. It’s been so prized in the workplace, and I’ve always thought it overrated. Give me streaks of inspiration and talent over faceless interchangeable team drones any time !
Thanks guys, very much appreciate your thoughts on this one. Keep them coming! 🙂
Great post Mr Monevator. So good, I actually tweeted it too.
Read the Free Capital book last year and it is by far the best finance book I’ve ever read. Even if the actual points to take out of it are well hidden, it is inspirational stuff and shows with the right amount of application, enthusiasm and dedication for the task (plus, I reckon, a hell of a lot of luck) you can make this investing thing we love into a paying career.
The kind of investors I tend to come across have already made a lump of money in some other endeavour, and are now looking to invest some of it in the stock market for bond-beating income and growth.
They generally like directly investing in individual shares rather than trackers as they are hands-on people.
I think in their case the key to being a successful investor is not to make a mess of it, i.e. the avoidance of serious mistakes is more important than having a small chance of a big win.
So I’d say future time perspective, freedom not consumption, avoid borrowing, and not team players probably apply. Less so the enjoyment bit, although I think most of them at least half-enjoy it otherwise the lure of the tracker is too strong! As for responsibilities and career, they’re not generally relevant as the build-up or savings phase is effectively done already.
I think the most important points are independence of mind and working alone though… investing is not a good place for a committee!
@UKVI — I think you’re right about the average investor with a meaningful sum to invest. I was once told by a veteran IFA that Monevator was great but I was wasting my time writing articles about growing your wealth, as the only people who had any real money were the de-accumulators in their 50s and 60s! With respect to your sample set, the irony is they should probably go passive double-quick, as I’d wager most will believe because they were good in one area of business, they will be above-average in investing. I don’t see much evidence of that.
@Ermine — I’ve a clean sweep of 1-7, and no sign of it changing. Even though I’m fairly well-liked (I hope) professionally, I’m pretty much unemployable, for instance, in a full-time position, whereas I do very well freelancing and contracting. Indeed, the more I discover about investing, psychology, and my fellow investors, the more I am drawn towards three hunches. (1) I am wired differently from most people, for good or ill. (2) Most people are extremely ill-equipped to pick shares, therefore I might just have an edge and the outperformance I see from time to time might not be pure luck (this is very tentative, and could certainly be due to recency bias after a strong 2012) and (3) even more than ever I think most individuals are better off in passive funds. This might be a case of “I’m an above average driver” syndrome, but it’s where I stand at the moment. It’s a bit of a dilemma, and one that might be better explored in a new side-blog, as I don’t want to confuse this one even more with the active/passive debate.
@teamdave — Agree. I think most of the investors profiled are quiet and sensible models of how a private investor should approach the markets, and on the whole fairly humble, too. That doesn’t guarantee success, of course, but it’s a start.
Excellent summary, Monevator, thank you.
Read this book a couple of years ago and refer back to it for guidance/ inspiration (when the whole world seems to be going passive-tracker gaga).
One thought to add – as a private active investor – I’ve found that treating your investing like a business is a useful mindset. Your inventory/ capital is cash, expect to draw nothing for several years as you get the business off the ground, and be aware that survivorship bias exists when pursuing mastery in anything (including business or investing success).
I bought the book after reading this post and had a quick read. The investor who interested me the most was John Lee. So, I went and bought his book, How to Make a Million Slowly. I dived into his world of hand’s-on value investing, which had me looking into London’s AIM market and browsing the financials site ADFVN, then I ended up on the site of UK Value Investor (who has commented above and whose site I have bookmarked) and here I am again. All that within 48 hours.
What I’ve found is that for me, at the moment anyway, passive investing to match the market is the best option. There seems to be a lot involved in picking and maintaining a winning portfolio, and with the gains vs losses as I see them, with my very limited knowledge, I could lose a lot more than I could gain. I wouldn’t enjoy the process. I’d just get stressed out.
I’ll try to learn more about choosing my own stocks just in case it’s an avenue I decide to go down in the future, but I’m quite happy to have come full circle again to confirm what I’m doing is right for me.
One thing I’d like to add is that while we are all packing away for the future, it’s important not to neglect the present. Have that second helping of dessert during your New Year dinner.
I love this article, and your blog. I’ve been subscribed to the newsletter for a good few years, but – despite agreeing with your outlook for those without an edge – I struggled to confine myself to the passive arena. I wanted an edge. I wanted to be an active investor. I don’t like working for others, and (being 20 years into the rat-race) couldn’t bear the thought of even another 10 years on my ‘sentence’.
So, just over five years ago I set my sights on making the transition, and I’m proud to have achieved that goal last year. It can be done, but it certainly isn’t easy.
I started on the assumption that Wall Street would have some consistency to its frankly criminal activity, and it turns out they do. There’s actually a common “language” being communicated in the price action for every asset class you can imagine, based on a very simple premise: looking for tricks to be played into places where tricks were played in the past. There aren’t enough of us the other side of their trades on the first pass, so they return to the similar places to offload more capital, in batches. These behaviours can be observed and anticipated, so I don’t believe the investors in Free Capital were just lucky.
That’s not to say that it’s easy to do. It took me four years of looking at charts for a minimum of 3-6 hours, seven days a week. I had two months off in that period. I’ll say honestly, it’s one of the hardest things I’ve undertaken. It drove me to depression; I developed anti-social behaviours that negatively affected, or ended, relationships I held dear; I suffered severe losses when I thought I had it sussed and clearly hadn’t, or was too impatient to wait for clear opportunities.
Being the other side of all that now, I don’t have a single regret. I recovered all of my losses in one month; last quarter saw me hit 43/49 trades correctly (88%), my account grew 484%, and my losses amount to <2% of the gains. Most importantly, the relationships that survived that period are now stronger and more meaningful than ever.
I don't believe luck can be sustained in this game. The active investors that make it just pay *very* close attention to the criminals running the show and trade when they do.