One of my favourite investing books is Free Capital. It profiles a dozen successful private investors, with insights into their lifestyles as well as their methods.
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.
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!”
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.
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.
- 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! [↩]