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Secrets of the market millionaires

Cover of Free Capital by Guy Thomas MAKING £1m or more from the stock market is a dream for many private investors, but a reality for only a few.

Isa millionaires, in particular, are a rare breed. Brewin Dolphin, the investment manager, has nine among its clients, with the largest pot valued at £4.4m. Killik & Co, the broker, and Barclays Stockbrokers have 16 Isa millionaires each.

Last summer, Hargreaves Lansdown, the adviser, had three clients with Isa portfolios worth £1m or more, but market falls in the second half of 2011 mean there is only one left today, with a portfolio of £1.2m.

But a book called Free Capital, written by Guy Thomas, has tracked down 12 private investors who have made millions through buying and selling shares.

Six are Isa millionaires, having made their fortunes within the tax-free wrapper, and some achieved that status as early as 2003 ? even though Isas were only introduced in 1999 and their predecessors, personal equity plans (Peps), in 1987.

Thomas said: ?Six of the investors have accumulated £1m or more in an Isa ? which, given the inability to borrow and low contribution limits in Peps and Isas, is arithmetically impossible without exceptional investment returns.?

He has calculated that even if the maximum permissible contribution had been made every year since Peps started in 1987, the total invested up to the end of the 2003-04 tax year would have been £126,200. ?Making £1m on these contributions by the end of 2003 implies a compound growth rate of at least 23% a year,? he said.

Thomas spoke to most of the millionaires in the book on condition of anonymity. However, the Money section has tracked one down and interviewed him for his tips (see case study).

Most of them made their money from investment ? rather than from setting up businesses or inheriting wealth. While some worked in the City and others have backgrounds in academia or engineering, a handful never went to university. Most were able to give up their day jobs for good in their 30s or 40s to concentrate on investing.

The 12 investors adopt different approaches. A couple focus on the bigger economic picture, but the majority are stock pickers, focusing on individual companies that they think will do best over the medium to long term.

All but one focus on small firms, though they have different ways of engaging with management. One avoids all contact with companies, preferring to look only at the ?facts?, while another attends 50 annual meetings a year and often speaks to several directors in a day.

Most also went through a long initial period in which they were largely unsuccessful as investors, learning by making mistakes, before they found an approach that worked for them.

While many had exposure to the bubble in technology shares that developed in 1999 and 2000, their market experience allowed them to ride it for a while and then get out in time.



1 Think small
All but one of the 12 investors profiled in the book focus mainly on small British firms and ignore the top 90% of companies by stock market value.

They point out that smaller companies are less well researched by institutional investors, meaning that there is more chance of finding an opportunity that has been overlooked by the market.

The directors of small companies also tend to be more accessible, meaning that private shareholders can hold them to account more easily.

In addition, small businesses are susceptible to external changes that could transform the fortunes of the stock, and are also more likely to become takeover targets ? which can significantly boost investment returns.

For instance, Eric Whiteside (not his real name) made more than 10 times his original investment in Ben Bailey, a housebuilder based in the north of England. He bought in between 2001 and 2003 at an average price of 70p and the company was taken over in 2007 for 700p, more than 10 times Whiteside?s first purchase price.

Small firms can also have tax advantages. For instance, Whiteside invests predominantly in firms listed on AIM. Although most shares in this market cannot be held in an Isa, any money invested in them falls outside an estate for inheritance tax (IHT) purposes after two years.

Whiteside and John Lee, the Financial Times columnist who is one of only two investors named in the book (the others are given pseudonyms), also actively look for companies that are controlled by a family or families. This is partly because having non-working family members who live off the income from the business usually leads such firms to have a strong focus on maintaining dividends.

Since 1955, smaller companies have delivered average annual returns of 15.1%, compared with returns of 12.4% from the UK market, according to the Credit Suisse Global Investment Returns Yearbook.

Case study: Research is paying dividends
Eric Whiteside (not his real name), a stock market millionaire, is featured in the book Free Capital. The 53-year-old, from Bromley, southeast London, is a full-time investor, having built and sold a property lettings business when just 39.

He does rigorous research on the 68 small companies he invests in. His focus is on family-run firms and main investment sectors are oil and gas and technology. A successful stock is Lo-Q, provider of technology to cut queues at theme parks; he bought seven years ago at 7p and the stock is now at 275p.

Whiteside is pictured above with his wife Belinda and children Daniel and Gracia.


2 Keep an eye on tax
One of the investors, a former university lecturer known as Sushil, said: ?Most things in investment are uncertain and fluid. Tax is one of the few aspects with some certainty and stability that you can do something about . . . with Isas, Sipps [self-invested personal pensions] and spread betting, the UK is quite a low-tax jurisdiction for investors.?

If you started saving now with the current Isa allowance of £10,680, and this increased in line with 2.5% inflation each year, you could be an Isa millionaire with a savings pot worth £1,007,613 after 28 years. This assumes annual growth of 6%, according to figures from Hargreaves Lansdown.

Several of the investors also use spread betting ? that is, betting on a market or stock rising or falling. Although it is risky, spread betting is tax efficient because the usual 0.5% stamp duty on share dealing does not apply, and any profits are exempt from capital gains tax (CGT) because it is classed as gambling.


3 Don?t rely on advisers
All the investors profiled in the book take control of their own investment decisions, with only minimal reliance on wealth management companies and stockbrokers. They also take no advice on which shares to buy.

Thomas said: ?A consensus of expert opinion is often not valuable in investment, because it is already reflected in market prices. Successful investors tend to have a predilection towards figuring things out for themselves.?

They also steer clear of fund managers. Lee said: ?Personally, I would not want to give management of my assets to anyone ? I think authorised investment advice is a bit of a con.?


4 Monitor bulletin boards
In addition to looking at newspapers, broker research and financial blogs, many of the millionaire investors use investor forums, also known as bulletin boards, such as Motley Fool and ADVFN. Luke, who used to be a City banker, has written more than 30,000 posts on the Motley Fool site (fool.co.uk) over 10 years. Others simply sit back and monitor them, to see what other investors are talking about and to gauge market sentiment.

Bill, a former electronics engineer, uses bulletin boards for ?tail-coating? ? reading posts from private investors who he thinks are knowledgeable on specialist sectors.

ADVFN?s forums are the biggest in Britain, with more than 10,000 posts made each day and individual discussions on the smallest companies. Motley Fool has more general discussion boards, with about 1,000 posts a day, while other sites such as Interactive Investor (iii.co.uk) and Green Energy Investors (greenenergyinvestors.com) also offer forums.
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