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Reviews - Free Capital

Cover of  by Guy Thomas

Free capital, as Guy Thomas evokes it, is ?money surplus to immediate living expenses? ? the wealth accumulated as full-time private investors by the 12 people interviewed (10 under aliases) for this book. How they achieved and held on to their special blend of financial independence is fascinating.

Most will read the book because they want to learn and to emulate, so this is above all an unusually compelling self-help title. The 12 individuals have made large sums in markets dominated by big, information-rich institutions. They have proved that a wide variety of approaches and styles can work. Some have PhDs, others almost no qualifications. Several took up investing full-time because their health made it hard for them to follow conventional careers. Six are ISA millionaires, an achievement that is impossible, given the maximum permitted annual contributions, without ?exceptional investment returns?.

So what lessons spring out of our meetings with these 12 men? Best is Vernon?s characterisation of investment as an activity with ?negative scoring? ? one where success depends on avoiding mistakes because the downside is large. The same might be said of driving, or working as an anaesthetist, he argues. In activities with ?positive scoring? (selling and most sports, for example) it pays to ?have a go? because the price of failure is small. The ease of online dealing, Vernon believes, encourages people to think investment carries ?positive scoring? ? and it is noticeable how many of the interviewees have long relationships with one or more trusted brokers.

With Vernon?s point about negative scoring in mind, the varying approaches to due diligence command all the more attention ? from Bill, who focuses on a very few figures and ratios in evaluating an opportunity; to Eric, who spends hours on the phone to directors, salespeople and rivals; and to Vernon himself, with his three layers of checks.

Though they may have widely varying approaches, almost all of the 12 specialise in the same area ? UK small caps ? as the most likely source of outsize returns. This makes sense: given how thinly researched Britain?s 3,000 or so smaller listed companies are, they offer private investors the best chance of gaining a profitable information advantage. Most aim to build positions they will hold over several years ? there is only one day trader featured.

This book answers its market extremely well. However, mistakes provide more valuable lessons than successes, so I would like to have read more about things that went wrong. Beyond that, the big question for me was: so much for the exceptional, what is the average person to do? Most of us are not going to become wealthy, full-time private investors. Learning about investment has to be crammed into a full life. If financial education and self-help are really as important as the regulators and politicians say, how are the time-poor majority to find something that answers their needs?

Andy Davies

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