There’s a great book that came out in 2011 called Free Capital.
If you want to generate wealth by investing (and I’m guessing you do), you should read it.
‘Free capital’ is money that’s surplus to your living expenses.
Money that you can afford to lose.
Not the money you need to pay your mortgage, buy food or hold back for emergencies.
And that’s the only cash we should be putting into any financial market.
Using the market to grow your wealth
This book is about how best to grow that free capital over the long term.
The author, Guy Thomas, is a private investor.
He’s like you and me in that respect.
Trying to buy low, sell high and grow our money.
Only unlike most of us, Guy does it full time.
That wasn’t always the way.
He used to have a job as a research actuary.
Apologies to any Monkey Darts readers if that’s your job too… but it sounds a little boring to me!
Poring over statistics to figure out insurance risks and premiums.
I’ve got to be honest, it doesn’t excite me.
But then maybe that kind of work sets you up to be a smart investor, like Guy is now.
Because Guy gave up his career at a firm of pension consultants to focus on his personal investing.
That’s how he makes his money.
And I can see how going through rows and rows of data and statistics to spot anomalies and work out risk is a good discipline for investors…
If you’re going to invest money in a company, you need to do your homework.
Just as you do with your short-term trading.
Only, investing is a little different to trading…
A different skill set
In short-term trading, we focus on technical things like price charts and trading volume.
By looking at how price has behaved in the past, we can figure out potential turning points in the market.
And by studying how price is acting around certain levels, we can work out the likely market trend, along with targets to aim for.
Developing those skills can make you a better, consistently profitable
Technical analysis is cool for trading.
But when it comes to investing for the longer term, you need to put your energy into studying the fundamentals…
How to find a good investment
Like a company’s balance sheet and accounts.
The size of its market.
The outlook for the economy.
Those kinds of things.
You want to know if it’s making money, if it has good cash flow, how much debt it has.
And you want to know if the current share price offers good value.
Is it trading for less than the value of its assets?
Does its growth potential justify the value the market is putting on it?
Those are the things that Guy Thomas looks at in his book.
And he’s clearly doing something right if he can jack in his job and survive by investing full time.
That’s the premise of Free Capital.
It’s the idea that you really can get rich by investing in the stock market.
And he’s rounded up a group of private investors who’ve proved that.
The book’s subtitle is: How 12 Private Investors Made Millions in the Stock Market.
Thomas interviews these guys and picks apart what it is that makes them successful.
He uncovers each one’s investment approach and reveals lots of great tips and insight they’ve discovered along their journeys as private investors.
Each has his own style.
But there are some common threads.
For example, most of them have made their money in small company shares.
That’s not surprising.
Over the long term, small caps tend to outperform big companies.
This chart of how $1 has grown in different assets shows that.
That’s a very long-term chart, I know.
But you get similar results over a 30 to 50-year period.
Dividing your free capital
I know a lot of Monkey Darts readers are into short-term trading.
Perhaps you like to spread bet on the currency markets (forex).
Or bet on an index like the FTSE or Dow going up or down.
I like to trade those markets for short-term moves that last from a few days to weeks.
And so I have a portion of “short-term” trading money for that.
But it’s important to put money away for the long-term too.
Just let it work for you…
And historically, the most popular way to do that is in the stock market.
I say‘ historically’, because we now have a new asset class to think about: cryptocurrencies.
Perhaps in 20 or 30 years, cryptos will be seen as the greatest long-term wealth builder?
Anyway, for now, let’s deal with what we know.
Shares are the best of the major assets
Currently I’m looking into what the best ways are to grow your money long-term.
Statistics I’ve seen prove that over the long-term, shares outperform other asset classes such as cash and property.
According to one report I read, over the past 30 years, “UK shares have delivered growth of 1,433% (with dividends reinvested) or 9.9% per year.
“That compares to 402% in property (5.7% per year) or 438% (6% a year) in a cash savings account (with interest reinvested).”
Shares are riskier.
But the pay-off is that they offer the potential for higher returns.
That’s what’s known as the equity risk premium.
When you’re earning an income from employment and have years to go until retirement, you can afford to take higher risks.
So, you go for stocks over cash and bonds.
When your earnings disappear because you no longer work, safety becomes more important.
So, you’ll shift asset allocation away from stocks into ‘safer’ assets like bonds that pay you an income.
Lesser-known wealth generators
Free Capital is a great read.
It proves that the stock market is a great wealth generating machine.
And it’s packed with great insights from private investors who use that to their advantage.
But there are plenty of other places you can look to grow your free capital.
I’m researching this in detail now.
And I’ll fill you in on what I find another time.
But I’ll leave you with a couple of teasers…
For example, I discovered that £10,000 invested in a well-chosen portfolio of fine wines would have grown into £217,400 over a 23-year period.
That’s an impressive annual growth rate of 14.26%.
And check out this chart:
I know stamp collecting is something people do as a hobby.
But did you have any idea it could be so lucrative?
An investment in rare postage stamps would have grown your free capital by more than 400%.
That’s a lot better than the FTSE, property or gold did over the same 22-years period.
There’s more to consider with these sorts of investments. I imagine liquidity is an issue, for one thing.
If you suddenly find you need some cash, it’s probably not that easy to sell your stamp collection for the price you want.
But there are lots of other ‘alternative’ assets that may be more up your street.
Each of them could be great ways for your free capital to generate wealth.
We’ll look closer at them another time.