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Book Review: Free Capital

Summary Guy Thomas profiles twelve private investors. The interviewees remain anonymous and speak frankly about their successes and failures. Free Capital is an inspirational and educational read. The Market Wizards of U.K. amateur investors. Actuary, private investor and honorary lecturer Guy Thomas put together a terrific read called Free Capital: How 12 Private Investors Made Millions in the Stock Market after a thorough process of selecting and interviewing over 20+ private investors. The book consists of interviews with twelve private investors. It could have been part of the Market Wizards series by Jack. D. Schwager and an appropriate subtitle would have been: Interviews with the U.K. best amateur investors . If you enjoyed the Market Wizard series you are almost certain to like this book. The final selection of interviewees is made up of investors employing a variety of styles. The author segments the styles as follows: Geographers: top-down investors. Start from a macro perspective and search companies that will benefit from that trend. Surveyors: bottom-up investors who look at individual company financials. Activists: Investors taking an active approach to their investments. Putting a large percentage of their portfolio in a name and developing a conversation with management. Eclectics: Go back and forth between styles or don’t fit the other styles. It even includes one day trader and varies from activists to buy and hold dividend investors. Every investor interviewed had been highly successful with many racking up the balance of their U.K. tax-free, limited contribution accounts, up to well over a million. A feat than can only be accomplished by highly skillful investors. Thomas was also careful to monitor results of the interviewees over a market cycle to ensure their strategies could withstand a bear market. What is the book about? First and foremost the book in an inspirational read. Although a few of the investors in the book are exceptionally intelligent, many appear to be just above average in intelligence and some had to deal with severe setbacks in life or very tough starting conditions. Most of the people profiled struggled to keep their pre-investment career on track. Yet, they were able to achieve tremendous success through investing. They accomplished this through a variety of strategies. An important takeaway is that when you study investing, stick to a strategy that suits you and keep at it ultimately you should be able to achieve financial freedom. For many in this book, becoming a private investor enabled them to get away from company politics. Why you shouldn’t read Free Capital First of all to enjoy this book it is required you are interested in the practice of active investing. If you a convinced passive investor you will not like this book very much. The interviewees are all U.K. based private investors. The author guards their real identity which allowed them to speak frankly. The book really stands out in its genre because the people profiled do not try to talk up their strategies, try to look smart or otherwise try to boost their own ego. However, if you are looking for sophisticated literature, you should read the papers authored by Thomas (highly recommended as well). Who should read Free Capital? Read Free Capital if you are looking for an inspirational read. Quite a bit of actionable advice is dished out by the various interviewees but there are no stock tips. Of course stock tips wouldn’t have a very long shelf life any way. The book is especially valuable if you are developing your style as a private investor. You may not yet realize that it is also possible to be an activist investor from your home office. Even though most people day trading end up broke, some prosper. Perhaps you are considering to become a full time investor because you hate your career but do not dare to take the plunge yet. These people did it but all took precautions. You may think you are handicapped because you don’t have a finance or business background but neither did these people and they destroyed their benchmarks. Free Capital is certainly one of the best investment books I read in 2015 and I highly recommended it.

Relative Strength In Rising Rate Environments

By Andy Hyer With wide expectation that the Fed will raise interest rates this month, it is worth considering how a momentum strategy tends to perform in a rising interest rate environment. Invesco PowerShares addressed this topic in their September 2015 paper Harnessing the Power of Factor Investing . According to their findings, momentum was able to generate excess returns in both rising rate and declining rate environments. However, the excess returns were higher in rising rate environments. (click to enlarge) (click to enlarge) Some thoughts on why this pattern may occur: By the time rates rise you are typically well off the market bottom and well out of a recession. On average, stocks are at least fairly valued at that point and there aren’t a ton of bargains to be had that are really cheap for obvious reasons. At that point investors look for growth and that is what momentum is good at picking up. Late cycle also means fewer stocks participating in the rally, which is also good from a momentum perspective. Good momentum stocks usually don’t have to rely on cheap financing (they can generate cash flow organically) so they don’t get crimped like value stocks do when rates rise. While many seem to fear what affect a rising interest rate environment will have on stocks, it is worth remembering that rising rates have tended to be good for a momentum strategy. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value.

Is The Acceleration Factor A Better Way To Measure Momentum?

Momentum has received a lot of attention in the asset-pricing literature over the past several decades, and for good reason. Trending behavior is a staple in markets. In contrast with other pricing “anomalies,” short-term return persistence – positive and negative – is a robust factor across asset classes. The fact that momentum is deployed far and wide in the money management industry and hasn’t been arbitraged away suggests that the persistence factor is persistent. The question is whether momentum as traditionally defined can be enhanced? Yes, according to a small but growing corner of research that looks at price trends through an “acceleration” lens. Momentum is generally defined as the directional bias for asset returns to persist, particularly over a 6- to 12-month period. The modern age of momentum research begins with Jegadeesh and Titman’s 1993 study “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Fast forward to the present and you’ll find a small library of research that extends the analysis in a variety of directions, including the recent focus on the so-called acceleration factor. There are several ways to define acceleration, but the general concept is simply a methodology for measuring changes in momentum – “the first difference of successive returns,” as a recent paper explained ( “The Acceleration Effect and Gamma Factor in Asset Pricing” ). What’s the value of monitoring and measuring acceleration? This study finds that it provides “better performance and higher explanatory power than momentum.” As such, “momentum can be considered an imperfect proxy for acceleration.” That’s an intriguing comment since momentum is already viewed as a solid framework as a risk factor and as the raw material for profitable trading strategies. But can we squeeze even more from this realm of asset-pricing analytics in the search for robust signals? Perhaps. Another line of research along these lines comes to us by way of Morningstar, which recently published an academic study that found that acceleration is quite useful for anticipating severe market losses. ” The Economic Value of Forecasting Left-Tail Risk ” reports that the geometric return for the most recent six-month period less its equivalent over the preceding six months, along with trailing 1-year return, are powerful factors for predicting negative skewness in returns. The results suggest, according to the authors, “that it is possible to reduce tail risk without giving up returns.” There are a number of variations one could devise in trying to mine acceleration as a risk metric. David Varadi has explored several possibilities, including what he labels the volatility of acceleration (VOA). Noting that this indicator has interesting properties for estimating volatility and adjusting asset weights, he writes that “the VOA framework is one step in the direction of looking at alternative and possibly better measures of volatility.” The research on acceleration and its applications is still in its infancy, but the early efforts certainly look intriguing. It’s premature to abandon momentum in favor of acceleration. But there’s a compelling case for expanding the definition of price persistence.