Richard Farleigh reveals the 100 secret strategies that he developed to enable him to succeed in the markets.
During his time running a trading desk, Farleigh set out to develop a repeatable methodology based on observation and reasoning, not just on one-off flukes and luck, to enable him to outperform the market on a regular basis.
The (potentially controversial) beliefs that he incorporates into his strategies include:
- Markets tend to under-react, not overreact.
- Big, obvious ideas offer great opportunities.
- It is safe to invest with a consensus view.
- Contrarian trading is usually irrational.
- It is best to enter and exit the share market at the right times instead of always staying invested.
- Price trends are well known but under-utilised.
- Chartists are just astrologers.
- Investment and trading are increasingly similar.
Some of the techniques simply involve being better than other investors at some of the basics, including only chasing genuine opportunities, managing risks and coping with losses.
As his trading results started to attract some attention, Farleigh was frequently asked to give presentations of his ideas to other professional traders. From the feedback during these sessions he realised that others were interested in an approach to investing which was based on first principles. Finding that anecdotes were the best way to make a point, and that ideas could be summarised into numbered strategies, allowed him to show clearly how the methodology worked.
Years later, he is still using the same approach, and has found that amateurs, as well as professionals, are keen to find out how markets work and how to improve their investment performance. This book contains those secrets.
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About the 100 Strategies
The rules are based on two broad experiences. Firstly, my involvement with investing and trading has been an endless pursuit of looking for patterns and developing my own repeatable methodologies. I have wanted to turn an art into a science. Secondly, from so many conversations with intelligent and educated people, who are curious about markets, but have been unhappy with a lack of useful reading material.
The book is intended for anyone with an interest in trading or investing, whether they are amateurs or professionals. The laws grew out of a series of popular lectures that I gave in my early career and out of the process of training new people to trade the markets.
Perhaps a unique thing about my approach in this book is that I have developed a framework which is applicable to all markets, whether they are bonds, money market, commodities, currencies, stocks, or property. The more I have learnt about these markets the more I have been convinced that it is sensible to approach them the same way. This is very useful, especially when some markets are underperforming.
This is a serious book. It is definitely not a "how to get rich quick" trick. I have presented my observations and interpretations as laws for practical purposes. It incorporates equally a lot of groundwork analysis of markets.
In finance there has been a gap between practitioners and the theoreticians. I intend to bridge that gap with a solid and, at times, theoretical explanation for my observations. Nevertheless, I have presented the material in a personal way. It is light hearted, with lots of anecdotes. I have not done endless amounts of research on each of the laws, so at times I may have erred on the detail. However it is always the concepts that are important, as these are what I am trying to get across.
"Taming the Lion, joins One Up on Wall Street, Adventure Capitalist and The Zurich Axioms as one of a handful of works of blinding originality permanently resident on my investing bookshelf."
- Richard Beddard, Editor Interactive Investor (www.iii.co.uk)
We live in a copycat world where a new sound is mercilessly imitated and degraded by inferior musicians, and fresh formats spawn 'me-too' genres. Big Brother begat I'm a Celebrity, which begat Celebrity Love Island. Sadly it is true of investment ideas too.
But a new book, Taming the Lion, joins One Up on Wall Street, Adventure Capitalist and The Zurich Axioms as one of a handful of works of blinding originality permanently resident on my investing bookshelf. Strangely it is also an explication of momentum investing, the trend-following investment strategy of the dotcom boom.
It is a surreal moment when Richard Farleigh, the book's author and number 785 on the Sunday Times Rich List 2005, Skypes me. I am sat in a frigid office near Liverpool Street and he is calling from his home in Monaco. The contrast in personal wealth is also striking. But his use of Skype makes sense because Mr Farleigh is a technology investor and Skype is at the forefront of peer-to-peer telephony, the disruptive technology that routes telephone calls over the internet for free, or the price of a local call.
"I am not an expert," he says, "But if you shorted every telecoms company in the world, I cannot see how you could fail to make money. Calls are disappearing. They are even trialling broadband down electricity lines."
It is a speculation, not a recommendation, but contained within it is the difference between Mr Farleigh and your average trend-follower. "The style of trading using trends is the icing on the cake," he says. The cake itself is a deep understanding of the fundamentals.
He formulated his strategies, the subject of the book, investing ‘OPM’ – Other People's Money – as a bond trader in the 1980s and 1990s and subsequently after his retirement in 1994, aged just 34, funding small and mostly British technology companies.
Like the 'trend is your friend', the notion that 'elephants don't gallop' is a cliché. The idea of investing in smaller companies is hardly original but the strategies he employs are all home-grown. One is to trust in management.
In the depths of the tech crash Mr Farleigh rescued Clearspeed, then a struggling computer graphics company. "I do not know much about semi conductors," he says but, "The whole team were prepared to sacrifice their salaries because they loved the product so much." Within five minutes of meeting Tom Bees, the chief executive, "I immediately knew he was exceptional."
If it sounds like Dragon's Den, the BBC2 series where entrepreneurs have minutes to sell their businesses to venture capitalists, it is, says Mr Farleigh – but without the pressure of the camera. "Even though I have invested in more than fifty companies without much due diligence I have not really suffered."
That must sound pretty radical to investors schooled in pawing annual reports and buying only what they understand. But pragmatism is a competitive advantage in fast moving markets, says Mr Farleigh. Where the payroll may only number twenty, not only is the quality of management more variable, it has a much bigger impact than in, say, a blue-chip company.
Trusting management is one strategy, there are 99 more in the book, but the fundamental lesson Mr Farleigh teaches, like those other great investors who spilled the beans, is that to speculate successfully we must understand why markets move. It may sound obvious, but as Mr Farleigh says, "Some things are obvious only when you have been shown them".
Richard Beddard, editor, Interactive Investor
This review originally appeared on the Interactive Investor website. Click here to read the original article. W Rose
If you want to get underneath the mindset of one of the most successful and prolific private equity investors in high technology start-ups, than you don't have to ponder any more. Richard Farleigh's long awaited book, 'Taming the Lion, 100 Secret Strategies for Investing', reveals the underlying principles that have guided his investment strategies.
Chapter by chapter, the book provides fundamental investment strategies that Farleigh has followed in an easy to understand language, without too much economic or financial jargon that would put off many non-financial readers. Many of these strategies are tested with real world examples, often revealing the negative consequences that can follow if the strategies are not adhered to properly. This makes Farleigh's 100 secret strategies more credible and believable compared to other books on investment strategies, which tend to be more prescriptive and theoretical.
Taming the lion
The long experience gained as a bond trader and private equity investor is used throughout the book to make fundamental observations of the market and respect for its behaviour. Using the analogy that a lion tamer can tame a lion with a healthy fear and respect for the lion, an investor can follow similar principles: having a healthy fear and respect for the investment market and prices.
The market is like a huge supercomputer which absorbs all available information, for rest of the review see:
http://www.thechilli.com/articles/misc/071_TamingTheLions.asp Ad Todd
Contents of Taming the Lion
Introduction
A brief biography
A day in the life
1 - Markets
1.0 The different markets have many useful similarities
1.1 Fear the market
1.2 Markets are more efficient than generally acknowledged
1.3 Market opportunities are disappearing
1.4 The markets can overwhelm government intervention
1.5 The market is strengthened by speculation
1.6 Respect the market not the experts
1.7 Most professionals are not outguessing the market
1.8 Listen and read very critically
1.9 Understand recent history
2 - Comparative Advantages
2.0 To outperform the market you need a comparative advantage
2.1 Everybody is a hero in a bull market!
2.2 Never stray from your comparative advantages
2.3 A small percentage advantage is enough to outperform the market
2.4 Test the advantage over time and make changes slowly
2.5 Financial markets advantage #1: Information
2.6 Financial markets advantage #2: Original analysis
2.7 Financial markets advantage #3: Brokers and bankers have extra information and free insurance
2.8 Financial markets advantage #4:Understanding market behaviour
2.9 The Strategies are based on six types of market behaviour
3 - Risk
3.0 Manage and embrace risk
3.1 Good ideas can lose money
3.2 Asymmetry has fooled a lot of investors
3.3 Wild swings and losses are uncomfortable but they may offer the best rewards
3.4 Diversify
3.5 Assess risk - and then double it
3.6 Risk adjust results after the trade
3.7 Qualities of the successful trader
3.8 Trading pressure increases with amount at risk
3.9 The trader's dilemma - the stop loss?
4 - Patterns and Anomalies
4.0 Look for patterns and anomalies
4.1 Choose the right markets
4.2 The share market dilemma
4.3 Crisis situations almost always provide an opportunity
4.4 Short term interest rates will tend toward the inflation rate plus the economic growth rate
4.5 Government bond markets for the major economies are not prone to crashes
4.6 Currencies: two economies and fact or fashion?
4.7 Some markets are driven by supply
4.8 Property prices often lag stock prices
4.9 Charts are the astrologers of the markets
5 - Big Ideas
5.0 Markets are slow to react to structural influences
5.1 Look for the next big thing
5.2 Ignore obscure theories and observations
5.3 Only invest in the broad markets when they are in line with the prevailing economic environment
5.4 Be methodical - use a checklist to quantify and add rigour to a view
5.5 Buy stocks when economic growth is strong and inflation is weak
5.6 Buy bonds when inflation and economic growth are both weak
5.7 Buy commodities when inflation and economic growth are both strong
5.8 Few assets benefit when inflation is strong and economic growth is weak
5.9 You are unlikely to out-analyse the analysts
6 - Small Companies
6.0 Small companies offer more opportunities than large companies
6.1 The quality of a company's management is by far the most crucial factor in determining its success
6.2 Determining the fair valuation is more difficult with small companies
6.3 Clearly identify the comparative advantages
6.4 Be sure the business is sustainable
6.5 Good products don't always sell
6.6 Growth puts strains on small companies
6.7 Be sure of a route to exit and adequate cash resources
6.8 Shareholders can help unlisted companies
6.9 Be pragmatic with due diligence
7 - Price Behaviour
7.0 Prices go further than expected
7.1 Forget the old price
7.2 People often misjudge probability and logic
7.3 A price is an average of possibilities
7.4 The probability can be asymmetric
7.5 Be nervous when a market doesn't rally on good news
7.6 Don't day trade!
7.7 Avoid trading in options if you do not understand their pricing
7.8 Back your hunches with at least a small investment
7.9 Features of good trading models
8 - The Understanding and Use of Trends in Prices
8.0 There is statistical proof that market prices trend
8.1 Trends operate across commodities, currencies, interest rates, stocks and property
8.2 Trends have been in operation for a long time
8.3 It is not true that markets usually overreact
8.4 Trends are resistant despite being well-known
8.5 Trends represent the gradual dispersal of information
8.6 Price reaction is delayed by inertia and scepticism
8.7 A rising prices attracts buyers
8.8 Economic cycles breed market cycles
8.9 News against the trend is often ignored
9 - Market Timing
9.0 Combine fundamentals with price action
9.1 Ignore the noise in price movements
9.2 Don't be a hero - do not buy falling markets
9.3 Trade with the trend - wait for the trend before you enter the market
9.4 Add to winning trades, not losing trades
9.5 It is safe to be with the consensus
9.6 Do not use price targets or time limits
9.7 If the fundamentals have changed adjust the position accordingly
9.8 You will not get the high or the low
9.9 A powerful model shows probability is on your side
10 - Avoiding Temptation
10.0 Know when to stay out of the market
10.1 Identify what is difficult about the existing environment; it may change
10.2 Monitoring trends may alert you to opportunities you wouldn't normally find
10.3 With success, bank some profits
10.4 Negotiation is an art
10.5 The evolution of the con artist
10.6 Wealth preservation is not simple
10.7 Be sceptical of sophisticated retail products
10.8 Management and brokerage fees should be minimal in a passive portfolio
10.9 Follow these rules and be part of the hedge fund (r)evolution
About Richard Farleigh
Richard Farleigh was born as one of eleven children in the country town of Kyabram in Australia in 1960. He was placed in foster care at an early age and grew up in Sydney.
Despite a difficult start in life and being diagnosed as backward at the age of 5, he went on to win a scholarship to study economics and econometrics at New South Wales University, and graduated with first class honours.
Farleigh worked briefly in the Research Department at Australia's central bank, the Reserve Bank of Australia, working on economic modelling.
At 23, he passed up the opportunity for an academic career in economics and joined a leading investment bank, Bankers Trust Australia. There he worked for a number of years in designing and managing swaps and other derivatives. During this period he demonstrated a strong ability at trading financial markets, and was then appointed head of the bank's proprietary trading desk, which achieved spectacular results by predicting big picture trends and by using a trading model he developed.
In 1992 he was hired as head of a very powerful private hedge fund in Bermuda, which had searched the world for the best candidates. He was able to retire at the age of 34, and moved to live in Monte Carlo. From there he began investing in small companies which were mostly situated in the UK.
Over the years, he has invested in over 50 start-ups, many of which have floated or been acquired. One such venture has been Home House, a Georgian mansion which Farleigh as a backer and Chairman, help to convert into one of London's most fashionable and successful private members' clubs. Despite his early retirement and being affected by the tech wreck in the year 2000, Farleigh has become substantially wealthy and he has been named as one of the top ten entrepreneurs in Europe.
Apart from being keen on tennis, skiing and boating, Richard is an internationally ranked chess player, and has represented Bermuda and Monaco in the Chess Olympics.
Richard is one of the new Dragons in the current BBC series of Dragons' Den.
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