| From the mouth of a dragon |
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| As one of the ‘dragons’ on BBC’s hit business show ‘Dragon’s Den’, Australian Richard Farleigh has achieved fame on this side of the world as a ruthless ‘business angel’, always looking for a bigger share in the contestant’s company than entrepreneurs are willing to give. However, Farleigh is first and foremost a trader, having run a proprietary trading desk for Bankers Trust as well as a hedge fund in Bermuda. In his new book, ‘100 Secret Strategies for Successful Investing’, Farleigh shares the knowledge which enabled him to achieve such a level of success that he was able to retire by the age of 34. |
Another week, another investment book. But what distinguishes ‘100 Secret Strategies for Successful Investing’ from the pile is the author’s success to date as an investor and his common sense approach to the markets.
Today Richard Farleigh is better known as one of the ruthless dragon’s on hit show ‘Dragon’s Den’, but he spent his early career running a trading desk for one of Australia’s leading banks. Having emerged from a difficult childhood, he became one of Bankers Trust’s top earners, and his focus at that time was on predicting big picture trends and the effects on the currency and interest rate markets. This role led him to Bermuda where he managed a hedge fund – a job which meant that he was able to retire to Monaco by the age of 34. Since then he has operated as a ‘business angel’ backing early-stage companies, mostly in the technology sector in the United Kingdom.
His book outlines 100 ‘secret strategies’, or maxims, which he encourages investors to use to out-perform the markets. These include:
1. Fear the market: ‘Be like a lion tamer. The lion can be tamed, but only by maintaining a healthy fear of the lion’.
2. The quality of a company’s management is by far the most crucial factor in determining its success: ‘Good management will find a way to make their product work, while poor management can mess up good products’.
3. Look for the next Big Thing: ‘the beauty of big ideas is that you often have plenty of time to get involved’.
4. Prices go further than expected: ‘You will find that long after many others have sold out prematurely, you can persist, even if you are amazed by the market’s subsequent performance’.
5. Know when to stay out of the market: ‘Sometimes the best trade is not to trade at all. The fundamentals may be confusing and there is no clear trend in prices’.
An apparent believer in the ‘Efficient Market Hypothesis’, which asserts that prices on traded assets already reflect all known information, Farleigh warns that starting with an assumption that the markets are inefficient can be dangerous for investors.
However, he does recognise that the markets are not always efficient, and he gives the examples of:
- All the relevant information is not equally available to all buyers and sellers
- The buyers and sellers all have the relevant information but do not sufficiently understand the implications of that information.
So how do you exploit these inefficiencies? Farleigh recommends finding your own ‘comparative advantage’.
‘Everyone is a hero in a bull market,’ he claims, but if you want to make 12 per cent gains when the market only makes 10 per cent, then you need a ‘comparative advantage’. For Farleigh, this was focusing on investing in small companies – but he does admit one major diversion from this strategy which was to cost him big. In 1997 he financed a $1 million purchase of uncut sapphires from Sri Lanka, which today may be worth $3 million – or may be worthless.
So his advice? ‘Having very clearly identified your comparative advantage, you must continually remain certain that all trades and risky investments fit the criteria. Continually filter every decision with that in mind’.
Farleigh also warns investors to be sceptical of sophisticated retail products which offer a capital guarantee, and advises that ‘the more complicated the product, the more chance to disguise fees’.
‘To many investors, the lure of a capital guarantee, for example, can sound like a miracle because they can’t lose their capital. They are not aware that they are risking all of their interest income,’ he warns. |
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| Article appeared in the September 2007 issue.
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