Eric – The Networker

This article is part of our 'Guru' series - profiles of successful traders, with takeaways for the UK private investor.
You can find the rest of the series here.

Today’s post is a profile of Guru investor Eric, who appears in Guy Thomas’s book Free Capital. His chapter is called The Networker.

Eric – The Networker

Eric is one of the investors in Guy Thomas’ book Free Capital.

I usually describe the people in this book as anonymous, but in this case it’s not true.

• It’s become widely known in the UK investing community that Eric is David Stredder, known on twitter as @carmensfella.

David runs regular investor dinners in Beckenham, Kent under the banner Mello (( The name of the original restaurant they were held in )) and the less regular Mello conferences (this year there were three – in Derby, Kent and Chiswick).

• He’s also a director of the ShareSoc lobby group.

For the purposes of today however, I’ll assume that I remain unaware of his true identity.

As Guy points out in his introduction, most investors are loners.

• Investing is a private and individual act (putting your money where your mouth is).

But Eric is a networker – with company directors and other investors, at AGMs (he attends 50 a year), investor presentations and directly through phone calls.

Background

Eric was born into relatively poor circumstances in Blackpool, where his father ran a grocery home delivery service.

• At 11 he won a scholarship to a private school.

Eric began wheeler-dealing at an early age, hustling a game I’ve never heard of called Elton Derby on Blackpool beach.

• He decided not to go to university, instead starting his career as a trainee sports journalist.

He eventually ended up in property, and built up a lettings agency that he sold at the age of 40, having gone full-time at age 28.

• He didn’t entirely give up property however, and still does the occasional development project.

Shares

Eric has dabbled in shares since the 1980s, but became serious about it in 1997 when he sold his business.

Unlike most people, Eric did well on small stocks during the dot-com bubble, but lost money on large tech stocks in the bust.

• Since then he has focused on small caps.

As Eric sees it, they are less well researched, and yet easier to research.

• The accounts are simpler and the directors are more accessible.

But they are so small and illiquid that institutional investors can’t buy them.

Guy describes the enormous lengths that Eric went to in order to discover information on northern England house-builder Ben Bailey, in which Eric had invested one-third of his portfolio.

• In 2007 the firm was taken over for 10 times what Eric first paid for it.

Eric’s other successes have tended to be:

Traditional dividend-paying family companies, often with a Yorkshire connection, or at least a Yorkshire mentality.

He also had impressive gains (on smaller stakes in) high-tech growth companies.

Guy says that Eric’s edge comes mainly from disguised enquiries about current trading levels.

You can’t always get an inside track, but you often find someone who lives near the stadium.

I’m not trying to have difficult conversations. But in the end I think that success depends on the number of difficult conversations you are willing to have.

Guy notes that Eric is a good listener, having being a Samaritans volunteer for several years.

Eric doesn’t used financial analysis, having had no training in it.

• Indeed, many of his biggest failures have been companies with complicated accounting (large discrepancies between profits and cash flows).

Portfolio management

Eric usually has holdings in more than 50 firms, but most of the value is in a dozen companies.

• He uses a small traditional private client broker, but also uses spread bets for what he thinks will be short-term holdings.

He also usually has a dozen short positions, which are smaller than his longs, and show a lower hit rate (55% vs 77% for longs).

Low profile

He often builds up large positions in small companies, but avoids breaching the reportable 3% level as he prefers to maintain a low profile.

• Similarly, though his activism has resulted in other private investors becoming non-execs at firms, he’s never taken such a position himself.

Tools

At the time of the interview, Eric used the phone for all trades.

He hasn’t made much use of ISAs or SIPPs, since he draws a lot of money (£10K per month) to support a large family (eight children and step-children).

• Interestingly in this context, he likes the tax-efficiency of spread betting.

Selling

You can’t hope to sell all at the top. You have to sell into demand when a share is still rising -­ feed the ducks when they’re quacking.

I am always slicing the top tenth or so off holdings which are going up.

Conclusion

Painstakingly collecting scuttlebutt sounds too much like a real job for me, but Eric seems to thrive on it.

Like many algorithmic traders, “networking” is a black box strategy.

• There’s no actionable methodology we can learn and apply for ourselves.

Eric’s chief tactic appears to be getting in on sales growth before the wider market realises, and then hanging on for the ride.

His second edge – a focus on small companies – is better known.

• But the exclusive use of (UK) small caps is risky, and throws away the benefits of global multi-asset diversification and trend-following.

Similarly, Eric seems almost uninterested in the UK’s generous tax breaks for investors (apart from the exemption on spread-betting gains.

• And at the time of the interview, he was ignoring low-cost online brokers.

This kind of approach demand a particular set of skills – and a personality type – that I’m pretty sure I am lacking.

So I’ll stick to the numbers – which have become ever easier to crunch – and to the three pillars of investing:

1. Asset allocation
2. Costs, and
3. Taxes

Until next time.