Taylor – The Autodidact – Free Capital

The Autodidact

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 Taylor, who appears in Guy Thomas’s book Free Capital. His chapter is called The Autodidact.

Taylor – The autodidact

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

Unlike most of the investors in the book, Taylor had no formal training in finance.

  • Many of the others in the book were accountants, or had studied economics.
  • Others had taken the Society of Investment Analysts exams

Taylor left school at 16 with few qualifications, and instead read a lot of investment books.

Guy attributes this study partly to Taylor’s long-term ill health.

  • He has ME, and is for long periods almost housebound.
Early trading

At the time the book was written, Taylor was living in Yorkshire, with his mother and a dog.

  • After school, he briefly worked as a builder’s apprentice and warehouseman, and had a few brushes with the law before becoming a print estimator.

His father took him horse and dog racing, and Taylor started betting on the horses when he was 17.

He became unwell in 1994 and moved back to Yorkshire.

  • He began to invest in 1995 with £50K from the sale of his London flat.

In 2000 he transferred his old pensions into his SIPP, to give a total pot of £100K.

  • At first he put 90% of this with a discretionary broker, who put him in underperforming tech stocks (the dot com boom was over).

After a couple of years, Taylor took back the whole pot.

  • By 2010 he had grown this to close to £1M, with compounded growth of more than 25% pa.
Trading style

With a small pot, he began with a concentrated portfolio – always fewer than 10 shares.

  • Sometimes one or two shares would make up more than 50% of the portfolio.

To make a large fortune from a small one, you need to be a plunger.

Of course, it’s also a good way of making a small fortune from a large one.

Taylor used the Hemscott Company Guide, company annual reports and the FT as information sources.

Taylor’s initial style was GARP (Growth At a Reasonable Price).

  • This involves looking for “quality” companies with growing sales and profits and a defensible moat.
  • Unlike value investing, the companies need not be cheap – they just need to have rosy future prospects.

Taylor avoids using debt.

I don’t use leverage. Never have, never will. I am just not interested.

Scuttlebutt

Scuttlebutt is all very well, until it becomes spin.

Scuttlebutt is qualitative information (opinion) from industry insiders.1

  • It was first described by Philip Fisher in 1957.
  • We’ve come across it before in our articles on Excess Returns.

Since then a PR industry targeting shareholders has developed, and scuttlebutt has become less useful.

Taylor found this out first hand when he was heavily invested in Erinaceous.

  • Industry insiders told him that fraud at a subsidiary was contained, but he later learned that this was from fear of lawyers’ letters.
  • The firm went into administration soon after.
See also:  John Lee - Defensive Value and Dividends

Taylor also concluded that he should avoid companies with silly names.

Erinaceous means like or relating to hedgehogs.

Turnover

Despite – or perhaps because of – his portfolio concentration, Taylor has a very low stock turnover.

  • Only John Lee and Luke from Guy’s book are lower.

He explains this with a quote from Reminiscences of a Stock Operator:

It was never my thinking that made the big money for me. It was always my sitting. Men who can be both right and sit tight are uncommon.

I’m going to take this as a variation on Cut Your Losses And Let Your Winners Run.

At the same time, Taylor is not afraid to change his mind when the newsflow changes.

  • For many investors, negative news lead to re-framing in order to minimise its impact.
Macro trading in bear markets

In 2008, with a bear market underway, Taylor decided that his strategy might no longer be appropriate.

When the market falls 50%, it becomes much more difficult to find a few individual shares which you are confident will go up.

He switched to short-term macro trading of currencies and indices.

  • Because of his distrust of leverage, he used ETFs rather than spread bets to implement this new strategy.

This is too cautious for me – spread bet profits are tax-free, and it’s much easier to take short positions.

By summer 2009, when the next bull market had begun, Taylor switched back to his original approach.

  • I’m quite impressed by Taylor’s ability to quickly pick up on market cycles.

When conditions change, you need to change your approach. It is much better to be right than to be consistent.

Conclusions

This is a short chapter, with not much content.

  • Taylor uses a GARP strategy with portfolio concentration and low turnover.
  • And this leads to 25%+ pa compounded returns.

If only life were that simple.

Guy compares Taylor’s portfolio concentration with the advice from Buffett to treat investing as though you have a 20-slot dance card.

  • Once you’ve made 20 investments during your life, you have no more slots for new purchases.

It’s probably true that you will make fewer than 20 life-changing investments, but it seems to me that Taylor’s approach (and Buffett’s advice) work best at the extremes of the investment spectrum.

  • When you have a small portfolio, you are making big bets in order to grow the size of your pot.
  • When you are a multi-billionaire, you need to take big positions in order to move the needle.

For those of us in the middle ground – let’s say £500K to £10M – the safety and stability provided by diversification is very welcome.

I meet a lot of people with concentrated portfolios, and investors who buy only UK small-caps (or just trade FX).

  • They usually turn out to be trading £25K to £250K.

My question is always the same:

  • Will you be happy with this approach when you’ve grown your pot to £5M?

And if not, why are you happy with it now?

Until next time.

  1. Scuttlebutt is a navy term for a barrel containing water with a hole to drink from – it is thus broadly equivalent to the modern office term “water cooler chat” []

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2 Responses

  1. Guy Thomas says:

    Hello Mike,
    In reply to your final question, doesn’t your most recent previous review suggest that Sushil would answer “yes”?. (And Peter Gyllehammar, and Owen.) But your reaction: “to say I am surprised [at Sushil’s 100% smallcap strategy] would be a massive understatement” did make me think. Looking at it from the outside, I can see your point.

    I really like this series of articles. The book was written to be read carefully, so it is great to see someone reading it carefully. The general response to the book has been kind, but it is a bit disconcerting for a careful writer that most feedback is along the lines of “Liked your book, I read it last night!”

    Best wishes
    Guy

    • Mike Rawson says:

      Hi Guy,

      It’s great to have your positive feedback. I’m really enjoying working through your book in detail (though at this rate it will take another two or three years to complete).

      I try to look at each of the chapters (and also the other books I cover) from the perspective of a UK Private Investor operating today.

      The subjects have normally been selected for an interview because of their success, so it’s less a question of whether their strategy worked for them, and more whether I could recommend their approach.

      I’m sure that you are right that Sushil, Peter and Owen (and possibly some others) would answer yes. But for us mere mortals, the risks of a very concentrated portfolio outweigh the benefits.

      Mike

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Taylor – The Autodidact – Free Capital

by Mike Rawson time to read: 3 min