Taming the Lion

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, www.bbc.co.uk/dragonsden

An excellent investment book…

• 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