Richard Farleigh, the full time business angel and star of BBC’s Dragon’s Den series, shares his experiences as a very successful investor in his new book, 100 Secret Strategies for Successful Investing (Penguin).
Australian multi-millionaire Farleigh, a self-confessed “deal junkie”, has backed more than 70 small start-up British companies in the past 12 years - more than any other private investor in Britain. His investments have a “hit rate” of one in four.
Mr Farleigh shares his investment strategies and techniques with FT.com readers in a Q&A. ............................................................................................................................................
Given your very successful track record as an investor and trader, how best might others profit from the current market volatility and how is this market perhaps different than those highly volatile markets of the past?
Anne Fitzsimons, Dublin
Richard Farleigh: Perhaps the simplest way to TRY to profit from the market turmoil would be to look for oversold stocks. For example, some Aim listed companies that are below their cash value but are profitable and thus not eating into their cash. How is it different now? To me the markets appear to be increasingly correlated, so that weak house prices in the US have quickly affected other markets, such as the stock market and currency markets.
What would you say was the ’best’, surest route for the average Joe; someone with minimal financial resources, possibly even in a salaried position, but genuine intelligence and passion to achieving similar success to yourself.
Homer Sententia, US
Richard Farleigh: Well...everyone has to start at the beginning. If you want to try investing, start small and don’t expect it to be too easy - I have had plenty of luck along the way.
Which industries would you recommend investing in at present?
Chris Lewis, London
Richard Farleigh: The environment is a hot sector at the moment. Also anything that gets oversold in the current crisis. Technology is a fast moving area. Innovation is sometimes cheap and brings a lot of competition.
You started as a trend-follower. Why did you give that comparative advantage up and start to buy unlisted companies?
Steen Clausen, Copenhagen
Richard Farleigh: A lifestyle change! watching companies grow is nice after years looking at prices on screens!
Have you made any money from your Dragons Den investments?
Martin Conder, London
Richard Farleigh: Yes! I haven’t cashed in, but I reckon the £80k or so I put into Igloo (a refrigerated trucking company) is worth double or triple, and the entrepreneurs are on their way to being the first Dragons Den millionairs. The Reggae Reggae Sauce company has already sent out a dividend (after selling more than half a million bottles!).
What do you really look for in any start-up - people or their idea?
Richard Farleigh: Definitely people. Good people are unlikely to be wasting their own time on poor product ideas. Often when I decide to back someone, I also put a lot of trust in their judgement of their idea. On the other hand, the wrong people can stuff up the best product idea!
What is your biggest regret in terms of investments you have made or opportunities missed?
Neil Crossey, Belfast
Richard Farleigh: I have plenty, but with investing hindsight is easy! I signed a lock in agreement just before the tech wreck when a company called ARC floated.
In the six months that I was not allowed to sell stock, the value of my holding dropped from £45 to under £5m....so I regret signing that bit of paper! In general, investing is about probability, so it’s not too much use regretting bad luck, as long as your technique is sound over time.
First, thanks for such an excellent book. As a newbie to markets, I’m trying to keep capital in deposit and invest the interest as in Chapter 10 of your book. Could you please point out if there are any obvious problems with the above strategy?
Robert Wu, London
Richard Farleigh: Glad you like the book, thanks. As a newbie, just playing with interest earnings is a good way to learn while limiting your risk. Best of luck.
How do you evaluate management of the people you invest in? What qualities do you look for specifically?
SK Tan, Asia
Richard Farleigh: Drive and ambition. Common sense and intelligence. Signs of commitment. Friendliness, and if possible, a sense of humour!
What plans would you make when you don’t know the likely success rate of a planned direct sales marketing campaign? (I’m referring to an internet-based business start-up in investment services).
Christopher Hargreaves, UK
Richard Farleigh: I would try the normal technique and test the market a bit. Also keep some cash in reserve in case it fails.
Technology is a fast moving area. Innovation is sometimes cheap and brings a lot of competition. Is a good investment return possible with only a few bets? Are a lot of patents a secure way to big returns?
Herbert Rgheimer, Germany
Richard Farleigh: Diversifying is probably necessary for most tech investors, to smooth out the returns with the high risk. A patent is no guarantee of a good idea. Also patents need to be fairly comprehensive. A ”first mover advantage” is often more important than a patent.
What would you say is the key for successful investing?
Toshio Matsui, Osaka, Japan
Richard Farleigh: If I had to say one thing, the key would be to avoid mistakes. The media often portray the markets as readily predictable, and that leads many people to believe that it’s easy to make money. Remain a sceptic, even if you have some success.
When I look at a business I might see weaknesses and think OK, if I invest we can fix that. But a weakness in management is very hard to fix. How do you evaluate management and assess if they are up to the task ahead?
Martin Conder, London
Richard Farleigh: Try to take them out for lunch or dinner or a drink. Talk about anything - the cricket, politics, music whatever. See if they have passion and intelligence. Good business people have both. It’s like assessing a date! Not always easy, but you have to try.
Can you tell me what ratios you use to value a start up company?
Tom Francis, Manchester
Richard Farleigh: Whatever I can - the size of the potential market, comparative companies, money already spent....
In the main, are new businesses generated out of eureka moments? How do you know a good idea when you see one?
Mark Howell, UK
Richard Farleigh: I get tingles in the spine! I try to imagine if the idea could really have an impact.
When a business I invest in turns bad I have a rule not to invest more money without making changes to management. What is your view?
Richard Farleigh: I don’t agree, sorry. Sometimes it is management, but there are so many things that can go wrong, it’s not always their fault. Don’t tell them that though!
How do you manage to “police” so many investments at once? I personally believe you make money by selling companies, so getting in early with start-ups is the best way to go but. I am unsure of how to manage the time involved with multiple investments.
Greg Roumbies, London
Richard Farleigh: I’m on the phone a lot, chatting and trying to keep in touch with the mood of the management. I get involved only when I think they need me, and I try to back the right people in the first place.
What aspects of your career as a trader have helped you discern good investments?
Richard Farleigh: The best lesson from trading is to understand risk - that also applies in the business world.
The term “entrepreneur” is an often over-used term. What differentiates an entrepreneur from a prudent businessman or businesswoman?
Richard Farleigh: I guess entrepreneur refers more to a business person who projects his/her personalty on to a business. Vigin, EasyJet and of course Body Shop are clearly the results of entrepreneurs.
“Greed is Good” according to Gordon Gekko in the film Wall Street. How does today’s entrepreneur balance maximising short-term opportunistic returns, with letting a business gestate and develop for holistic and altruistic reasons?
Michael Franks, Marlow, Bucks
Richard Farleigh: I believe that in a fair and competitive environment, profitable businesses are good for society. They create jobs and produce goods and services.
Read an extract from 100 Secret Strategies for Successful Investing