Peter Thornhill is a well-known advocate for long term share investing.
He’s been educating others through his presentations and his book Motivated Money for almost two decades.
Peter’s teachings helped me make sense of the sharemarket and realise it’s not some crazy casino. It’s simply an emotionless exchange where companies can raise capital, and people can buy and sell existing businesses.
The craziness is what we as humans inject into the sharemarket (with our fear and greed) that gives it a bad rap.
There’s a lot of good content shared here. So please make sure you bookmark the suggestions for later on, because I’m sure you’ll get a lot out of them!
Peter Thornhill’s Investing Strategy
For those unaware, Peter’s core message is, we should be investing in shares for the growing income stream. Not focusing on capital growth or trading.
Over time, as company profits grow, dividend payments also increase, leaving the investor with little to do but sit back and collect the income.
As a side benefit, the shares will also increase in value because the company is more profitable – hence becoming more valuable.
Peter wrote an article detailing his approach over at FirstLinks: Give me the long-term predictability of shares, at any age. The comment section is also interesting.
I’ve written about the dividend approach on this blog too: Dividend Investing – The Perfect Fit For Aussie Early Retirees.
And I also cleared up many of the common misconceptions of the dividend growth strategy here. Alight, let’s get into the interview!
Q&A with Peter Thornhill – Introduction
How long did you work in the finance industry, and what was your role?
Peter Thornhill: I left school in 1965 having failed most of the matriculation subjects (year 12).
Dad got me a job with a bedding manufacturer, embroidered sheets and pillowcases, as an apprentice sewing machine mechanic. Soon realised I could cross that off my bucket list!
Applied for a job with National Mutual in the actuarial department and went back to night school to complete my final year. Got married in 1969 and changed jobs to work for a GM dealership arranging finance for new cars sales.
In 1970, took off with my new wife on an 18-month working holiday. Almost 50 years ago, a one-way economy airfare was $400! We spent 6 months in the US, then to London and didn’t return for 18 years.
Initially worked for National Mutual in their London office, on the princely salary of £11 a week. Applied for a job in 1972 as a clerk with a merchant bank. Ten years on, I had morphed from a clerk to running the new business department and, following the 1973 – 74 financial disaster, took over the care of hundreds of orphan clients as a financial planner.
In 1982, I was approached by Henderson Unit Trust Management to join them and open an office in the Midlands, Birmingham. Moved the family to Kidderminster in Worcestershire.
In 1987, following a successful period in the midlands, Henderson’s moved me back to London to take over the South East of England. In the process, was approached by Mercury Asset Management, a subsidiary of the merchant bank, S.G Warburg. They offered me a job, sales director, back in Australia, as they were getting involved with Potter Partners, a Melbourne based stock broker.
After moving to Australia…
Thus, in 1988, was born Potter Warburg Asset Management. I got mentioned in dispatches and in 1992, Perpetual Trustees approached me to join them as National Sales Manager.
They were about to launch the venerable Industrial Share Fund, previously an in-house trustee common fund, as a public offer fund. Moved the family from Melbourne to Sydney. Then, in 1995 MLC approached me to launch an industrial share fund, and so was born MLC Incomebuilder.
In April 2000, at 53 years of age, I resigned from MLC to pursue my true vocation; public speaking and wrote a book!
When did it dawn on you this ‘dividend growth’ approach was a great way to invest? Did it hit you all of a sudden?
Peter Thornhill: No, it was a process of osmosis. The period of financial planning in the UK laid the foundations. Here I was dealing with 3rd and 4th generations whose wealth had come from investing in shares, living on the income and passing the corpus to the next generation.
Wealth was judged by cash flow, not the size of ones toys. I presently invest in a listed investment company in the UK that has been around for over 100 years. It has just celebrated its 53rd consecutive year of dividend increases. This meets my benchmark but is not newsworthy!
What’s changed in the investment industry since you first became involved in it? And what’s stayed the same?
Peter Thornhill: The only thing that has changed, is the sheer volume of rent seekers that have entered the industry. Fund managers, soothsayers, fortune sellers, etc. All promising a quicker/better way to get rich.
What has stayed the same is the simple principle of wealth creation through human endeavour.
Has your decades of experience investing done anything to weaken or strengthen your income approach?
Peter Thornhill: No change, merely hardened. The pushback when I first arrived back in Australia, was what turned me in to the monster I am today.
Being told I was wrong, forced me to re-examine all that I had taken for granted in the UK, only to confirm I wasn’t. The pressure to conform was what eventually made me leave the industry.
Peter Thornhill and his thoughts on LICs (Listed Investment Companies)
You’re a fan of LICs (as am I). Can you explain why you like this vehicle so much? And do you have any favourite LICs?
Peter Thornhill: They are simple, they have been around for decades and suffer none of the structural problems associated with the managed funds industry. Too many people become slaves to their money. Money remains my slave so that I can focus on what really matters in life.
LICs enable us to sit back and get on with all that life has to offer. No favourites. My simple selection criteria is that they must have been going for a minimum of 50 years and the management must be integral. Reason for 50 years is that I am singularly unimpressed by the carpetbaggers who have entered the industry over the recent decades.
The managers from the funds management industry who have decided that a locked in asset base is attractive! They then launch a listed investment company and their management company then charges unconscionable fees.
What’s your thoughts on purchasing LICs when they’re trading at a premium to NTA. Some people like to only buy when they’re trading at a discount.
Peter Thornhill: I don’t ever think about it. Since investing in Argo in 2000, we have made a further 24 additions. That’s more than 1 a year. Do you know how much time I spent looking at the discount/premium – nil. I have better things to do. Ditto with the other LICs we own.
Do I lose sleep that a few of the parcels were bought at a premium? By the way, what about the other purchases that were bought at a discount. Perfection is a dream with hindsight.
Should we pick our own dividend stocks too, or should we keep it simple and buy LICs?
Peter Thornhill: If you seriously have nothing better to do and you are a qualified stock analyst, or fund manager.
Most people spend most of their lives wasting priceless time on things they aren’t good at. I counsel people to become brilliant at one thing and outsource their incompetencies.
What’s your thoughts on index funds (ETFs)? They also have low fees, similar dividend levels and low turnover. Or do you have an issue with the variable distributions due to the trust structure in general/other reasons?
Peter Thornhill: Yes, and liquidity. ETFs usually have a market-maker as the fund manager doesn’t provide a daily redemption facility. During the GFC, in the US a number of market-makers stepped back buggering up the liquidity.
Peter Thornhill on long term investing
Do you prefer to be fully invested the majority of the time or wait for opportunities? Does waiting make any sense?
Peter Thornhill: Waiting for what?
Are you saying don’t bother, just keep investing?
Peter Thornhill: Yes. This is the start of analysis paralysis. Wasting time every day watching prices.
Often, if they make a decision, the price may drop even further leading to regret which makes the next decision even harder. Or, a dead cat bounce starts it going back up, so they buy and it falls back again. The permutations are endless.
Labor may remove franking refunds if they get into government. Some investors may think this is detrimental to the dividend approach. Having experienced many changes over the years, can you put that into some context for us?
Peter Thornhill: Which ‘investors’? Imputation has only been around since 1987. What did investors agonise over before then? Other countries survive without imputation.
I assume you mean they’re not true investors if they’re worried about it?
Peter Thornhill: Correct.
What’s your thoughts on ‘total return investing’? The idea that we shouldn’t care whether our return comes from dividends or capital growth. And in retirement, we just withdraw a set percentage of the portfolio each year to live on, selling if need be.
Peter Thornhill: Bollocks! There are two elements here; certainty or pot luck. Dividends are reasonably consistent over time. If, however, you are cashing shares to supplement your income you will be exposed to the fluctuations in share prices which may see you selling shares at a less than ideal time…. GFC anyone?!
Eating the seed corn is how civilisations implement Darwin’s theory by self-selecting themselves out of the human race. If you have a use by date on your birth certificate, it might work.
Sadly, if you retired too early with too little you have no choice.
On that, do you think in terms of living off say 4-5% of the portfolio each year, or do you simply think in terms of the cashflow the portfolio is generating, whatever level that may be?
Peter Thornhill: The portfolio tells me what our income and lifestyle will be, just as my employers told me what it would be for all those decades.
Nothing magic happens when you retire, your income remains subject to all sort of vagaries that plague the human race. Toughen up princess!
You’re a fan of using debt to buy shares. Specifically using home equity to build a larger portfolio and debt recycling to pay off your home sooner. What LVR do you consider safe? Or do you simply think in terms of whether the income + growth is going to be higher than the interest payments?
Peter Thornhill: Spend less than you earn and borrow less than you can afford. Huge debt is just plain stupid however, I understand that everyone wants to get rich quick. Time will do all the hard work if you have the patience.
It has always struck me as odd that if I tell people someone was negatively gearing into an investment property, he would be congratulated on the clever tax deduction he was generating. So why is it that losing money on property is clever when, with shares, everyone wants to see the book balance, i.e. income coming in equals income going out.
Why can’t one negatively gear into shares if it is such a slick idea? It certainly beats negatively gearing into property. Rents don’t increase like dividends do. Nor do you get franking credits with rent. Also, the holding costs and maintenance costs with shares are zero; unlike property!
Diversification and the risks of only investing in Australia
How should we approach living on dividends in a recession- just a cash buffer of 2 years spending as you’ve suggested elsewhere? Any mental advice for dealing with downturns?
Peter Thornhill: Yes, over the last 117 years we have never had a period where there has been more than 2 years of consecutive negatives. Besides which, why are people incapable of dealing with a little bad news?
Fear is based on ignorance and the sense of entitlement rules. Anyone who believes that governments are in control will always get a nasty shock.
The Aussie market is heavy in financial stocks iike banks. Is that a concern? Or are you happy to roll with the market and hold whatever are the largest dividend-paying stocks of the time?
Peter Thornhill: No. We have some superb global companies that far outweigh some of our largest companies; CSL and Cochlear immediately come to mind. Besides which, what would I know about shares to make me concerned?
You’re not a fan of traditional diversification. Do you think we need to add international shares to protect against an Australian specific risk, like poor management of the country or another type of catastrophe – whether banking/housing crisis etc?
Peter Thornhill: Not really. I think it is overplayed for most domestic investors. Also, events are not ‘local’, they are all global. The GFC being a classic example of sheer stupidity exported all over the world.
Do you think the Australian economy/sharemarket will continue to prosper in an increasingly technology-driven world?
Peter Thornhill: (Yes), with leadership which, sadly, is hard to come by. We live in the world, not Australia.
Some investors like to add an LIC which focuses on small/mid size companies to add a bit more diversification due to the concentrated nature of the Aussie market. Your thoughts on that? Or do you think the old LICs are diversified enough?
Peter Thornhill: Is 100 companies enough? I’m comfortable that over the last 40, 50, 60 years, the older LICs have done the job; a steadily increasing income stream.
Business (Industrials), Resources and Property
Can you elaborate on why you say productive enterprise sits at the top of the food chain? Purely its role in society and wealth creation?
Peter Thornhill: It reflects the endeavours of the human race. If you believe that human endeavour will come to an end, then you could consider investing in something else, but I’m buggered if I can think of what will replace it.
You’re not a fan of mining or property. Is that due to their performance over certain periods or is it also philosophical?
Peter Thornhill: Both. If mining companies are a great investment, why don’t other companies stop what they’re doing and take up mining? Sadly, the cash flow from mining is erratic in the extreme and fails my benchmark.
If property is a great investment why do banks lend you money to buy property? Why do all the listed property companies not invest in property but sell it to you?
Why has no successful listed residential property trust ever survived? And why are companies getting their (commercial) properties off their balance sheets?
As a comparison, here are the returns of Listed Property against Australian business (ex resources) as represented by the Industrials Index.
Dividends must increase with inflation for this strategy to work. That has certainly been the case up until now. What convinces you this will continue long into the future?
Peter Thornhill: If it does not occur, then clearly no one would ever start a business, as there would be no point. We would all sit around and day-trade residential property, until we realise that there are no longer any companies providing the everyday needs we take for granted.
If you are running a business and your profits are not growing with inflation, then you are going backwards, with one inevitable result.
The good news is, you won’t be doing it for too long!!
Final advice from Peter Thornhill on staying the course
Any advice for investors when their LICs are underperforming?
Peter Thornhill: If you don’t have the discipline then don’t bother starting. You are only going to frustrate yourself and curse all those who make it.
Let’s go back to my benchmark for performance. I’m doing this for the growing income stream!
Refer back to the beginning; what about my UK LIC that has had 53 years of dividend increases. Where is the underperformance?
What are the biggest mistakes (behavioural or otherwise) you see investors make?
Peter Thornhill: NO discipline and too damned impatient.
What helps you personally stick with your strategy and stay invested with an ultra long-term outlook?
Peter Thornhill: Benign neglect. I’m too busy romancing my wife all over the world to bother with trivia.
Anything you’d say to a new investor considering this approach and wondering whether it will work for them – how would you convince them?
Peter Thornhill: I wouldn’t. Decades of presenting have made it very clear to me that a small minority intuitively get it and act. The bulk of an audience enjoy the presentation and do nothing. And the remainder hate me for exposing them to the mistakes they have made.
Could you tell us the size of your portfolio and the level of grossed-up dividend income it generates? This would help readers get an idea of what’s possible with this strategy.
Peter Thornhill: Currently around $11 million. The dividend income on our return to Australia in 1988 totalled just under $1,000. Last year, our total investment income was approximately $400,000.
Anything else you’d like to add, or you feel is important to highlight?
Peter Thornhill: Matching! Two savers in a relationship is nirvana. Two spenders is cosi cosi (so so). A spender and a saver is a disaster. One party will forever white ant the efforts of the other.
And finally, why do you think more people don’t follow this approach?
Peter Thornhill: Fear, pure and simple, based on ignorance. It looks like a casino and they have not the slightest understanding of the drivers of share VALUES. The sole focus is on gyrating prices and endless, mindless commentary.
To sum this up, here are two charts. The first one shows how most of us look at the returns from the sharemarket.
And the second chart is how Peter looks at it.
Peter simply looks at where the market started, and his return up until today. He doesn’t bother with or care what happened in between to get there.
And as a final point, here is what Peter calls the ‘mothership’ slide – the foundation that the dividend growth strategy is built on.
Because of this, I feel it’s the most important picture of all!
It’s a chart showing the dividend growth of Australian business (excluding resources) since 1979.
No income reinvested. No money added. Just the pure and simple, growing income stream.
Personally, one big takeaway from this chat, is to be disciplined. Stay true to your strategy through thick and thin. If your underlying investment philosophy is sound, there is no reason to change course or second-guess yourself.
Also, to do better in the market, most of us should (ironically) ignore it completely! Simply continue to buy shares in your chosen investments and forget about it. Spend your time doing more productive and enjoyable things!
Admittedly, I’m guilty of being too enthusiastic about investing and spending too much time on it.
And as for the market’s wobbles and setbacks? Well, we just need to harden up and deal with whatever happens. Think of it as a constant game of ‘three steps forward, one step back’.
Another thing Peter reminds us, is the power of investing in business as a whole.
The relentless progress that’s made through innovation and technology, as well as the productivity, ambition and determination of other humans, is what underpins the sharemarket and our wealth in society today.
Let’s thank Peter for sharing his thoughts with us and being so generous with his time to answer our questions.
And don’t forget you can get Peter’s book on his website – www.motivatedmoney.com.au – which I highly recommend.
I’m sure you’ve enjoyed this Q&A with Peter Thornhill as much as I have. And hopefully it answers some of the common questions I see regarding this strategy and his message.
Please share your thoughts in the comments. As always, thanks for reading!
By the way, if you’re interested in the spreadsheet I use to keep track of my annual dividend income over the years, you can get a copy of it below.