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Thornhill on shares for investment income in retirement

This is an edited transcript of a recent interview between James Gruber and Peter Thornhill, on Morningstar's Wealth of Experience podcast.

Peter is a financial commentator, author, public speaker and Principal of Motivated Money. His investment philosophy involves owning high quality industrials and LICs, and holding them forever.

James Gruber: Peter, welcome to the Wealth of Experience podcast.

Peter Thornhill: Thank you.

Gruber: Are they [LICs] your primary investment?

Thornhill: They are now, they were not back then [before he left his employer and started his own public speaking business]. Because when I was working in the industry still working for fund managers, the likes of Peter Morgan, Anton Tagliaferro, John Murray, et cetera, I would often follow their advice, I would buy individual shares. So, I left the industry owning quite a substantial number of individual shareholdings, direct. I have been unwinding those and unwinding them faster and faster now and redirecting it all to listed investment companies.

Gruber: Okay. So, let's get into your overall philosophy. It's long-term, it's primarily industrials, it's steady dividend paying companies or LICs. You don't want volatility in those dividends, you don't want them paying out dividends in full one year and then zero the next year. What do you look for in an investment?

Thornhill: With the listed investment companies, it's quite straightforward. They have a history, a long history, and that gives me the comfort, particularly the City of London [an investment company that Peter's held from his time living in London], 162 years. How many staff changes have occurred in 162 years? But they have not been talking about their amazing bottom-up approach, their value approach, blah, blah. They have stuck strictly to a very simple investment goal, to increase the capital over time and to produce an income stream that grows over time, full stop. That's it. And clearly in 162 years the staff has changed, but that specific target has been matched every single year, decade, et cetera. And it's that consistency that I'm looking for.

Gruber: You do advocate industrials primarily. Most investors' portfolios are filled with banks and miners in Australia, given that they are a large part of the indices. Why do you say that investors should largely stay away from them?

Thornhill: The banks I've got no problem with, it's purely the resources. Digging stuff out of the ground, it's okay, but it's cheap and cheerful. I mean, to give an example, if I'd invested $100,000 in the industrial index 42 years ago, it would now be worth $2 million in price alone. The All Ords, it would have been worth $1.3 million, and the resources, it would have been $1.3 million. Now, if I reinvest the dividends over the 42 years, the $100,000 in industrials becomes $15 million. The All Ords gives me $8.3 million, and the resources gives me $5.2 million. Digging stuff out of the ground is not what I consider to be a great investment. It is the value add from the technological, the manufacturing and the intellectual inputs that occur within quality industrial companies that make all the difference.

Gruber: Do you advocate that investors hold on to their investments that they don't sell even if markets take a big tumble?

Thornhill: Well, if markets take a big tumble, the last thing you do is sell, wouldn't you? But I say that with a smile on my face, because to be honest, fear is based on ignorance. Knowledge is power. If you are frightened – and this is something that's annoyed me for decades – volatility has nothing to do with risk. Volatility is merely a function of the liquidity. Why was it during the GFC that a whole load of people sold their Commonwealth Bank shares and they went from $64 to $26? Are you telling me that Commonwealth Bank lost more than half its business? No, sorry.

Gruber: So, what should investors focus on? CBA drops, as you say. What should they focus on? Should they focus on the dividend? How do you get around that from an investor point of view? How do you stay focused?

Thornhill: It's very hard. It's almost impossible. Every day, the media has commentary on individual companies. Can you tell me how often the media talk about the dividends? They only are paid twice a year. Share prices are fluctuating every single day. So, there's a whole lot of useless information being pumped into people's faces. Turn the television off and focus on the important things in your life – your family, your career, and friends. People are becoming slaves to their money. Money is my slave. It's out in the back room doing all the work and I'm at the front of the house having all the fun.

Gruber: I imagine some people would find that difficult. They may not have the psychological makeup to do that.

Thornhill: Correct.

Gruber: Is that key in this kind of philosophy?

Thornhill: Yes, and if you don't have the willpower to be able to absorb all the media commentary, you can't switch it off mentally, then you're going to have one hell of a life. You're going to be spending an awful lot of your time worrying about something in the background when you should be focusing entirely on your family, career and friends.

Gruber: With the LICs, you've mentioned a number of them there, can you go through a just to – give us some examples of why you like them?

Thornhill: The best example is the recent COVID smash, if you like, where a lot of companies, individual companies, because of the sheer uncertainty, reduced their dividends, some companies cancelled their dividends for a period of time until sanity returned, and the fear began to drift away. But during that period, the listed investment companies were able to use their retained profits to help stabilize the dividends. And it's that element that I love. And it just – as I say, listed investment company around for 162 years, 56 years of unbroken dividend growth. I love it. It's very simple. I don't worry about a thing. In fact, I was interviewed after the Global Financial Crisis and the interviewer asked me what was on my wish list. And I said, oh, another Global Financial Crisis, please. And there was hesitation. He said, but Peter, why would you want another Global Financial Crisis? I said, I'd like to buy some more Commonwealth Bank at $26 because I didn't go hard enough the first time around.

Gruber: What would you advocate an investor do? Say, they were starting off now with a portfolio, how should they go about buying LICs on the ASX? Should they wait for discounts, average in? What would you advocate?

Thornhill: If they're uncertain, dollar cost average. So, if you've got $20,000, depending on how frightened you are, dribble it in at $2,000 every three months or something like that. That way you can congratulate yourself. When you bought up here, you keep quiet about when you bought down there, then up, then down, then up, then down, then up, then down. I mean, it's a pity that that would even be an element in their consideration. But unfortunately, as we've already discussed, different strokes for different folks and depending on their attitude towards the market and its volatility. I've never been particularly fast. Over the decades, I can honestly say, I bought high, I bought low, I bought high, I bought low. But if you take the line of best fit between all those high lows, guess where the line has gone? Upwards, for 40 plus years.

Gruber: You've got quite the investor following, and I assume that you've been able to get through to these people your philosophy and the others have kind of fallen by the wayside, the ones that aren't psychologically adept at implementing your philosophy. Is that a fair description?

Thornhill: Absolutely. And after 30, 40 years of presenting, I can say the feedback from thousands of presentations, my best guess is 10% of the audience intuitively get it and act, 80% enjoy the presentation and do nothing, the other 10% go away absolutely devastated because I've just run the sword through whatever fancy investments their family had been put through. I've actually had people walk out. So, I'm there for the 10%. I'm sorry, but all the rest, if they're not up to it, that's cool. I'm there for the 10%.

The full interview with Peter Thornhill is available on Morningstar's Wealth of Experience podcast.

Peter Thornhill is a financial commentator, author, public speaker and Principal of Motivated Money. He runs full-day courses in the major capital cities explaining his approach to investing "in the vain hope that not everyone is frozen with fear".

This article is general in nature and does not constitute or convey specific or professional advice. Share markets can be volatile in the short term and investors holding a portfolio of shares will need to tolerate short-term losses and focus on a long-term horizon, and consider financial advice.

 

15 Comments
Rich Cousin Pennybags
September 13, 2023

In my opinion there is nothing wrong with following Peter's advice and investing long term in LICs or UK trusts, and playing on the sidelines by speculating in resources, speccies, whatever else for a bit of fun.

Fund trustee
September 14, 2023

Except that it doesn't deliver the best outcomes over the long term! Any well constructed growth option in super funds, which includes global shares as well as domestic, has beaten the local industrials market by at least 0.5% per annum over the last 10 year or so.

I get really frustrated with the number of people who accept simplistic advice like this, and then berate their super fund for allegedly not delivering, when the truth is that the Growth Option in super funds does better!

Arghhh.

Look it's a sound enough strategy, but please go with it knowing that you might be leaving something on the table by not using better investment optimisation analysis.

Rich Cousin Pennybags
September 15, 2023

Sure I've got no issues with what you say. For my super I've done exactly that and just put on the high growth option with an industry super fund. I am talking about my own investments outside of super. I'm up over 100% on several names over the past 12 months. This easily cancels out any laggards or losers. The profits go to paying off the mortgage or invested using the Peter Thornhill method. We all need to find our own way and stick with it.

Peter Thornhill
November 26, 2023

Yes, we should all be trained in “investment optimisation analysis”. 

SGN
September 08, 2023

We invest in ETF not LIC.
ETF meets our purpose divid 4 times a year with imputed credit.
Easy to hold and trade. eg STW SFY IOZ ILC fits well with our retirement strategy,
ILC had there days and was only popular because ETF were not around that is my view.

CC
September 08, 2023

LICs can smoothen dividends using retained profits providing a steady increase unlike ETFs which can be lumpy and vary from year to year. At tax return time LICs are so simple, just dividends and franking credits, whereas ETFs can be a complex mess. both have their place.

KS
September 08, 2023

The annual tax statement of ETF may contain details on adjustment to the cost base of the EFTs. A cumbersome process to keep track of the annual small adjustments to cost base of the holdings every year for calculating capital gains purpose when the ETFs are eventually sold.

John
September 08, 2023

Peter - if your 'industrial only' strategy is so good why is there only one LIC (Whitefield) that follows this strategy?

Why don't the ETF providers launch a XJIAI fund?

Peter Thornhill
November 26, 2023

Don’t know and don’t care. Wouldn’t touch an ETF with a barge pole.

CC
September 08, 2023

I personally believe it's a mistake to leave out the Resources sector completely. The world is very different to what it was 30 years ago with geopolitical tensions and new technologies making mineral security more critical and Australia has some of the world's best mining companies. Unlike 30 years ago they now pay hefty dividends too and investors have done very well indeed from BHP, FMG MIN. etc over the past 10 years admittedly with volatility. Australia's "industrials" is far too concentrated in mature low growth companies namely banks, Telstra, insurance and REITs.

Edwin
September 16, 2023

Agreed. Things have changed. The Industrials have been a laggard in last 5 years.

Craig
September 07, 2023

so very true-the real victims are the family offices who get conned into believing more complicated is better, because you are rich you need "special investments".

Dudley
September 07, 2023

https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200-industrials Select: . "TOTAL RETURN" . "Compare" .. "S&P/ASX 200 RESOURCES (TR)" . "10 YEAR" No significant difference. 40 years ago, Australia had some industry and China's was years away from WTO membership.

Peter Thornhill
September 07, 2023

Are they the accumulation or price indices?

Dudley
September 07, 2023

"PRICE RETURN" is dead clear; which flavour of "TOTAL RETURN" in graphs is not abundantly obvious.

Follow links:

Industrials: https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200-industrials

Methodology: https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200-industrials

Download: https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-asx-australian-indices.pdf

***--> Pg 16: Calculation Return Types <--***

Greatest interest: "Franking Credit Adjusted Total Return Indices"

 

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