Beforehand, I had read a lot about the bloke. His style and perspective on the way he treats investing is not what you'll get from everyday media. He spoke for two hours straight and it tuned me in the entire time. Even as someone who went in knowing the angle he would present, I was impressed he challenged the audience to rethink and our reasoning for investing.
I took a few notes and have summarised some takeaways/lessons he shared.
I should mention first, that Peter Thornhill is a stringent investor of Australian Listed Investment companies. His focus is on buying assets that provide income (read: dividend paying shares) and doesn't speculate (buying for capital growth).
He's been buying and holding these equities for decades, and now reaps the benefits of a passive income in retirement that is worry free. He still speaks and presents to de-bunk the notion that shares are ‘risky' but rather that cash and property is the riskiest investment you can make.
Here are some of the takeaways I want to note:
General financial understanding and strategies
Initially, Peter started with an introduction to how to get yourself ready to invest and the higher level strategy to win from it.
Perception is reality
This was the theme of the night.
We all have our different perception of what things are. I think of myself from one angle, others form a different view.
We tune into what we like to hear – that mate who's property value has skyrocketed, the horror day on the stock market.
Peter explained the difference between investing and speculating. Investing being a purchase of something that generates and income whereas speculating is hoping the difference in price from buy to sell increases.
Our perception of what is an investment was challenged. Is a hand bag an ‘investment piece'? What about a car?
There's only two rules
This was made simple right up front. To clear a path to financial independence you must follow these two rules:
- Spend less than you earn
- Borrow less than you can afford
This wasn't a specific point he made, but something he glossed over which I thought applied. During his entire time working, even with good incomes and not he still consistently put aside money.
Peter noted the 95% of people (not a real statistic) fail with their long term financial plans because they can't stick to it.
Peter Thornhill has been investing the same way for 30 years. Buying into LICs, never selling, reaping the dividends and continuing on.
He didn't jump out during the GFC, or when interest rates were high. He went all in and it has paid off for the man. His current salary in retirement is pushing $400k of passive income.
It's easy to be distracted but the new shiny opportunity (investment properties in a up-and-coming area, bitcoin or a mates business) but in reality find a tried-and-true method then repeat and don't stop.
The media play with our loves and fears
Can you recall newspaper headline claiming ‘billions wiped off the stock market' in a day? How about one saying ‘investors happy after earning billions in one day'? Negative news sells.
Our media is skewed to reporting the awful times better than the good. Since the GFC our markets have risen and risen. Superannuation funds have seen long term growth that exceeds what we lost during the 2008/9 wipeout. It was purely a correction and happens every now and then.
What also happens is that the stock market consistently delivers returns, growth and performance to investors.
It's easy to write a book about the great depression, and much harder to get people to read a book about someone getting rich slowly and passively.
Peter Thornhill wants to be PM
Ok, not really something you can adapt to your finances but his aspirations here were amusing. As PM he would shut down the ASX for all but one day of the year. You buy and sell on that day and be done with it for another year. What it would mean is no stock tickers, not constant chatter, no paranoia and citizens would move onto living.
In place of having the market open each day, instead we'd be given an update on what our property is worth. Every day we'd get reports from people on how they feel knowing their house has gone up $30k, down $2k, stayed the same, etc.
Peter would challenge the perceptions we have based on what data and media is available to us. For shares, we know every working day what a stock is worth and can understand our money made. For property we only every know when we buy and when we sell.
Perceptions of investing
The next topics for discussion moved more to the tactics of investing and what Peter Thornhill looks for most.
The Industrial Index is where it's at
Peter illustrated the strength of the industrial index in Australia.
This index is the Australian All Ordinaries minus resource stocks (mining). His belief is that man has never made money from digging things out the ground and the charts can prove it. His notion is that if there was money in it all the banks etc would get involved and get digging!
I've read that Peter follows a few indexes, mainly ones which cover the entire range of sectors, but one example is the S&P/ASX 200 INDUSTRIALS Index (XNJ)
He also mentioned that the industrial index could be even stronger if property was also knocked out. These are commercial property trusts, primarily land that is rented out tenants.
Whitefield is an example of a LIC that invests to beat the Industrials Accumulation Index over 5 year periods.
You can do a lot worse than doubling your money over 10 years like the WHF investors have done (with zero additional costs needed). This is before franking credits as well so you'd be even more ahead
Forget the yield trap
This was probably my biggest new observation of the night.
Peter highlighted the insignificance of a yield in the form of a percentage.
Yield is your income over price of the asset – or dividends received over stock price.
For example if you get 5 cents on a $1 stock you make 5% yield. Yield makes sense when you are looking at term deposits as the rates determine the amount of return, but on shares like our famous LICs its the other way around. The amount you get returned determines the rate/yield. Yield only illustrates the difference between income and growth.
The beauty with shares like LICs is that the share price will rise and your dividend will rise, the gap between the two does not. You dividend per share (DPS) is much more relevant. Over time, LICs can control and increase the amount you get paid. Over the long term the DPS increases for market growth and performance whereas a term is limited to the % amount allocation.
Confused? Let's try and write and example.
If you bought Argo investments in 2013, you would have got a 26.5c per share dividend that year, in 2018 you would have received 31.5c per shares. You now enjoy a growing return without any extra outlay or effort.
In 2013 the share price was 6.29, 26.5c is a 4.21% yield in the year you bought, but in 2018 the yield would be 5.00%
The yield percentage listed is only ever comparing the price of the stock at present against the most recent full year dividend.
If you bought the share at the 2018 price of 8.29, a 31.5c return would be a listed as a 3.8% yield.
Over time, as long as you hold, the dividends will increase and you will enjoy more and more dividend growth
Peter's emphasis is more on the dividend per share (DPS) and earnings per share (EPS). For good companies these should increase, giving you a higher yield percentage wise each year.
If you bought Argo at $5.16 in September 2003, 15 years ago, a 31.5c full year dividend would be a 6.10% yield.
Still can't work it out? Let Peter Thornhill himself explain.
Good investors don't own property
I love to hear arguments against property, because they call out so many assumptions we make about it as an investment vehicle.
There is a reason Bunnings, Woolworths, Westfield don't own the property they operate on – it doesn't make money! There is only money to be made by being in the building, not owning it. Businesses don't want to own their buildings
Peter's phrase was “Property is a dead weight on the balance sheet of a wonderful business”.
I like to run my family finances like a business and with an investment property on the books it triggered me immediately.
He shared examples of buying Westfield (WFD) stocks early on, that over 15 or so years payed out dividends that covered cost of the original investment. No what kind of property income could do that?!
Peter Thornhill in closing
Towards his conclusion, Peter wanted to iterate two more notes that would hopefully hit us and force action
The market is at an all time low right now!
Peter left us with this gem.
He pointed to every year in his chart from the last 30 years and explained that every year he bought the market is at an all time low, so get buying! 200 years of upwards trends can't be wrong.
It'll only continue on it's merry way and we can benefit. Prices always look cheap 10, 20, 50 years later. Same can be said for property but it doesn't make you an income!
So go home and get children to face their future rather than the past
Keep it simple.
It doesn't matter whats happened in past, its the decisions we make now. Do we want to believe the media or look at the facts and absorb what's real and balanced.