Brent Potts: Corporate raids with Kerry Packer, Black Monday – and three investing lessons

Lessons for current investors are practically leaping out of the recent podcast interview Centennial Asset Management's Matt Kidman recorded with broking veteran Brent Potts. In a career spanning more than half a century, he's seen it all.

• Kerry Packer’s corporate raid of Westpac in 1992
• The 1987 “Black Monday” stock market collapse
• The near-demise of broking

These are just some of the topics traversed during the chat. And from all of it, Potts – who built the Potts West Trumbull broking firm before selling it and starting from scratch – distils insights that are (almost eerily) prescient and relevant for the investors of today.

You can catch the full recording here. 

It’s a 45-minute listen, but Pott’s dulcet tones and razor-sharp recall, teased out by the insightful questions of Kidman (a fund manager and former journalist), kept me glued to my headphones.

These are some of the highlights:

With Australia’s oldest bank today opening at around $24 a share, it’s strange to think Westpac stock traded at $3 in 1992. That’s when Brent Potts helped late media tycoon Kerry Packer – once considered as one of Australia’s most powerful – raid the Westpac (ASX: WBC)  register and ultimately scoop a 10% stake.

“When it dropped below $3, [all the brokers] knew they’d be left with a pile of stock because there was going to be a shortfall,” said Potts.

“They quickly sold what they had. And in the end, the shortfall became available and that’s where Packer bought the bulk of his holdings.”

Timed impeccably, Packer’s move coincided with Westpac’s near collapse, on the back of a then-record $1.5 billion loss ($3 billion in today’s money) spurred by a $2.7 billion bad debt equal to more than 40% of the bank’s tier one capital buffer at the time. The stake Packer held after his successful move would today be worth almost $8.5 billion – wouldn’t Jamie love to hold that in his war chest today?

The 1987 market collapse

Rolling back the calendar further, Potts reflected on the global markets carnage that unfolded around Black Monday. A staple topic on Livewire and in the broader financial universe, many have said – as did Potts – that the world seemed to be falling apart. There’s a common view this was a make-or-break moment for many in the world of finance.

“A 30-year-old today hasn’t lived through something like the 1987 collapse,” said Potts.

“When you look at a chart today, from the 1987 collapse going out to 2022, it looks like a blip. But it was five years before [the market] recovered.”

Why? Because of leverage, which was at then-record levels among business entrepreneurs and the international broking community – of which Potts was part.

Pay attention to this point because it feeds into the key lessons he’s learned over the years, as detailed below.

Paul Keating’s “godsend”

In case I make it seem the podcast played like an old war story, there was a happier recollection of the advent of Australia’s world-leading pension system.

“Particularly the ongoing rise in contribution minimums (what we now know as Superannuation Guarantee provisions) from the 2.5% starting point,” said Potts.

“It had to keep going up and up, and [Keating] put a level of 15% on it. It was a godsend because the investment world became much greater with that volume of funds flowing in.”

“The recession we had to have”

But also under Keating’s tenure, Australia got its own financial crisis in the early ‘90s. In the wake of the 1988-89 asset price boom, and reminiscent of the 1970s, interest rates hit 17.5% in 1990.

“It was a severe downturn, with many property companies collapsing as the interest rate cycle killed them,” recalled Potts.

“Even Westpac stopped redemptions on its property trusts, which really affected pensioners who had in many cases invested just for the yield, only to find they couldn’t get their money out.”

A different kind of crash

A serious car accident in 1992 followed by a long period of convalescence laid the groundwork for a momentous personal change – the sale of the broking business, Potts West Trumbull, he’d built over the prior decade-plus.

Asked by Kidman if this period of reflection from a hospital bed prompted him to consider a quieter, less-entrepreneurial career – or retirement, Potts response is emphatic.

“No. I don’t play golf; my sport is the market. Because it’s a competition almost every day,” he said.
He laughingly adds that his wife insisted she didn’t want him around the house. She always told me that we married for better, for worse – but not for lunch!”

But Potts did sell the business in 1992, after an approach from the now-defunct Prudential-Bache.

And once back on his feet, Potts teamed up with Peter Gray to form a new company that went on to become Southern Cross Equities. This name disappeared in mid-2008 when Southern Cross merged with Bell Financial Group.

He and Gray built the new venture and drew in several people now well-known alumni in the local financial universe, including Richard Grainger, David O’Halloran, Charlie Aitken, and Adam Stratton.

Online broking hurls a spanner

Alongside his experience of macro landmarks and building businesses, Potts spoke about the technological shift. In his view, the internet changed the broking landscape forever, and the reverberations continue to be felt today.

“Look at the way broker rates have fallen now, and they’re always under pressure to keep going lower,” Potts said.
“And because of what’s called direct market access, in many cases institutions don’t need the broker, they can just put the order on themselves by paying a few bps.”

He’s referring here to the widespread use of VWAP orders – variable weighted average prices – which in his view have replaced some of the skills.

“For example, if you were doing a corporate raid when Solly Lew wanted to buy 15% of Myers in one go, you wouldn’t put it in the machine but would find someone who’s a willing seller,” said Potts.

“You’ll always be paying a premium above the market to buy it, but you match the buyer and seller. Then you put it all through in one go.”

At this, Kidman reflects on his time working for Geoff Wilson AO – himself a former broker, with a reputation for always knowing who in the market held the highest proportion of any given stock. Analysts today don’t have that innate sense of markets but are more likely to buy and hold on the underlying “story” of the companies involved.

“Because you’re getting an order on a VWAP, you’re not bidding anybody, in many cases, particularly in the orders you get from institutions.”

This is an art both Potts and Kidman lament as being largely lost in modern broking. Analysts today don’t have that innate feeling for markets but are more likely to buy and hold on the underlying “story” of the companies involved.

“Because you’re getting an order on a VWAP, you’re not bidding anybody, in many cases, particularly in the orders you get from institutions.”

Potts' biggest investing lessons

“I don’t use gearing” – Returning to the point emphasised earlier, in the discussion about the 1987 market crisis – and another part of the chat I haven’t detailed – Potts believes debt played a starring role.

That’s a big reason he never uses any gearing: “When the GFC hit, many of the falls were because people were so leveraged.”

“And if I was advising private clients, I wouldn’t tell them to leverage their positions, I think it’s the wrong thing to do,” Potts says.

“I tend to hold on too long” – Potts believes knowing when to sell is one of his Achilles Heels.

When Kidman asks if he’s a good seller of stocks, the response is: “I’d like to say yes, but no. I tend to hold on too long. I should stop-loss them, but I don’t”

But there he’s also reaped the rewards of a buy-and-hold. One example was a pre-GFC Magellan (ASX: MFG) – which fell to 37c during the 2007-2008 period. This saw him ride the stock from around 40 cents all the way up near its peak levels.

“I sold some on the way up – you take some off the table. But I probably didn’t start selling till they got to $20 and then again when they hit $30, $40, $50, and $60.”

Buy when there’s blood on the streets – Another lesson he draws from the Magellan example was to have the intestinal fortitude to buy at some of the most volatile and difficult times. In the midst of the GFC, Magellan’s share price was around 70 cents. This eventually shot up to around $70

“Magellan only had $300 to $400 million in FUM. Ten years later it had $100 billion, and the shares had gone from 70 cents to $70.” 

Share your own memories

And if you've memories of your own from the halcyon days of the ASX and Australia's corporate history, please share them in the comments below.

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