Earlier this year, I was lucky enough to sit down with one of Australia’s most successful and experienced investors, Robert Millner, Chairman of Washington H Soul Pattinson (Soul Patts). Soul Patts are one of just two ASX listed companies that have increase their dividends every half-year for 20 years, and it’s paid a dividend every year since listing in 1903. Our chat was highly enjoyable and is well worth listening to in full. But if the podcast format isn’t for you, I’ve pulled out some of the key quotes and lessons for your perusal. I’ve also made the full, 6500-word transcript available for download at the end of this article. Here are four key lessons from my interview with Robert Millner.
Lesson # 1 - focus on the management teams.
This point was brought up on multiple occasions throughout the interview; focus on the management teams. Soul Patts has a small team, so much like a private investor, they need to ensure that the people running the businesses are trustworthy and capable.
“There's only 10 of us on the payroll at Washington H. Soul Pattinson. It's very difficult if something does go wrong in one of these investments, to send somebody out to try and fix it. I think our ability over a long period of time has been able to pick good management, and we've had very good management in most of our good investments.”
“It's about people. It's people, people, people. Unless you have good people running the business, someone can destroy a business very, very quickly. It's very difficult to turn that business around again, but what intrigues me is when I go around a brick plan or go to a part of a coalmine, or I go to some of the other part of the businesses, when these managers talk about their plan. They take ownership in it. It's not Brickworks' plan, they say, "It's my plan." A lot of good people have been in the businesses for 15-20 years.
We've just bought the fourth largest brick making business in America and some of the people there, I was over there five weeks ago, some of the people have been there for 30-40 years. It's their company. They've grown up with this company. It's not Glen-Gery, it's their business. I think that's what you need to try and generate when these people, and it all comes from the top with your good CEOs and managing directors and finance people. Get skin in the game, make sure they own some shares, so as I said, it then becomes part of their life and their employment and their financial return at the end of the day. Because the better the company can do, if they've got shares in the company, the better they're going to do."
Lesson # 2 - if you want to be successful, provide value to others.
While this comment was made specifically in reference to the fiduciary duty of superannuation funds and fund managers, it’s a message that can be applied much more broadly.
“There's an avenue for good people, the right people, looking after their money rather than making money for themselves. People are always trying to make money, but you've got to look after your people's money that you're managing first. That's the most important thing, because if you didn't have their money, you wouldn't have a business.”
Lesson # 3 - invest counter-cyclically and look for distressed sellers.
This is another point that popped up repeatedly during the interview. It’s also a message you’ll hear over and over again from the great investors globally – both Warren Buffett and Howard Marks have decried the lack of attractive investment opportunities available to them in this late-cycle market.
“You've got to be wary of cycles. As I mentioned before, New Hope were very, very strong and didn't pay silly prices at the top of the cycle. Soul Pattinson has always had cash and that's why we were able to buy the TV station after Christopher Skase and Alan Bond destroyed TV stations in Australia. These are examples of having cash and moving in at the right time. You talk about stocks, I can remember in the GFC that we had 10 or 12 years ago, I can remember paying $27 for Commonwealth Bank. We were buying TPG for 14 cents, so we've always had cash. When other people unfortunately have to sell things, and we're sitting there with cash, and we're able to move very quickly on something when we can.”
“The best businesses you buy are when people are distressed. That's been Buffett's great philosophy as well. Obviously, you get a downturn in the market, as I mentioned before, as an example when we paid $27 for Commonwealth Bank shares. You would have bought those probably on a P/E of 10 or 11 or whatever it was in those days.
When you look at our portfolio, we've got a very large holding in Brambles, for example. Their cost base is $1.02 a share. Macquarie Bank, our cost base is a very large investment there, $10.77. You don't go in and buy stocks at ... To me, you don't buy Macquarie Bank at the moment at $128 or $130. If you wait until there's a downturn in the market, if you can pick them up again at $100 or $90, you've done well. That's why I think I've tried to make the point before about being patient. Obviously, all those other metrics come into your valuation there, with your P/Es and obviously as I said, the main thing we look at when we're buying businesses is not stocks, is cash generation.
As I said, we need cash generation so we can then pay dividends, and that's one of the reasons why we've been able to pay increased dividends since we listed, because we've always been able to find businesses that generate good cash.”
Lesson # 4 - diversify your bets
You’re highly unlikely to find any single-commodity producers or narrowly focused businesses among the most consistent dividend payers and growers. Soul Patts has been able to achieve its incredible track record through multiple levels of diversification in its portfolio – it invests in a diverse group of companies, who themselves often own a diversified group of business.
“Over the years, as the cities have grown, the brick pits, the clay reserves were in the cities, so the first one in Sydney was in Saint Peters. So, as the city grows, you generate a lot of money from the land. We've set up this joint venture with Goodman’s Industrial, and it's now worth one and a half billion dollars. So, we've generated income from that, so that's insulated Brickworks from the cycles of the building products. And as I mentioned, they're one of the six or eight companies that have been able to maintain a dividend each of the last 20 years as well.”
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Excellent piece Patrick.
I'm a fan of lesson #2 - "provide value to others" - nice wrap Pat.
Ed Smith Great reading, Patrick. For many years I have followed a policy in my investing where I looked for P.E.s of under 15, a consistent and rising dividend stream which was fully franked and businesses which within themselves had sufficient diversification to moderate the cyclical stresses in the market. Sticking to those principles has served me well.
Excellent article, Robert Miller is a wealth of knowledge. Thank you