Rich Nan, Poor Nan: what I learnt about investing from my grandmothers
One of my grandmothers was a self-funded retiree in a capital city who took an active interest in her investments. The other lived in a small country town and survived fortnight-to-fortnight on the age pension. Let's call them Rich Nan and Poor Nan.
Rich Nan managed to successfully navigate the social and financial pressures of being a single mother in the 1940s and 1950s while building a career as an accountant in Perth. She understood the value of combining calculated risks and the power of compound interest.
Poor Nan had a small amount of savings and was distrustful of almost everything in the financial world. She was a hoarder and after she moved into a nursing home my mother found hundreds of dollars of banknotes hidden in the piles of magazines she kept around the house.
"Safer than the bank", I guess, was her reasoning.
She showed some adaptability late in life, buying her first shares (Telstra) in her 90s. But as Rich Nan could have told her, Poor Nan left her run too late to let compound interest begin really working its wonders.
Poor Nan was fearful and mired in the past. Clinging to old views, superstitions and nostalgia, she watched daytime TV and loved gossip.
She told stories about our family history, like how our convict ancestors had been unfairly sentenced and how we'd been cheated out of various fortunes over the years.
She also doted on me and indulged me endlessly. She amplified the magic and excitement of Christmas (often rising earlier than me and my brother on Christmas morning and waking us up). She was easy for me to be around and, in the end, stoic in the face of death when she knew it was upon her.
Rich Nan was the polar opposite in many ways. She wasn't outwardly caring, indulgent or easy to be around. There was no small talk. She was interested in serious ideas, books, community work, travel and the theatre.
She lived on the other side of the country and I probably only saw her less than 20 times in my life. But she took a keen interest in the academic results achieved by me and my brother and encouraged us to lift our sights, try harder and be disciplined.
These are not particularly attractive concepts to most kids. We were no exception.
Dad and Rich Nan used to talk over the phone each Sunday afternoon for hours. One of the main topics of conversation was the sharemarket. Overhearing some of these conversations is where I picked up the investing bug.
I was too young to understand the nuances, but I knew that she was a patient investor (not a trader) with a steady eye on a business' long-term prospects.
She was the long-time treasurer of the successful community-owned South Perth Hospital and in Hands That Heal, the history of that institution, it says "she was known for her always optimistic but keenly analytical summaries of the state of the hospital's finances."
In her sharemarket investments, for instance, she appreciated the global potential of the fibre-reinforced cement (FRC) developed by James Hardie. FRC used alternative reinforcing materials to make asbestos-free, cement-based building products.
She bought the stock in the 1980s and it grew to be the largest holding in her portfolio.
Another stock she held for the long term was an innovative water filtration technology company called Memtec, which was taken over in 1997, the year she died.
I've been thinking of her a lot lately and the broader topic of transferring knowledge and wealth across generations. I've also been asking myself which of the stocks in the portfolios I run would Rich Nan most approve of. Here are my top two:
I wrote about fashion jewellery and accessories retailer Lovisa (ASX: LOV) in my March column. I suspect Rich Nan would love the long-term potential, with Lovisa currently rolling out stores in the UK, France and the US. She'd likely also appreciate the impressive profit margins and absence of debt on the balance sheet (ever the fiscal conservative).
The company is backed by one of Australia's most savvy retail minds in billionaire Brett Blundy, who stepped into the role of chairman last year. I take this as an indication of the potential he sees in the business (in addition to him being the company's largest shareholder).
I think of Lovisa as "the Bunnings of accessories", offering the largest selection at the best prices. It's chosen a great niche to specialise in and has a good shot at dominating this area in many countries.
It's what some investors refer to as a "category killer" and has an extraordinary global growth opportunity. This is a stock that our family can easily hold for the next decade or longer.
Pinnacle Investment Management
What would Rich Nan make of Pinnacle Investment Management (PNI), an incubator and supporter of funds management companies? It provides marketing and support services to a growing stable of funds managers so that they can focus on what they do best - investing their clients' money.
She'd probably appreciate the company's growth strategy, which has three key drivers.
Firstly, it seeks to grow the existing businesses it has stakes in, including Hyperion Asset Management, Plato Investment Management and Solaris Investment Management. It does this via its business development team and also its ability to help funds managers create new products and funds.
Secondly, it has backed the creation of new funds management ventures, with Antipodes Asset Management and Firetrail Investments being two remarkable successes in this category.
Thirdly, Pinnacle has acquired stakes in existing operations that management believes it can add value to. These include Metrics Credit Partners and Omega Global Investors.
This three-pronged approach has been powerful and Pinnacle reported a 32% rise in net profit for the 2019 financial year. And that followed on the heels of an astounding 79% increase in 2018.
A company like Pinnacle is always subject to market conditions, but on a recent conference call, management seemed confident that 20% annual profit growth is within reach over the coming three years.
And like Lovisa, Pinnacle carries no debt and plenty of cash, which provides a firm fiscal base for growth and protection if things get off track for one reason or another.
In my view, Australian consumers are moving away from huge, integrated financial institutions and towards Pinnacle's way of doing business via independent boutiques focused on funds management that are separate from financial planning firms. I think Nan would approve.
Both of these stocks are also run by their founders. I'm not sure if that was a factor that was on her list, but it's certainly my preference. Ambitious, capable founders find ways to grow their businesses that a professional manager on a three-year contract never could.
Like Rich Nan, successful founders typically take a long-term view and patiently but passionately follow their game plans over many years.
Disclosure: Private portfolios managed by Greg Hoffman own shares in LOV and PNI.