David Kuo and Maynard Paton talk to Peter Hargreaves, the co-founder of Hargreaves Lansdown.
You can listen to or download this podcast here.
David:
This is Money Talk, the weekly podcast from the Motley Fool. I'm David Kuo, and today I'm delighted to welcome a man who started out working in his father's bakehouse making rolls, but today is rolling in more dough than he knows what to do with by selling us investments. He is Mr Peter Hargreaves, one half of the successful investment company, Hargreaves Lansdown (LSE: HL). Mr Hargreaves, welcome to the podcast.
Peter:
Well, I'm very pleased to be here, David.
David:
We are delighted to have you here, because I know we are huge fans of yours, you not only look after our pensions here at The Motley Fool, but also Maynard is a very big fan of your company, we are grateful that you're here today. Now, you have just recently published a book called "In for a Penny" – now, I've read the book, so has Maynard, and we were fighting over it the other day; I got through it in about three days, I think it's a fabulous book – but why did you write the book? Who is it aimed for?
Peter:
Well, I've always thought I had a book in me, and I hope I might have another one in me, but I try to serve three purposes, and I hope I do that. Number one is, the story of Hargreaves Lansdown is a great business adventure, it's two guys and a part-time secretary start from my spare bedroom, and we build it into a company that's worth a billion pounds. Now that is a business adventure, it's a true business adventure, and we just thought people would be interested in that, and we started at the bottom of a recession, which is also quite interesting in these times.
I also felt that, during that time, we broke all the perceived wisdom of business, anything that we did would not be what you had learned in the Harvard Business School, so we just carried on our business in the way we thought it should be done, and we have lots of unique business ideas in that book, I mean they're all completely legal …
David:
Thank goodness for that!
Peter:
… but they are not normally the perceived way that people do business. We run our business very very differently than most other businesses in the world, but the best businesses in the world are like ours – they cut through all the rubbish that big businesses get involved with: meetings, memos, and you name it – and then finally, because we're in the investment business, which I think is a fascinating business, I've been in many many businesses in my life, and the only one that I've really enjoyed, and been thoroughly absorbed with, is the investment business, but there's so many pitfalls. So in the book, I try to warn people about the pitfalls that they can fall into when investing, and so rather than try and suggest what investments people should buy, although I do that as well, I think it's quite important to let people know what they shouldn't be doing, and the most important thing is to remember that, if a return looks extremely tasty and exciting, it's probably one to avoid.
David:
So are you saying this book is ideal for people who may be interested in starting out in business, or starting up their own company? – and then they read this book, and they have some idea as to all the dangers and all the troubles that they may have in trying to set up their own business?
Peter:
If the book was used for that purpose, that would be my dream. If I can impart some of the advice, some of the lessons we've learned over the years, to anyone setting up in business, or anyone who's recently set up in business, or even established businesses to help them grow their businesses further, that would be my dream, more than anything else in the book.
David:
Right.
Maynard:
So can you explain what Hargreaves Lansdown does now, and how it has evolved over time, and how it makes its money?
Peter:
Well, when myself and Stephen set out, we used to have this joke that we ought to go and look at what everybody else does, because we didn't really know what we were doing, we were finding our way, and we never ever did that, and we're so grateful we didn't, because we started with no preconceived ideas.
Now Stephen always wanted us to be the best, and I always wanted to be the biggest, and it was only after several years that I realised that we'd only ever be the biggest if we were the best, but we never looked at what everyone else did, the only thing we knew was that the investment business was completely dependent at the retail side, which talking to private clients, was totally dependent on what people call sales commission, and we thought that was not the way any mature business should proceed, so we had to work out how we produce the sustainable business that didn't depend on initial sales commissions, we take none.
What we try to do is make money from the investments that we hold, and the way we've done that is, we've gone to the investment groups who manage this money, and say, "Look, we're giving you guys an awful lot of money, we don't want to charge our clients anything – we want you to part with some of your annual management charge to us, so we can give our clients the investments free, advice free, and we will buy your investments if you part with some of your annual management charge to us, and that's how it works.
David:
So how easy was that to convince the providers of these products?
Peter:
It took 25 years.
David:
Not too long then! The other thing is, how did you arrive at the name Hargreaves Lansdown, rather than Lansdown Hargreave?
Peter:
Well, it was my bedroom, and I'm older than Steve! I'd just say Lansdown Hargreaves doesn't trip off the tongue as well.
David:
What – Lansdown Hargreaves? (Laughs)
So the company has evolved over all these years – now how do you see it evolving in the future? – I mean, what is the next step for Hargreaves Lansdown?
Peter:
We actually think it's more of the same, we have no great new plans or ideas, I think we might like to service a larger audience, we think there are a lot of ex-patriots who live in southern Europe and other parts of the world who we would like to talk to and give them a similar service, but in all honesty we believe that we just want to do more of the same. The one thing that will happen, whether we want it to happen or not, even whether the clients want it to happen or not, is we will become more and more internet-based.
David:
You already are very internet-based anyway?
Peter:
Yes we are, I mean I used to have this famous saying, not that I'm very internet literate myself, but I always used to say, "If you can't smell it, you can't touch it, you can't see it, you can't feel it or you can't taste it, it's perfect for the internet", and investment fits all those criteria.
David:
Now the other thing you talk about in your book is something called the "special culture" that you have. Now, I've met a few of your chaps, I've met Tom McPhail, I've also met Richard Hunter, I've met the two of them – now, can you explain to me what this special culture you have is, because I think I know what it is?
Peter:
Well I think it's, we allow people to breathe, we allow them to grow, and we don't handcuff these people, we allow them really to say what they like, and that's why the media love them, because they know we're not constantly trying to gag them, and that culture's throughout the firm. If somebody thinks something's wrong, they shout, and we have a no recrimination, if somebody does something wrong, we know the person that made the mistake is more upset, even the client that had the mistake made with them, or even, whatever they did wrong, we know the person who's most upset is the person that made the mistake – we don't need to castigate them.
David:
So you don't give them the Alex Ferguson hairdryer treatment then? – because you do have this reputation as being slightly stricter than the ordinary boss? – is that fair?
Peter:
That's not fair - internally I'm a pussycat.
David:
Right! – and externally?
Peter:
I rant and rave, but everybody knows it's not important – never at staff, I rant and rave at things that go wrong. Externally, the people that deal with me absolutely hate me, because I fight for everything.
David:
So are you a very hands on person within Hargreaves Lansdown? – do you manage the day-to-day running of the business?
Peter:
I believe I get involved deeply with the bits of the business that I think I'm good at. The bits of the business that I don't think I'm good at, I have appointed people to do those things that I'm not good at, but I am very close to them. There's two ways of delegation: one is delegation where you actually give somebody a job, and you go back regularly and make sure they're doing the job – that is delegation.
Giving somebody a job, and then never checking whether they're doing it properly or not, is called "abdication", and that is the worst thing that anyone can do, say, "Here you are, Jim, you're going to do that", and then three years later, you go back and found he's made a complete hash of it, and then you get upset with him. You never went back and checked that he was doing it properly, so delegation is where you actually go back and make sure, over a period of time, that (a) he can do it, and (b) he's doing it. Then after that you can leave him to his own devices.
David:
Now the thing is, Hargreaves Lansdown has been through quite a number of recessions, now how do you see this particular recession that we're in now?
Peter:
It's the most different, it's easily the worst, and we're nowhere near out of it, and it's going to go worse – that is my view. I've always had this saying in business that optimists fail and pessimists prevail, so I don't think it's wrong to be pessimistic. Every recession's different, and the thing that's most different about this one is that in all previous recessions, when the stock market has been bad, interest rates have been good, so investors have had somewhere to place their money where they would produce some sort of return, this time there's nowhere for them to go, and this is something we've found rather unusual, because there is an appetite to invest, and what we're almost doing, we're almost holding investors back, we don't want them to go into something that will crash again.
So it is very very different than any other recession I've known in my life; it's possibly more like the '74 than the '81, but of course in '74 the country was bust, and I'd argue that the country's bust again now. It was the North Sea oil that saved us then, and the one thing I'm absolutely sure is, Gordon Brown hasn't saved us this time, I think he caused the problem. Sorry, that's not true – he did cause the problem.
David:
I think I agree with you there, yeah, he certainly did. Now, the thing is, one of the problems that we have here at The Motley Fool is trying to explain to people who have been invested for the last ten years, and they say, "Look, David – I've been investing like you've told me to for the last ten years, and I've got nowt, I've got absolutely no return whatsoever, I'm lucky if I have my capital back", so how do you explain to these people that you should carry on investing? It's very easy to say, "Yes, you've got to keep the faith, the next ten years won't be the same as the last ten years, or at least we hope it won't be", but you eventually run out of things to say to them, you have to say, "I know it's terrible", but how do you go about doing it?
Peter:
I think you have to put behind you what happened in the past; no-one ever predicted that the stock market would peak at just about 7,000 at the turn of the millennium, and still today to be only 4,500 is actually lower than that, so we're well below those figures after nine years, which is frightening, and it's just that financial assets haven't been the right thing to be invested in during that period of time, and people say, "Well, property did OK" – well actually, property …
David:
Hasn't done too good either, has it?
Peter:
A lot of people said property was a one-way ticket, and of course it isn't, and people never think of property in the right light, they forget the stamp duty, the conveyancing fees and everything else; they forget of all the repairs and renewals they have to carry out on property. Property's a high maintenance investment.
Right now I think you can only tell people where you think they might do better in the future, and I think there are two or three themes, and the first theme is, securing income, because income's what you live off, and I also perceive that the west has pampered itself too much, we pay ourselves far too much in this country, we have this huge millstone round our neck called the public sector, they're talking about getting rid of 350,000 public sector workers today, they should put a nought on the end of that, 3,500,000 would be the right figure – that is how many public sector workers, we have too many, I mean how we do that, I don't know.
And the other theme I think that is quite important is, that if we're not happy with western economies, if you look at emerging economies, if you look at places like India, China, Hong Kong, Singapore, Malaysia – not all these countries are politically stable, but they don't pay themselves as much, they have highly educated workforces, and some of these people want to work very very hard indeed, whereas in this country, I mean most of the menial tasks in this country, we've got three million unemployed, if you take off the disability register the ones that aren't actually disabled, they don't want to work, and so all the menial tasks are done by, sometimes Polish graduates, and there's something wrong there when people can live better on the dole than actually working, so one has to ask the question – are we paying everybody too much? – and we're certainly paying the public sector too much, there's no question about that.
David:
Do you have a view about the minimum wage at all?
Peter:
There shouldn't be one.
David:
Right, and the reason for that being?
Peter:
It deters the future, it says to people, "I'm not going to work unless I get that", and all these people that don't work, all the scroungers, as they're called, they'd be far happier in employment. There's nothing better than a reason to get you out of bed. Most of those people would feel good about earning something, but why would we want to do that when somebody will pay them more to do nothing?
David:
Do you know something that's really scary? – you and I could interchange places, and you could be asking these questions, and I would give exactly the same answers.
Peter:
But we don't need both of us then, do we? – one of us can go! We've got two people agree, you only need one, don't you?
David:
So why then do you think people are so afraid to talk up about the minimum wage? – to talk against the minimum wage? – why is everybody so politically correct at the moment and saying, "Yes, we should have that – we shouldn't really be paying people less than £5.50 an hour" – why do you think there are so many people out there saying that?
Peter:
I think if we really sat down with every single person in this country, we would find that 90% of the people that worked in this country and lived in this country agree with the two of us, it is the abject apathy of the populus of this country that astounds me.
The first time I've seen something that said, perhaps that apathy is finished, is when a lot of people voted for UKIP in the last election. I hope it wasn't a protest vote, I hope people were saying, "Why are we in Europe?", because there's absolutely no reason why we should be in Europe, and I am convinced that that is a good thing, but I think it was a protest vote; I wish it wasn't, I wish people were saying and questioning whether we should be in Europe or not, but that was the first sign that perhaps there's less apathy.
In 1979, when Margaret Thatcher was swept to power, there was no apathy then, the people of this country were prepared to stomach anything to sort out, this country was completely ungovernable in the '70s, people who had any economic nous whatsoever knew the country was one of the worst countries in the world. Now, we're not there yet, sadly, because people haven't felt it yet, the amount of debt that Gordon Brown's saddled with is just huge, and that will be paying off for 25 years.
David:
We're talking about a trillion pounds there.
Peter:
We're talking two, because public sector pensions are unfunded, and that's the second trillion.
David:
So where should people be investing now? I mean, that is all well and good, the two of us talking about the state of the UK economy, so somebody listening to this podcast would be saying, "Right David, right Peter, I agree with the two of you, but where should I be putting my money now?"
Peter:
Well, I think you should be buying income-producing assets wherever you can find them in the world.
David:
Are you talking about high yielding shares?
Peter:
Yes, and anything of that nature.
David:
Gilts, that kind of thing? – bonds?
Peter:
No, I don't think you should be buying gilts, and the reason I don't think you should be buying gilts is because I think the government will have to pay more interest to people who want to buy government stock than they are at the moment, which will mean the price of government stock will go down in value, so I'm not keen on gilts at all, and I think the policies of the government are inflationary, so you wouldn't want to be invested in fixed interest there. I think high income shares, companies with good dividend flows, sensible, sound companies, but actually I'm afraid to say it – we should be investing in the Far East.
David:
Do you know, I agree with you about that one as well!
Peter:
Well, from your name, I should imagine you would.
Maynard:
So how should investors choose a unit trust? – at Hargreaves Lansdown office, thousands of different unit trusts – how should investors pick one that gives them exposure to the Far East, or high yielding shares? How can they narrow it down?
Peter:
Well, you can buy thousands of unit trusts from us, we have singled out just over 100, between 100 and 150, that we perceive are going to perform well in the sector in which they invest, just to try and simplify the matter for people, and basically the best advisor that any investor can have is theirself, the more information they can have, the more they get interested in it, the better they will do.
Maynard:
But you've got up to 150 – how can I, an ordinary investor would just want maybe two or three, so how can I narrow it down just to that?
Peter:
We look at good fund managers, we try to direct people towards the most appropriate areas to invest, whether it be economies or sectors. We do believe there is scope for, I don't think people should be completely diversified, because all you've done is bought the world markets, so you need some little bit of overlay, and say, well actually, I quite like Singapore, so I might be a little bit more heavily involved in it, you normally have only 2% in Singapore, you think, I might have three.
You might think, well I think Japan's very good, and you might have nine normally in Japan, you might have 12. I'm not saying these are the right places to invest, and you might say, well I don't like America, I think the dollar's weak, I'm not sure on the American economy, normally you'd have 20% in America, I'm only going to have 15. So you should be making those small bets with your money, and that's where we try and just improve people's returns by giving them some guidance about whether they should be, what we call overweight, ie more than the percentage they would normally have; or underweight, less than the percentage you'd normally expect as a UK investor.
Maynard:
So what about past performance as well? We all know the warning about past performance is no guide to the future – what are your views on picking unit trusts based on how they've done?
Peter:
We have spent many many millions of pounds trying to take out all that situation, because if you have a fund that invests in small company technology stocks, and small company technology stocks are the hottest sector of the market, you will have a top-performing fund, so what we've done with all the sectors that we have is we've taken out the sector benefit, and we've said, now, this particular investor, this particular fund manager, has this amount of money in these various sectors – how well has he done against the benchmark?
So he would have done 15% if he'd have done the benchmark, if he's done 12, he's not very good; if he's done 20, he's good – our system constantly monitors that, and so we do get a good feel for people that actually earn their living, they actually add value to what they're investing in, and that's how we've done it, and it's a very very sophisticated program, we've had some very very clever mathematicians working it out for us.
Maynard:
Yeah, you mention in the book about hiring Greek mathematicians – it all sounds quite complicated.
Peter:
Well, it is!
David:
That's why they agree!
Maynard:
So how does the ordinary punter then?
Peter:
They don't need to know about the back engine, do they? They just need to know that what we've actively singled out are funds that will hopefully, fund managers that will actually add value, because most fund managers don't add value at all, most actually take value away, because if they're going to charge you 1.5% for managing this money, if they don't beat the market by 1.5%, you might have been better in an ETF.
Maynard:
OK, let's say you've found a manager who's done well in the past, and he's added value, all managers go through bouts of underperformance?
Peter:
That's not a problem, I mean Anthony …
Maynard:
Anthony Bolton, yes.
Peter:
… he went through several periods of massive underperformance.
Maynard:
How can you tell an Anthony Bolton, who's going through a temporary bad patch, and the guy who's just been lucky, and now is being found out?
Peter:
Now, that's a very interesting question, because there are two parts to analysing funds: one is the quantity that I've just been talking about, and the other is the qualitative, and that's what Mark Dampier and the other research guys do, they meet with these people, and the guy that you don't want is the one that's petrified because he underperformed last year, you want the guy that is a very very confident person that says, "Well actually, it's not been the time for what I invest in, but I'm not going to change my opinion".
At the end of the '90s, Neil Woodford had his worst bear market of all times, everything was doing phenomenally well, technology, small companies – he had the worst bear market he's ever had – he didn't change his portfolio. Anthony Bolton went through a couple of stages like that, the real top guys say, "Look, it's not my time, but I ain't going to change my philosophy, because I'll come back right one day".
David:
So have you met the next Anthony Bolton yet? – is there anybody close to taking on the mantle of being one of the best fund managers around? – Neil Woodford?
Peter:
Woodford's good, I mean he manages a huge amount of money, and he's been slightly wrong in the last three months, because he's been more defensive than he should have been, I mean he should have been buying absolute rubbish companies for a couple of months, because the reason why fund managers moved into those companies, they could double their money in those things, you're saying Hargreaves Lansdown's stock's dear – well it is, so why, if you think you can double your money in a highly indebted, highly geared business, you could double your money, why would you buy Hargreaves Lansdown? – if you ain't going to double your money in my shares. You might over time, but you're not going to do it very quickly.
Maynard:
But wouldn't all the assessing fund managers – wouldn't it all be easy for the ordinary person at home just to go for a tracker?
Peter:
Yes, I mean if investors want to invest that way passively, then I can't argue with that.
Maynard:
You've even admitted in your book, the average unit trust doesn't beat a tracker?
Peter:
Correct, but you wouldn't want to invest in the average unit trust, I mean what we're trying to do is find above average unit trusts. You've got to remember that the banks, the building societies, the live companies, have the vast majority of money in unit trusts, and in general they're all dreadful. Standard Life have a great investment team, and some other life companies have a great investment team, but most of them don't.
David:
Now Peter, I have one final question for you, and the thing that I took away from your book was your innate ability to be able to sidestep what you think are going to be scams and dangers for investors – how do you do that? You sidestepped Barlow Clowes, you sidestepped precipice bonds, you sidestepped Split Capital Trusts – how do you know, how is it possible that you can have a feeling for these things well ahead of the problems occurring?
Peter:
Very simply, I think it's a family trait. My grandmother trusted no-one, my mother trusted no-one and I trust no-one, and I think since I've been investing since I was the age of 11, I didn't invest in my name in those days, you couldn't do at age 11, I think I can probably sense it, and I remember when I was a chartered accountant, and for many years I did a fairly tedious task called auditing, and when I used to go on audit, I used to be able to smell it as I walked through the door, whether there was something dodgy going on. But I think it's 50 years' experience of investment markets. I will be too cautious, I will miss huge bull plays in the market, I am too cautious, but I think I'll keep people away, and Mark Dampier's the same as me, we will keep people out of the real problems.
David:
That's absolutely wonderful, that is a great answer, and I think a lot of people out there will be saying, "If only I knew how to sidestep some of these investment scams out there, then I wouldn't be hit by Bernard Madoff, then I wouldn't be hit by Allen Stanford", I mean how did they manage to hoodwink some of the most professional of investors – how is it possible that that can happen in this day and age?
Peter:
Well, the regulators are very poor, aren't they?
David:
Well, thank you very much Peter, for coming in today, that was an absolutely delightful podcast, I think we've taken a lot from it. Now, I end each podcast with a quote, which I think sums up the idea behind today's podcast. Now, I've found one today from Albert Einstein, and he said (and think you'll probably agree with this), "Everything should be made as simple as possible, but not simpler" – do you agree with that?
Peter:
That's lovely, that.
David:
It is, yeah, Albert Einstein, he hasn't made an appearance on this podcast for a long time.
Now, we have your book, In for a Penny, which is available in the bookshops, but we also have one copy to give away – now listeners, you have to answer this one simple question, and if you answer it right, and I'll tell you where to email it to afterwards, you can have a chance of winning a copy of this book called In for a Penny.
Now, I want to know what the letter K in "Peter K Hargreaves" stands for, right? Look it up on the internet, you'll probably find the answer, and then email me at moneytalk@fool.co.uk, I'll sift through all the answers, and one will win a copy of this signed book.
If you have a comment about today's show, you can email me at moneytalk@fool.co.uk, or you can comment on the Money Talk blog, which you can find on the front page of our website. Thank you once again, Peter, for coming in today, thank you Maynard.
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