Stephen Bland tells a tale that demonstrates the simplicity of the best investing strategies.
This will be my last article for 2006 and as in previous years I am presenting something a little different from the usual investment stuff. Here's a story which may be wholly fact, wholly fiction or somewhere in between.
Doris was a tax client of my accountancy practice. She lived in Worthing but despite the fact that my firm was in London she chose us to do her tax returns on the recommendation of another client. She told me that she hadn't always lived in Worthing but had been something of a London socialite several decades previously. Though now elderly she had an air of faded glamour, evidenced by some old photos she once showed me that must have been taken fifty years or more earlier showing her as indeed an elegant and attractive lady.
She was no mere airhead looker either. She had been all over the world in her time, some at various critical stages of the massive events of twentieth century history, and was full of entertaining and intelligent stories of her life and the people she'd known, many in high places in politics, business and the entertainment worlds. She didn't relate her tales in a boastful or showy way, just as events in her life that were humorous or important to her. I didn't doubt her at all. Many people embellish their histories but in Doris's case it all felt true.
Although she was knowledgeable on many things, Doris had a blind spot when it came to money. This is not an uncommon trait I've found after dealing with the financial affairs of a large number of people over a long period. She disliked anything to do with investments or tax and the like. Mind you, she had plenty of the folding stuff so didn't really need to worry. Bluntly, she was pretty rich, so much so that she never really knew how much she had, which it has been said is one mark of a rich person. In my experience this is true.
Most of her wealth was invested in shares held in a portfolio she had inherited a very long time ago. When I got to know her she was already quite elderly, and had been holding the shares for many decades. Due to her blind spot with money she neither knew nor cared what shares were held and in consequence she never did any trading. The only changes to the portfolio over all those years were consequently those mandatory impositions resulting from corporate activity.
Apart from her pension, her income consisted of the share dividends and interest on cash held in her bank account. The latter grew constantly because her income was vastly in excess of her outgoings, the dividends were paid to the bank and she took out what she needed leaving the balance to grow continuously. She did though contribute very handsomely to various charities from this cash. From memory, I seem to recall the portfolio was worth around £7m when I started handling her affairs, delivering an income of something like £275,000 a year, plus a cash balance of some £1.5m earning interest. And as a result she didn't arf have a tax bill each year though she never complained about it, nor about my eyewateringly high fees.
The share portfolio and its dividend income had grown tremendously over the lengthy period she had owned it. Over some forty years, at £7m it was around 65 times its value when she inherited it at a then value of £108,000 back in the thirties. A compound growth rate of roughly 11%. This rate may not seem that much in isolation but over such a long period it adds up seriously. And no it is not the oft quoted magic of compound interest, an expression which makes me slightly nauseous, there's no magic just math.
The shares were generally a selection of the blue chips of their day. I don't know what strategy if any had been employed to select them, I couldn't tell how it had been done because it was too long ago but at a guess it was purely a selection of blue chips because, well, they were blue chips. They weren't concentrated in any particular sector but were well diversified.
I used to tell Doris that she was one of the best investors amongst all my clients, precisely because she knew nothing about it and even more importantly, didn't want to know. On a risk adjusted basis, because her portfolio of blue chips was low risk compared to the way many others I knew invested, she possibly was the best.
Very few people of my acquaintance who traded shares could manage over the long term to make 11% a year. Sure they would have great years of maybe 100% or more gains if they happened upon the right shares at the right time and got out in a timely manner, but those good years were mostly countered by extremely poor ones sooner or later. It is much more difficult than many investors realise to grind out an average compound return of 11% a year over a long period, most will fail because they think they can improve on it by trading and will take great risks to do so. 11% pa seems much too low a return to these types, the great irony in the end being that almost all of them will never achieve even that.
Doing nothing? Nothing doing.
On one occasion I went down to see Doris in Worthing to get the details for her tax return. Usually she came up to my office or posted the stuff but she asked me to come down. I fancied a trip out the office and drove there. She took me out to a decent restaurant and we went back to her flat. She was in a reflective mood, rather quiet. At one point she took out from a drawer a gold man's pocket watch. It had belonged to her father she said and she wanted me to have it. I told her that wouldn't be right, I was only her accountant and hadn't known her that long, five years or so. But she insisted and I took it.
A couple days later I got a call from her solicitor. Doris had died. Committed suicide with an overdose. I was probably the last person to see her alive because it happened that same evening after I left. Turns out she had contracted an awful disease and wasn't prepared to continue living with it. It could have been treated but that would have left her seriously physically impaired and clearly she did not want to live that way. So she had given me the watch knowing what she was prepared to do shortly after.
And her money? After a number of charitable bequests and the substantial tax bill had been settled it went to a cousin of hers whom I didn't know. I still have the watch now which is many years later. In fact I got it out to write this story and it's sitting on my desk as I write.
Doris's story may well have been part of the inspiration behind my High Yield Portfolio strategy. Although I don't know if her shares had been selected originally on that basis she was certainly a quintessential buy and hold investor which is a strong element of the HYP approach. A perfect illustration of my view that the less you know the more you know.
