The experiences of a lifetime exert a profound and lasting influence on what you think about investment. Some seminal events in my past have had a lasting effect on my way of thinking in the present.
If you began investing near the top of the dot-com boom or shortly before the crash of 1987, you will tend to think that another disaster is always just around the corner.
Conversely, if you got rich trading technology stocks in the dot-com boom and managed to avoid the bust, you are more likely to be a natural optimist. What follows are some of my conditioning life experiences.
Equity ownership is a powerful incentive
In the early 1980s, stockbroking firms were partnerships. The partners owned the business and had unlimited liability for its debts. This imparted a sense of responsibility that was wonderful to behold.
Big Bang in 1986 was to change all that. Out went unlimited liability; in came outside cash and incorporation. This resulted in a big hike in salaries, cost-led expansion and empire building.
As a director on the stockbroking side at Henry Cooke Lumsden, based in Manchester, I watched with horror as our established business – known as ‘the Cazenove of the North’ – was hitched up to a boutique bank that had only been in existence for a couple of years.
Half the equity of the combined group was given away for fool's gold.
The recession of the early 1990s revealed just how weak the loan book had been. The bank duly went into administration and the stockbroking business was on the way to losing its independence. I had seen a franchise that took 125 years to build brought down in less than 125 weeks.
I learned that when investing in a business, it’s a good idea to check out the equity ownership of the people running it and how much they are drawing in salaries.
If they have a large amount of personal wealth tied up in the business and behave frugally, it is more likely that they will act like owners to preserve their wealth (and yours with it).
The rocky road to ruin
Long before the banking debacle, I had learned to be very wary of acquisition-led growth and the opportunities it provides for accounting smoke and mirrors. The 1980s was the era of the mini-conglomerate.
An entire genre of businesses sprung up seeking to imitate the success that Hanson Trust and BTR had achieved by bulking up with acquisitions. A handful managed to survive; most didn’t.
In my days at Henry Cooke Lumsden, I worked closely with Thomas Robinson & Son, an ancient, sleepy engineering business based in my hometown. The intention was to use it as the quoted vehicle to build a mini-conglomerate. The deals came thick and fast, and likewise, the profits shot up, fuelled by the acquisitions.
The larger deals were always done with paper, with cash alternatives fully underwritten. What began to worry me was the insatiable appetite of the business for fresh capital.
