09 Apr 2020
History lessons for an unprecedented crisis
Mark Hand |
Drawing on over three decades of experience, ANZ’s Mark Hand looks back on what ANZ has learnt from previous crises.
25 Jan 2023
Vale David Hains, legendary investor
David Hains, a legendary Australian industrialist and founder of one of the country’s first and most successful hedge funds, died on January 22. Hains’ career had humble beginnings selling white goods and he went on to develop a global manufacturing portfolio. But Hains told me he was tired of the stresses of the business and took a year off to become a professional golfer – a passion he maintained to the last – before moving into investments. Hains spoke with bluenotes just over a year ago on his storied career. Here is the story.
As he approaches 91 years old, David Hains still goes to the office every day. (At least when pandemic-related lockdowns allow.) He no longer runs the storied Portland House Group (PHG) himself – that responsibility was handed to his sons years ago – but he’s still fascinated by, and very active in, the markets.
It’s the curiosity, diligence and critical humility which has exemplified the billionaire’s long and varied business career. A career which received a kick start in 1956 with a loan from ANZ.
"Hains has always had an international bent, crediting a trip to the UK in 1958 with opening his eyes to how business and economies operated outside of – and dwarfing - Australia.” - Andrew Cornell
“I don't have much to do with the day-to-day running of the business these days but I have a small team doing research. That keeps me both occupied and interested,” Hains tells bluenotes in a recent interview. “We're always looking for patterns and things. It's more to keep me from getting Alzheimer's than it is perhaps always useful to the business.”
A longtime resident of the BRW (formerly Business Review Weekly) Australian Financial Review (AFR) Rich List - in the inaugural Rich List in 1983 his estimated wealth was $A70 million, this year, he and his family have an estimated $A2.89 billion - Hains’ career spanned retailing, manufacturing and golf before he established PHG as one of the legendary investment houses in Australia and one of the first truly international ones with offices in New York and London.
He has always had an international bent, crediting a trip to the UK in 1958 with opening his eyes to how business and economies operated outside of – and dwarfing - Australia. Hains started work at 15 and by 18 had moved into management, set up his own business at 20, and grew by buying, restructuring and selling businesses before stepping away from operations to become an investor.
Playing decently
The golf was no idle hobby. In his first major media interview, which I did with him for the AFR in 2009, he said he decided, having managed companies through a succession of economic downturns in the 1950s and 1960s, the trauma of redundancies and the desperation necessary for corporate survival was just too taxing.
He turned down several restructuring plays because he "simply could not face the idea of mass retrenchments, invariably part of a restructuring program". So, in the late 1960s, he decided to play golf. Not just take it up but play decently, convincing the great Norman von Nida to coach him. Hains took nearly seven years off to play golf, returning to business only when he began to appreciate that he was starting to worry about things that "really weren't very important". And he still plays, usually twice a week.
But Hains maintains a deep and abiding interest in the business world. For someone who has been through many cycles, Hains says the historically low, even negative, interest rate environment is a source of considerable interest.
“The valuation the market puts on stocks today reflects the zero cost of money and the fact there's nowhere else to go,” he muses. “And – once again - high tech stocks are being valued on sales and not on profits or financial results. It’s all about expectations and sometimes it's right - but sometimes it's wrong.
“We saw this with the nickel boom, equities in the late 1980s and the dotcom boom around the turn of the century. In some cases it's a bit like the tulip bubble, going back a long time. I think for some it’s a gambling approach rather than an investing approach although, of course, some people are going to be very right in choosing these stocks. But it’s easy to forget all the companies which have had super high prices in the past and have disappeared.”
Never, ever again – or not?
Hains and now his sons, Stephen, Richard and Michael (daughter Cathy is a thoroughbred breeder and son Paul publishes the Aeon magazine), have always managed PHG on a fundamental principle of preserving capital and eschewing leverage. That has meant a mixture between equities and fixed interest investments – which becomes more challenging in the current global interest rate environment.
“I can remember being in London and seeing framed copies of certificates for consuls paid just 2 per cent per annum and I thought, well, we will never, ever see that in my day because that was when we were sitting at around 6 to 8 per cent. But we have and I think that’s surprised everyone,” he says.
While fears of a return to high inflation are growing, the prevailing view remains interest rates will be lower for longer with implications for expected returns and the cost of capital.
Hains concedes for the moment that means being prepared to pay a higher price for yield but he demurs on giving a view on how long that will last.
“If interest rates stay where they are forever I guess it's alright to buy a stock for investment based on 3 per cent return. I'm no economist. I don't understand the relationship between interest rates and future rates and so forth. They're a mystery to me. Stephen, for example, does understand it, but I certainly don't,” he concedes.
Taking a position
From his long years as a manager and a direct investor in companies, Hains has developed a clear eye for corporate culture and market psychology. And with that comes the perspective of age – and indeed perspective about age. Rather than criticise the recklessness of youth he points out it is up to the younger generation to take more risk.
“Young people have a different starting point and obviously a totally different view,” he says. “They are looking from the bottom of the hill upwards and I'm looking from the top, looking down. And the view we get is quite different. If you want traders in financial markets, they've got to be younger because otherwise they've seen too many periods of extreme problems and they won't have the courage to take positions.”
But that’s not reckless: “I wouldn't say it's reckless because they think it through and it makes sense – it’s only when you look back, when you’re older. If you're old and you take risks, you don't have time to recover if you make a major mistake.”
Hains extends that perspective to new asset classes and is a strong adherent to the adage of not investing in what you don’t understand – and that applies crypto assets.
“I don't understand them. It’s too complicated, I’ve had these currencies and blockchain explained to me and I still don’t understand. But I think most people don’t understand it either and that’s the risk when investing.”
Maintaining human contact
Having interviewed Hains quite a few times now, what separates him – and many other investment greats – is that willingness to accept he doesn’t understand everything. His three quarters of a century in business are a living embodiment of “only invest in what you think you know”. “Hindsight is always better but not available to me,” he adds.
Hains is missing the office for the human contact and the informal and spontaneous interactions and is looking forward to his routine. Obviously he is very well set up at home and spends lockdowns at his property, the renowned Kingston Park on the Mornington Peninsula, but he doesn’t believe work places will be healthy if the human contact isn’t maintained.
“Working from home has been thrust upon us and, in many cases, it's being used as a better way to do things. And that may be true for certain types of businesses. The need to come into the office is certainly much lower for some people,” he accepts. “But I think you miss the communication between people, when they're having a coffee or when you can just stop by their desk and say ‘OK, I want to talk to you’ about something.
“Having a cup of coffee with your work colleagues and tossing around some ideas, that’s lost. And I think that's a pity. I wouldn’t like it. For some industries it might be fun but I think there will be a loss of communication and contact and also of culture – and that is the critical thing for any business.”
Good for it
ANZ has banked David Hains since 1956 and now looks after the extended family as well. How that relationship started is testament to the importance of backing customers and exercising judgement – even when the customer is just 26 years old. Hains says ANZ wasn’t his first choice – that was the ES&A.
“I was with ES&A and I asked them for a £5,000 overdraft so I could stock a lot more television sets. I could see television was going to be big. And they refused.,” he remembers.
“So Eric Lloyd, who was a great friend and my legal adviser, was friendly with Hugh Williamson, the chief general manager of ANZ. Eric took me to see Hugh and I sat there for about half an hour while they chatted and laughed and joked.
“Then Hugh turned to me and said ‘what can we do for you, young man?’ And I said ‘well, I'd like an overdraft of £5,000’. And he pressed the buzzer and he brought in the head office branch manager. He said to him ‘look, this young man wants an overdraft of £5,000 but that won't get him anywhere. Give him £25,000. And don't worry, I'm sure we'll get the money back’. And, of course, I made sure they did.
For a long time ANZ didn’t have any security over the exposure - just trust - and Hains and Williamson became friends. “He would invite me to these very formal bank lunches he had upstairs with business leaders and influential people and, as a young man, I really appreciated the opportunity to meet and learn from them,” he says.
“That was the start of my activity with ANZ and I’ve banked with them personally ever since.”
Lasting relationships
Loyalty, trust and relationships are central to Hains philosophy of business, not just with his bankers but with any long term association. He says simply it is just easier to work with people you know and trust and, over time, it is actually lower risk and more rewarding.
“We always try and maintain our associations because we're more comfortable with them, we know the people we deal with. That doesn’t just apply to banking but everywhere in business,” he says. “That’s not to say there won’t be problems but as long as you can talk through problems, you can usually resolve them. You get to a stage where what they tell you and you tell them is just believed, you don't have to spell it out. And that's a big factor, particularly in the financial markets.”
While credibility and relationships are an enduring value, Hains also believes the banking industry has become much better at handling financial downturns, particularly in contrast to the early recessions he experienced. He believes that more enlightened attitude has helped during the COVID-19 pandemic but also makes more business sense. There are also more alternatives for businesses which get into trouble today, Hains adds.
“If you go back to the business failures of the past, it was usually because banks over-lent and companies became overly indebted,” he says. “Then the economy would have a hiccup – and Australia was always boom and bust – and those companies had nowhere to go. The edict would come down from the banks head office and those companies would be unable to pay so bankruptcy or receivership was the only possible result.
“Now they do have alternatives, other sources of funding, they can usually find the money somewhere at a price, but also the banks are more willing to work with them. Of course part of that is there is so much cheap liquidity in the system. Whether that will stay the case I don’t know. But I think the banks do have a much better attitude today. It’s just the nature of business, there are cycles in businesses - we all make mistakes but sometimes you have to make a few bad decisions before you learn what the right ones are.”
Nearing 80 years in business has taught Hains many things and one is there are no universally right answers to business success. Having scraped through the dire 1963 recession, scrambling to keep the banks at bay, Hains vowed never to rely on borrowed money again.
“That’s the reason we haven’t had any borrowing since 1963,” he says. “And that can cost you money because you have no leverage. But you have to live with that, that’s the decision we made. It’s a business decision, it’s a risk-reward decision, but it’s not right for everyone. Everybody has to decide what their level of tension should be.
“Business conditions will always run in cycles but you've got to live through them to see the sun come out the next morning.”
Andrew Cornell is Managing Editor of bluenotes
Andrew Cornell’s 2009 interview with David Hains covering his full history in business is available via the Australian Financial Review
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.