The Brierley lesson for modern investors
About 25 years ago I bought a gold MGB roadster convertible for $10,000. The engine leaked oil, the soft top leaked water and the brakes were largely cosmetic; but it was a fun little car with a rorty exhaust note. And I was told its value could only go up.
One day a mate who worked in the financial markets told me it reminded him of the jaunty sports cars that the Brierley Investments team used to swan around in during the 70s.
I checked the ownership papers on my car and sure enough, the New Zealand Motor Corporation had sold the little MG new to ‘‘BIL Management’’ in 1971. Which also may have explained why I found a few champagne muselets under the seats when I replaced the carpets.
The memory of the little MG and its under-seat detritus came back to me this week with the news that BIL founder and infamous corporate raider Ron Brierley had pleaded guilty to possession of child sex abuse images.
Most would share professional director Rob Campbell’s sentiments of contempt for Brierley and sorrow for the damage inflicted on the children.
It’s a repulsive fall from grace for the former doyen of the investment markets, though perhaps not completely surprising given an earlier book that chronicled Brierley’s frequent visits to Thailand.
If you weren’t around in the 80s and 90s, it’s hard to understand the long shadow that Brierley and his lieutenants, Paul Collins and Bruce Hancox, cast over the investment markets.
Mums, dads, bricklayers and freezing workers – people had never ventured beyond term deposits and had no idea of how sharemarkets worked – suddenly became paperrich after moving to local equities.
Against a background of continually rising markets, BIL used to regularly do bonus issues and cash issues; such that within the space of a few years, the numbers of shares you owned could double or triple.
As well as holding shares in their own right, mums and dads formed share clubs who consolidated their hard-won wages to buy what they thought were places on an escalator that only went up. Many took out second mortgages on their homes so they could tip in more money.
I vividly remember going to a meeting of the Timaru Deerstalkers Association, where the main issue of discussion was whether to put their hard-won cash reserves into Brierleys, Equiticorp or Ariadne shares. I bet you a dollar to a donut that no-one there had a clue what Ariadne did. Mind you, they were likely in good company.
Poseidon, EnergyCorp, JudgeCorp – the list of similarly foggy commercial ventures goes on. Many of them enjoyed animated increases in share price, surfing the wave of frothy markets. Markets that rose from 600 points to 4000 points in just five years. In one year alone the local market went up 116 per cent.
Then came Black Tuesday (or Black Monday as it was known in the United States). On October 20, 1987 the biggest one-day stockmarket crash in history occurred, and the Dow Jones Industrial Average fell 22 per cent. The local Barclays followed suit over the next week.
The crash rocked the world, but markets fought back, recovering most of their losses in two years. Well, most of the world. Less so New Zealand, where the slide lasted four years and slashed almost 70 per cent off the value of the market.
The once-buoyant New Zealand housing market stalled and the country moved into recession. Confidence dropped and so did growth. Unemployment peaked at 11 per cent in 1991.
Brierley shares fell from $8 to 40 cents, taking a lot of dreams with them.
Many mums and dads had their savings reduced by half or more. And many had to either put off retirement, or settle for a meagre one.
Of course, a key contributor to the damage done and the length of the recovery was diversification. Or more specifically, the lack of it.
Retail investors had forgotten that there are four main asset classes, and focused on just one of them. Worse than that, they had focused on one asset class in one market in one currency. Namely, equities in New Zealand held in New Zealand dollars.
So when those went through the floor, these investors were massively exposed, given their lack of diversity into other assets or markets.
Although today’s context is quite different, and we’re probably not looking down the barrel of a global meltdown, much of the same underlying investor response is similar.
The residential housing market has gone off like a bucket of prawns in the sun. And everyone is trying to get a piece of the action if they can, taking out loans and focusing on just one asset class. Diversification is going out the window.
About 20 years ago I sold my exBrierley MGB for $7000. Although I’d been told that MG values could only go up, turns out that was wrong and I took a bath.
Likewise, many people are buying property, thinking it can only go up. If they are wrong, then it’s going to be a lot of people taking baths.
The residential housing market has gone off like a bucket of prawns in the sun.