“Motivated Money” by Peter Thornhill is the book that started it all for me. Thornhill would say the book is a guideline to investing, not speculating. It was also the first time that an investing strategy really “spoke” to me in any significant manner, and my basic strategy was derived from the wisdom contained in Motivated Money. Here are five things that I learnt from this excellent book:
1. Short Term Timeframes Ruin Investment Strategies
One of the major attractions of the book was Thornhill’s consistent message that long term timeframes make it inevitable that dividend paying stocks will deliver excellent results.
Thornhill provides an interesting example:
For those looking for the best income streams, the choice is obvious – Term Deposits provide the superior option. Most investors typically consider a three year timeframe, if that; the end result is that investors looking for income would favour the Term Deposits. In addition, many people also suffer from the prejudices forced upon them by parents and friends. A common one in Australia is that “shares” are risky, while property is safe. These prejudices also feed into investment decisions.
If we consider longer term time frames, the picture is totally different. Income from equities quickly exceeds income from term deposits, and the capital balance increases too. In the below example, neither dividends nor interest are reinvested:
2. Dividends Can be Used for Income
This point was another huge “lights on” moment for me. Historically, I thought of investments such as bonds and term deposits as “income” or defensive investments, where as equities were thought of as growth investments.
The yields on shares are typically lower than bond rates, and most investors focus on the capital gains (or share price fluctuations) from equities. Related to point 1, this is a problem of timeframes. As we’ve seen before, in the short term, while bond rates may prove attractive for income, over the long run (10 years or greater) this reverses.
This is why I ultimately use dividends for income. This is relatively counter intuitive, and most people can’t get past the relative low headline yields of equities. This is what Thornhill refers to as the “yield trap”, although be careful – this is not they yield trap as it is commonly thought of.
Ultimately, the use of dividends for income rests on whether you, as an investor, are comfortable with the dividend trend highlighted in the chart above. If you are, then you might consider using equities for income purposes.
If, as an investor, you focus primarily on stock prices (as opposed to dividend streams), then using equities for income may not be for you. As Thornhill says, I will be “sitting, bored witless, choking on my dividend cheques”.
3. Why Industrial Shares are Superior to REITs for Dividends
Thornhill begins his discussion of Property Trusts (REITs) by asking the following question: “If you could make more money owning property than going into business, why would anyone ever go into business?” The question, in my opinion, is a good one; the chart below highlights the superiority of dividend paying industrials for both capital gains and dividend income.
The primary problem is that Listed Property Trusts must distribute 100% of their income every year. They have no retained earnings to reinvest, and thus struggle to grow dividends in a way that is meaningful to investors over the long term. The graph above represents a 100% payout ratio, similar to term deposits. We have seen previously that dividend paying industrials outperform term deposits, and LPTs are no different.
Thornhill ends the discussion of Property Trusts with an incredibly important comment. He states:
Having wealth-producing investments is not just important in the years leading up to retirement; continuing to build that wealth during retirement is, if anything, even more important after one has retired.”
For those who aim to sell down capital during retirement, this statement should certainly make them think.
4. Worrying about Crashes makes for good blog posts, not good investing.
The financial media talks about market crashes all the time. People love charts that remind investors how long it took for investors to recover losses following crashes. Crashes are inevitable, they argue, and diversifying amongst assets is your best defence.
And diversification does help you from avoiding equity market crashes. The only problem is, diversification exposes you to downturns in other asset classes too. Now, I’m not arguing against diversification, but whenever only one side of an argument is provided, you should typically wonder about the other side too.
But its also worth understanding how markets react following crashes. The crash in the Dow Jones in 1929 saw a 40% fall over 7 weeks. What is often not mentioned is that the market had increased by 80% over the previous 20 months. The crash in hindsight seemed debilitating – but the reality is the crash was a correction of over exuberance.
When a crash occurs, it occurs because markets have reached an irrational high. After every correction, markets eventually recover. Spend less time worrying about the possibility of market crashes, and more time worrying about things that matter.
5. Timeframes matter – and its not too late.
In a refreshing chapter, Thornhill talks about his idea of short, medium and long term. While many people would consider the long term 10 years and short term 1 year, Thornhill believes the short term starts at 10 years! And as he says:
Any less and you are a mug punter!
As far as investment decisions go, you should think beyond your lifespan and that of your partner. You also need to consider your children, and your children’s children.
This book is the book that I give as gifts to my friends when they ask me how to invest. Its the book that really impressed on me not only how important it is to invest for your future, but gave me the tools and strategy to know that consistent and disciplined application would ensure that my retirement is comfortable. Highly recommended.