Brent Sheather: Be a winner, not a Winston Churchill

For Churchill, victory on the sharemarket proved elusive.

Most analyses of the lives of famous investors are undertaken because they are successful - think Warren Buffett, US money manager David Swensen or financier John Pierpont Morgan.

This is unfortunate because their success is often particular to their unique skills and most other investors don't have these skills.

However, on the basis of the expert's success, the public are frequently urged by financial advisers to model their investment strategies on those of the experts, often with disastrous results.

For example, Buffett has eschewed diversification and has been successful in picking winners.

That worked for Warren but, more often than not, doesn't work for most people, including, as we will see, Sir Winston Churchill.

No More Champagne: Churchill and His Money by David Lough looks at the personal investment strategies and investment trading disasters of Churchill, and the book is of interest because it presents a clear lesson of what not to do.

There were a few clues from Churchill's public persona as to his investment habits: the Gallipoli campaign was championed by Churchill and it was a huge risk which could have paid off, but didn't.

Similarly, his love of cigars and Pol Roger hinted at someone who might aspire to the good life.

What this book shows is that, despite being "the grandson of the seventh Duke of Marlborough and a member of the aristocracy", his deleterious management of his own finances meant he lurched from financial crisis to crisis.

Churchill the investor was a gambler whose net worth was highly volatile and he frequently depended on major infusions of new capital from benefactors, including friends and family, to avoid bankruptcy.

While readers might find No More Champagne of interest simply to discover that one of the century's most successful politicians "ran up huge debts, gambled heavily, lost fortunes on the stock market and avoided paying tax" the 532 pages contains some valuable lessons for today's investors as regards what not to do.

First off, let's have a look at some of Winston's specific trades.

Winston read about a certain Lord Cowdary, who decided not to buy a stake in an oil field for $80,000, only for the field to turn out to be worth $80 million.

Winston wasn't going to make that mistake so he bought, on the advice of a local commodity trader, shares in various small Canadian oil companies, most of which went bankrupt a couple of years later without finding any oil.

Winston changed stockbrokers like people change clothes; while travelling through Canada he opened accounts with local brokers but once he got to America and met local brokers, he decided US stocks were the place to be and shifted his cash funds from the Canadian broking firms to a new US broker.

After lunch with Charlie Chaplin he wrote to his wife saying he had made 1000 pounds in a few days by speculating on a furniture manufacturer. Between October 8, 1929 and October 12, Churchill's turnover reached $200,000, consisting of quick trades, in and out of one stock.

By this stage Churchill had lost track of what investments he actually owned and his luck was running out - the Wall Street crash was looming.

Nevertheless, his advisers recommended that he invest further and he was trading on margin, borrowing $5 for every $1 of his own money.

Winston's short term trading strategies meant he was exposed to the Wall Street crash (apparently losing 9 million pounds in today's money) but largely out of the market when it recovered, so that in August 1933 his total share portfolio was worth only 625 pounds.

So what specifically can we learn from Winston's mistakes?

• First, buying individual stocks is fraught with danger unless you are an insider or especially clever and lucky. The stockmarket over time outperforms government bonds but its outperformance of risk-free assets frequently relies upon the performance of a relatively small number of great stocks. The stockmarket is a big place and the lower the number of stocks in your portfolio, the lower the chance that you will own those great stocks. Churchill was both a well-connected insider and clever too, but not lucky enough to consistently own the best performing stocks. As happens so frequently to stock pickers, his high-risk approach translated into big losses.

• Short-term trading is gambling and allows one's basic instincts of fight/flight to dominate, with frequently disastrous consequences.

• Winston's letter to his wife, after reading newspapers and broker reports on investment matters in early 1929 when travelling through Canada, is insightful as it highlights one of the fundamental downfalls of "research". From his private railway carriage, Winston was "intoxicated by the country's money making opportunities" and he wrote to his wife, "I see various opportunities of profitable investment in this country". Specifically, Winston believes that Canadian stocks have "opportunities" but he doesn't consider the fact that the "opportunities" are obvious to all and have already been factored into prices. Second, by buying individual stocks he ran the risk that those stocks might not successfully avail themselves of the "opportunities". It's far more important to diversify. Winston couldn't buy a Canadian stock market exchange-traded fund but today you can.

The title of the book, No More Champagne, also gives an important insight into managing one's own finances: cutting out champagne, especially just for three days, or reducing cigar consumption to four a day, had absolutely no impact on Churchill's balance sheet and, worst of all, made him feel terrible.

Equally, today's suggestions from financial advisers, personal trainers and life coaches that eliminating life's pleasures like your morning latte and avocado on toast are the keys to investment success are just as ridiculous and painful.

Probably the best strategy, and certainly the least painful, is to be sensible in one's investment strategies. This includes diversifying widely, keeping costs low and taking a long-term perspective.

In contrast, Winston had a short-term perspective, traded wildly and speculated on individual stocks.

Humanity, however, owes Winston a huge debt of gratitude - he guided the UK and the western world through those dark days in 1940-41.

Today we can toast Winston's legacy and sample the high life by buying a bottle of his eponymous Pol Roger champagne - $265 a bottle.

While we are on the subject of bad advice and adverse outcomes, the vultures are circling Auckland Council again and urging it to address its non-existent gearing issues.

Ratepayers might like to reflect on how badly they did last time they sold Auckland Airport shares.

We calculate that since the council sold back in December 2002, the shares have returned, inclusive of dividends, 1116 per cent.

That's a very impressive 18.8 per cent per annum compound that ratepayers have missed out on - considerably ahead of the 3.5 per cent per annum cost of debt for Auckland ratepayers as evidenced by the current yield on Auckland City 10-year bonds.

• Brent Sheather is an authorised financial adviser. A disclosure statement is available upon request. He may have an interest in the companies discussed.