In theory the saying above is easy, in practice it is very hard.
Richard and Christopher Chandler, the New Zealanders who ran the secretive Sovereign Global Investment from 1986-2006, truly understood and executed Templeton’s investment advice. Utilizing those principles, with their own unique style, the Chandler brothers turned $10 million in family money into $5 billion. A 36% CAGR over 20 years is quite an achievement and like Templeton they did it in the emerging markets when few were.
Let’s learn a little about the brother’s family history and some of their investment and business lessons.
HistoryRichard and Christopher Chandler were fortunate to have been born to Robert and Marija Chandler. Their father Robert was an ex-lieutenant in the Royal Navy during World War II. He worked as a minesweeper during the war and later would work in the beekeeping business along with launching a business building homes and apartments. In a round-the-world trip in 1955, he'd meet his wife Marija in Croatia. The family would settle down in Matangi, a rural farming town outside Hamilton, New Zealand.
Robert was an eternal optimist with strong values and ethics, the basic foundation for a good business operator. Marija, the daughter of an anticommunist mayor and farmer, had the independent-minded focus and instincts to be a fantastic entrepreneur which showed after she raised her three sons. Both brothers learned from their parents to have audacious goals and to break from the ordinary. Much of their education in business came while their parents started a new company.
Chandler House 1972 [Photo from Legatum]
In the early 1970s, Robert and Marija bought a decrepit two-story building in a bad part of Hamilton, New Zealand. They put 5,000 New Zealand dollars (roughly $40k USD in 2017) down and mortgaged the other NZ$195,000 (USD$1.7 million USD 2017). After renovating the building, the couple launched the Chandler House (pictured above) which became New Zealand’s equivalent of Neiman Marcus. Marija was the chief buyer for the company travelling all over Europe and Asia acquiring high end goods. The Chandler House would eventually turn their Hamilton neighborhood into an exclusive shopping district. The store attracted people from all over the country.
When not in boarding school, Richard and Christopher were involved in all aspects of the business from buying to selling. Richard recalled that his mother was “the most brilliant businessperson I’ve ever met and taught us many of the key principles we follow as investors.”
- Know your customers - “Never buy something unless you know to whom you can sell it.”
- Focus & scarcity - “Buy as much as possible in a narrow range of hot items. That way, when competitors ran out of stock, Chandler House could clean up.”
- Identify & concentrate on the best opportunities - Richard said Marija was the “master of narrow and deep. With stocks, we do the same thing. We back our beliefs to the hilt.”
In 1982, the brothers would take over the operations of Chandler House. The two would spearhead growth to ten stores and a few outside investments, however, with the end of New Zealand’s de-regulatory boom in sight the brothers pivoted into other areas. They eventually divested all stores and funneled the $10 million into launching the investment fund Sovereign Global in 1986.
“We are great believers in the idea of having audacious goals, breaking out and doing something out of the ordinary,” says Richard. “It’s helped us turn what most people consider a mere profession into a vocation and, beyond that, an art, where we frequently put ourselves in harm’s way.”
Sovereign often went against the grain and bought highly out of favor international stocks. They had traditionally bought stocks at P/E ratios of 3 or less and were able to correctly predict those valuations would be re-rated much higher.
"It's essential to seek facts diligently, advice never." - Philip Carret Pioneer Investments
- Go where others aren't - Sovereign was one of the first major investors in Brazil when the country opened to outside investors in 1991. Sovereign was one of the first outsiders to invest into Russia during its transition to a market-based economy after the collapse of Communism. Sovereign also invested against the herd in Japan and Korea during the banking crisis in the early to mid 2000's.
- The pitfalls of money management - Richard said, "Money managers have to account for their actions to their shareholders, which means they have an undue fear of underperformance. We invest only our own money. Our investment decisions are driven by optimism, not fear." Richard also mentioned that most fund managers are focused on what can go wrong instead of what can go right. Sovereign never thought that way. They always focused on what could go right.
- "By buying big -- going narrow and deep, as opposed to diversifying -- you maximize your success."- Sovereign usually invested in less than ten stocks and favored large-cap stocks in large countries. Richard said, "If you are invested in big countries, that means there is a ready audience of benchmark-following investors who must buy the asset."
- Don't press your luck - The Chandlers's first investments was in real estate in Hong Kong. They also invested in stock index futures in Hong Kong and learned a valuable lesson. "The Hang Seng index was 60 percent property, so it seemed very closely related to our main investments," says Richard. Because of the volatility of the market, however, they set stop-losses to protect themselves from a downturn. On Friday, October 16, 1987, their broker informed them that their stops had been hit. After deliberating briefly the brothers ordered their positions closed. They were glad they did. The following Monday stock markets around the world collapsed, and the Hong Kong exchange shut down for three days. The Chandlers managed to get out with a $5 million profit and have not bought futures or other derivatives since. Richard said, "We learned that if you get lucky once, don't press your luck."
- Be creative in picking assets - Richard called it "delta quadrant" where they focused on "economies or distressed sectors where information is not easily available and standard metrics don't apply."
- Be creative in valuing assets - Sovereign correctly bet in 2002 that Japanese bank stocks traded at 3 percent of market capitalization as a percentage of assets. Citigroup and other banks were trading at 15 percent at the time. The brothers concluded that either the Japanese banks would have to nationalize or the country would reflate the economy with low interest rates. They bet on the later with a $1 billion bet in UFJ Holdings along with few other banks, and were correct.
- Have an unbelievable thirst for knowledge - One of the characteristics that Douglas Flint, who worked alongside Richard at accounting firm Peat Marwick before he started with the family business, noticed Richard's "incredible intellectual capacity and enormous, almost unbelievable thirst for knowledge. He used every project we worked on as an experience to learn a new business model." You want to know your investments better than most. This thirst for knowledge helped the brothers learn the businesses they were investing in better than others.
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Resources:Secrets of Sovereign
Thanks to our member @Kevin for the lead on this story