The way to earn exceptional returns: Do nothing

Citywire A-rated Nick Train and his partner, Citywire A-rated Michael Lindsell, have managed money together for three decades. In that time, they have come to be considered two of the UK’s sharpest investment minds.

“The way that we approach the equity investment challenge is to apply a very traditional, very simple, but powerful piece of investment advice,” said Train, speaking at the recent BCI Global Investment Conference. “That piece of investment advice is ‘run your winners’.”


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Train, who co-manages the Lindsell Train Global Equity fund, said that while this may sound simple, and even simplistic, it is not necessarily easy.


“I’m sure all of us have either taken profits or even exited some of our winning investments prematurely,” he said. “There are certain investors that don’t run their winners at all. They instead carry on pouring more and more of their precious savings into their losing investments on the often specious grounds that because it’s gone down it must have gotten cheaper.”

The stocks that Lindsell Train looks to invest in, however, are not ones showing some sort of cyclical value.

“The shares of great businesses like McDonald’s, for instance, have a propensity to go up, and they have a propensity to go up a lot,” Train said. “I’m not talking about share prices going up 50% or even 100%. Given time, shares of great businesses go up many, many, many times over. Peter Lynch called them baggers. Those are share prices that go up 10 times or 20 times, or more.”

McDonald’s, for instance, is up about 160-fold since 1980.

Winning stocks

“What that means, in point of fact, is that almost any decision to take profit or to exit this incredible business over the last 38 years has been a mistake,” said Train. “Notice, and this, I think, is of particular importance, that any decision to have sold out of McDonald’s on conventional valuation grounds is also a mistake.

“Even though McDonald’s was trading in 2000 on an ostensibly high PE rating of 28 times – and the share price did fall from that peak – I think you can still agree that it would have been a mistake to have sold out of this winner. From that peak in 2000, McDonald’s is up another four and a half times, while the S&P 500 is up two-and-a-bit times since then.”

Another example of this kind of ‘winning stock’ is one that appears in the Lindsell Train Global Equity fund – Unilever.

“Between 1962 and 1989, Unilever’s share price went up 100-fold,” said Train. “It’s worth contemplating why that might have been the case.


“This company manufactures and owns some of the worlds most beloved and trusted consumer brands,” said Train. “Those brands are consumed pretty much everywhere on the planet. Something like 2.5 billion people use a Unilever product every single day. That ubiquity has driven multi-decade profit growth and, as it happens, has also driven multi-decade dividend growth.”

Unilever has increased its dividend consistently for more than 50 years.

“There are so few companies that can do that or have done that, and it’s created incredible value for the owners of this company over time,” said Train. “Since 1989 the stock is up 14-fold in dollar terms. The S&P 500 is up 12 times over the same period. Why would you take profit in this wonderful, winning company?”

Train also highlighted the performance of Kao Corporation in Japan, which has grown its dividend 20 times since 1980, and its share price is 24 times higher in yen terms over the same period.

Long runway

“Babies’ bottoms are what I contemplate when I think about Kao,” said Train. “There are a lot of babies’ bottoms in Asia, and a lot of those bottoms are covered by Kao’s Merries diaper brand. A couple of years ago, there was an annualised $12 billion of nappy sales across the Asia region. Those are forecast to reach $30 billion by 2030.

“Again, why would you sell out of a winning business like Kao?”

Lindsell Train sees similar long-term growth in the world’s large beverage makers.

“The only thing more reliable than babies’ bottoms is booze,” said Train. “To us, it is absolutely no accident that many of the world’s most enduring family fortunes are based around the ownership of wonderful beverage brands. And we own a number of these right at the heart of our portfolios.

“Heineken is up 21-fold since 1989. Brown-Foreman, the owner of Jack Daniels, is up 30-fold since 1989.

“We also hold Diageo, which not only owns Johnny Walker and Tanqueray but also Guinness. Guinness is only 260-odd years into its 9 000-year lease on its Dublin Brewery. That is a long runway for this winner to carry on winning. ‘


What is most significant about these companies is that the full benefit of investing in them is only realised by holding them over extremely long periods. That requires a lot of sitting on your hands as an investor.

“That is what we try to do: as little as possible,” said Train. “And it’s not easy in these hyperactive markets.”

This, he said, is the sentiment expressed by Thomas Phelps in his book, 100 to 1 in the Stock Market.

“Phelps said that you should discipline yourself to regard every sale that you make as a confession that you made a mistake,” said Train. “However paradoxical it sounds, actually doing nothing is the way to earn exceptional returns in equity markets.”

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.