Don Argus, private investor

PORTFOLIO POINT: He’s wary of a 'toppy’ market, expects interest rates to rise and likes to 'follow the cash’ when considering investments.

Some time ago Don Argus agreed to meet me and reveal to Eureka Report subscribers his plans for retirement and investment strategy going forward.

It was just before Easter when the former BHP chairman and I sat down for a chat that would touch on many topics. The first thing I noticed was that he had abandoned his traditional corporate uniform of a suit for something more casual. It would be just the first of many changes.

Our conversation ranged from world interest rates and markets to what he will do with his life now he is 72 and “retired”. I believe they are equally important. Some of the quotes that follow have been edited for clarity and space, but in the main they are Argus uncut.

A great many Eureka Report readers will either face the same challenges as Argus or will see them on the horizon. One of those will be the subject of family. Don and his wife Pat have three daughters and five grandchildren. The education of their grandchildren is particularly important to Don and Pat.

In a strange way this is his second “retirement”. He took a break after stepping down as chief executive of the NAB in 1999. But soon after that he became chairman of BHP Billiton and Brambles and a director of Australian Foundation (AFIC) and Southcorp.

So much for retirement. He really has been working full tilt for the past decade. This prompted my first question: “What now? What are you going to do next?”

He has clearly given this some careful thought. Although he has left BHP, he plans to stay on the board at AFIC and to become more involved in mentoring.

“Companies around the world are sorting out what they’re doing with advisory boards and I’ve had quite a number of approaches to consider advisory board work,” he says. “It’s a mentoring role. You get involved in what they are planning or what their strategy is.

“A number of companies in the UK have started advisory boards. I was talking to Colin Marshall, the former chairman of BA (British Airways), and he said 'You’ll find it quite rewarding. You can spend whatever time there you want to spend, but if you don’t spend some time there, then you start to lose your way’.”

So Argus has a plan. But why not simply play golf? He has surely earned it.

In fact Argus has planned a golfing holiday in Europe with friends. But unlike a few years back when he played at the best courses but stayed in three-star accommodation, this time he will stay in five-star accommodation and play courses that are perhaps not quite so challenging.

Gottliebsen: But what don’t you play golf all the time?

Argus: Oh no. I’d go nuts. I’d drive everyone around me nuts.

Including your wife?

Yes.

I have taken these quotes out verbatim because they represent a real challenge for active people who retire. They go from being at home “on occasions” to being at home 24 hours and bored. It has broken many long-standing marriages.

My next question was about money. Don Argus is not short of money and for many years has been dealing in sums worth billions. In particular, at BHP he and the rest of the executive team have masterminded as good a strategy as any group in the world to deal with the next decade.

Given what he had done at BHP, my next question was about his personal investment strategy.

“I follow the cash ... I always have, always will,” he says. “I have a very simple method and I even do it up at AFIC. I just say to the guys, 'Show me where the cash is and show me what the net present value (NPV) of the future cash flow is going to be because if you don’t see any value in what companies are doing with cash, then don’t invest in them’. It’s as simple as that. And I can tell you that it works.

“I could become a good shareholder activist. The number of companies that just sort of mark time in the community and do not get challenged '¦ It’s remarkable and it’s a real issue.”

Accordingly, Argus says that his investment strategy revolves around following the cash. Investors have been using NPV and Discounted Cash Flow (DCF) analysis to value companies for a very long time with a fair amount of success.

“I started it when I was in the credit area of the bank and I’ve never faltered from it. When you join a resource company, you realise that a lot of the capital that you’re spending doesn’t really start to become positive until probably seven to 12 years out. It’s a very strong discipline: you’ve got to keep that cash going.”

Argus regards the stockmarket as “a bit toppy” so has a heavier than normal weighting to cash. “If you look at the history of the stockmarkets they trade in a band and if once something gets out of a band, then you’ve got to start to worry about it. I stay in the stocks that generate the cash and where I can see where there’s future growth, but I’m not in anything else.”

He says it is not a question of becoming risk-averse as he gets older. “I haven’t changed my philosophy in 30 years”, he says with conviction. He points out that many times in the past interest rates have been an issue; companies have had valuation problems and – worst of all – they have run out of cash. “History repeats itself and we are slow learners,” he says.

I ask whether he thinks the cost of money will rise in the next five years. He comes back without hesitation: “Oh, odds on. You go out to 2012, when a lot of the corporate debt starts to roll over. On top of that all the government debt starts to roll in as they wind back their stimulus or fund some of the stimulus. The cost of money is going to become quite expensive.

“In 1987 it was the high leverage in the middle market that went. That’s when we first had negative gearing. Everyone had their second and third house. High leverage in the middle ranks and with money costing 17%. The perfect storm. She blew apart.”

Argus does not think interest rates will rise that far around 2012 but he won’t put a figure on the likely increase. “I think central bankers are a bit smarter than they were '¦ I think Treasury is a bit smarter now with what they do with monetary policy.”

However he warns: “If the cost of money starts to get high, you will start to get liquidity problems again: the old demand/supply equation. That’s what happened last time. The liquidity issues started and when bankers don’t have good liquidity and they lose faith in each other, then the system slows.”

Argus might be wrong in being substantially more liquid in his investment than he normally is. Interest rates may stay low but Argus has implemented his “odds on” declaration, both in BHP’s strategy and his personal life. He believes in it with a passion.