Graham And Doddsville

Irving Kahn, co-founder of Kahn Brothers Group and one-time teaching assistant to Benjamin Graham at Columbia Business School, has died at the age of 109.  I had the opportunity to meet Mr. Kahn in 2012.  I’ll never forget Mr. Kahn’s first words…. a profuse apology for not standing to greet me.  He had fallen on a step and hurt his back.  Irving Kahn, a successful investor who was 106 at the time and still worked in the office 3 – 4 days a week was apologizing for not giving me a proper greeting?!

We had a wonderful lunch.  If I am half as lucid at 80 as he was at 106, I will be a happy man.  More than once during our meeting Mr. Kahn urged me to read Storage and Stability by Benjamin Graham.  Embarrassingly, I never got around to it.  I think Mr. Kahn would happy to know that I just placed an order on Amazon and the book is next in my queue.  We may not all be blessed with as many years as Irving Kahn, but at least we have something and someone to aspire to.

See:  Irving Kahn, Investor Who Profited in ’29 Crash, Dies at 109 (Bloomberg)

See:  Irving Kahn, the world’s oldest investor, dies at 109 (The Telegraph)

See:  Irving Kahn, Wall Street’s oldest stockbroker, dies at 109 (The Washington Post)

See:  The oldest money manager on Wall Street has died at age 109 (Business Insider)

See:  Irving and Tom Kahn Guest Lecture (The Ben Graham Center for Value Investing)

See:  Interview of Irving Kahn (The Ben Graham Center for Value Investing)

See:  Storage and Stability: The Original 1937 Edition by Benjamin Graham with a Forward by Irving Kahn (Amazon)

As far as I know, this video premiered at the Columbia Student Investment Management Conference held on Friday, February 1, 2013. This is the first live footage of Benjamin Graham that I have ever seen and includes interviews with Warren Buffett, Irving Kahn, Benjamin Graham, Jr., Charles Brandes and many others.  More phenomenal work from The Heilbrunn Center for Graham and Dodd Investing and Columbia Business School.

On November 1, 2011, Charlie Rose interviewed Superinvestor Seth Klarman for the Facing History and Ourselves New York Benefit Dinner.  If you have not seen this interview, it is fantastic.

One of my favorite nuggets is the following (see 25:30):

Warren evolved through 3 stages:  He went from buying cigar butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great businesses at so-so prices.  And maybe even this new area of buying weird securities from crappy businesses at better than market prices – like B of A preferred or whatever… I’m still in phase one.  We’re still buying cigar butts, there’s a good business there in buying them and it’s a lot of fun.

I think Warren captured the idea himself in his 1964 (sic) article The Superinvestors of Graham and Doddsville and in it he talks about – value investing is like an innoculation – you either get it right away, or you never get it.  And I think it’s just true.  I actually think there’s just a gene for this stuff.  Whether it’s a value investing gene or a contrarian gene.

When asked why we trade, many of us would answer with traditional, rational responses. We see an undervalued company. We like a business, a brand or a strategy. Or, it’s the flip side: We’re selling because we may think the fundamentals point to trouble. We see an investment that looks overvalued.

As we know, most people follow the herd.  But what about contrarian investors – the ones featured on this blog – who consistently move against the herd?

It’s what the academics describe as a relatively new intersection of financial economics, psychology, and evolutionary biology including new interpretations of mutation. And the upshot, to me at least, is that we may not be as deliberative as we might think when it comes to trading decisions. In other words, we’re wired to trade a certain way.

According to Andrew Lo of MIT and Thomas J. Brennan of Northwestern claim that science evolution may explain both the herd mentality and also a contrarian one.

In other words, many of us are bound to the pack. A minority of us break away from it.

Both behaviors are necessary from an evolutionary standpoint because they’re necessary for the species to survive.  Every species needs its normal populations and its mutants.

I think I was just called a “mutant.”  I guess if that puts anywhere near the same group as Warren Buffett and Seth Klarman, then I am proud to be a mutant.

Click here to read the entire article The missing link of investing: Science may explain why we trade at MarketWatch.com.

Click here to see An Interview with Seth Klarman and Charlie Rose.

Click here to learn more about Seth Klarman.

The first time I saw this scene from Other People’s Money was in my value investing class.  I came across the clip several months ago, thanks to Walrusvalue, and just saw another reference to it on CSInvesting.org.

In this clip from the 1991 comedy, Other People’s Money, Danny DeVito gives a 3 minute explanation of value investing – Benjamin Graham Style – with the clarity of a Warren Buffett.

Prior to 2008, it was normal for a value investor to have no particular “view on the economy.”   As Ben Graham said “Analysis should be penetrating not prophetic.”  In The Little Book of Behavioral Investing James Montier explains that “All Investors should devote themselves to understanding the nature of the business and its intrinsic worth, rather than wasting their time trying to guess the unknowable future.”

After 2008, several highly regarded value investors began to argue that while they still might not attempt a detailed economic forecast, they now found it more important to be aware of the economic environment and macro outlook.

As usual, my view is not as black and white.  Whether or not a value investor should have a “view on the economy” is still up for debate.  However, there is no doubt that investors must understand the the impact different economic outcomes can have on the intrinsic value of each stock they own.  Montier goes on to quote Howard Marks of Oaktree Capital who in 2001 wrote:

There are a few things I dismiss and a few I believe in thoroughly. The former include economic forecasts, which I think don’t add value, and the list of the latter starts with cycles and the need to prepare for them.

“Hey, ” you might say, “that’s contradictory. The best way to prepare for cycles is to predict them, and you just said it can’t be done.” That ’s absolutely true, but in my opinion by no means debilitating. All of investing consists of dealing  with the future .

. . and the future is something we can’t know much about. But the limits on our foreknowledge needn’t doom us to failure as long as we acknowledge them and act accordingly.

In my opinion, the key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you ’re going. Knowing where you are in a cycle and what that implies for the future is different from predicting the  timing, extent and shape of the cyclical move.

As usual, I completely agree with Marks.  So how do we know where we are and how do we analyze the effect of a range of economic conditions on the intrinsic value of an investment?  I believe that the best way is to study the only thing we know for certain – the past.  I know, things change, the world is different, we have globalization, a major worldwide debt crisis, a housing market the likes of which we have not seen since the 1930s, and the list goes on…  That being said, we must start somewhere.

One of the important steps in my investment process is what I call “Exploratory Research.” In this phase, I try to arrange all of the data I gathered to analyze how it relates to both each other and also many different variables.  The goal of this exercise is to get as creative as possible, with the hope of developing an analytical edge.  At the very least, this analysis will help me to understand how a business might react considering a range of economic scenarios.

I used to find economic data on Bloomberg, Capital IQ, or dozens of different websites.   However, I recently discovered an incredible Add-In for Microsoft Excel.   It is called the “FRED Add-in” and is provided by the Federal Reserve Bank of St. Louis.  As described on their website:

The Federal Reserve Bank of St. Louis Economic Data (FRED) Add-In is free software that will significantly reduce the amount of time spent collecting and organizing macroeconomic data. The FRED add-in provides free access to over 30,000 data series from various sources (e.g., BEA, BLS, Census, and OECD) directly through Microsoft Excel.

Key Features:

• One-click instant download of economic time series.
• Browse the most popular data and search the FRED database.
• Quick and easy data frequency conversion and growth rate calculations.
• Instantly refresh and update spreadsheets with newly released data.
• Create graphs with NBER recession shading and an auto update feature.

The best part is that the Add-In is free!  It is an amazing and powerful tool that you can download here.

A second resource I recently stumbled upon is Insidertrading.org which can be found here:  http://insidertrading.org/ .  It is another fantastic FREE resource to track insider buys and sells.  While I have found several websites in the past that provide insider buying/selling summaries, insidertrading.org seems to be the most comprehensive free site.  As value investors know, insider transactions can be a great place to find new investment ideas or raise questions about existing holdings.