Irving Kahn was the chairman of the investment firm Kahn Brothers Group. He was born in 1905 and prior to his recent death was one of the oldest active professional investors. The New York Times in its obituary of Irving Kahn wrote: “A disciple and later partner of Benjamin Graham, the contrarian advocate of value investing, Mr. Kahn would go on to work at Abraham & Company and Lehman Brothers, which he left in 1978 to open Kahn Brothers Group with two of his sons, Alan and Thomas.” Jason Zweig wrote in his tribute to Kahn: “He [was] Mr. Graham’s teaching assistant in the classes on security analysis that the great investor taught at Columbia Business School. Mr. Kahn also assisted Mr. Graham and Columbia professor David Dodd in researching their classic book, ‘Security Analysis,’ published in 1934.”
1. “In the Thirties, Ben Graham and others developed security analysis and the concept of value investing, which has been the focus of my life ever since. Value investing was the blueprint for analytical investing, as opposed to speculation.”
“Very few people have Ben Graham’s ability to take a subject very complex and boil it down to something simple.”
“Value investing is an art, not a science.”
“Between the ultra-depression-conservatism of Ben Graham and the brilliance of monopoly investor Warren Buffett, there are ample levels [of value investing] that should fit your own pattern of risk to reward, suitable for your capital needs and lifestyle.”
In these few sentences Irving Kahn identified many important points about value investing. First, value investing is a system. Second, the system is simple, but not easy to implement since certain aspects of value investing are an art. Third, by following the value investing system’s analytical approach you can invest rather than speculate. Fourth, the value investing system created by Ben Graham in the Thirties has evolved since times have changed. Fifth, there are variants of the value investing system that can be created on top of certain bedrock principles which will be discussed below. You can always find an approach that meets your unique needs. For example, after you retire, certain aspects of your approach to value investing can change.
2. “[Always] know much more about the stock I’m buying than the man who’s selling does.”
“The gambling nature of Wall Street has little or no interest in the serious, underlying nature of businesses.”
A value investor treating an investment security as a partial interest in an actual business is the first bedrock principle of value investing. If a share of stock does not represent an actual interest in a real business, what the hell is it? To understand that business requires research about the business not investor psychology. Irving Kahn is also pointing out in this set of quotations a truism that for every seller there is a buyer and vice versa. Daniel Kahneman writes: “There is always someone on the other side of a transaction; in general, it’s a financial institution or professional investor, ready to take advantage of the mistakes that individual traders make.” You must work hard to understand the underlying business and its markets better than other investors to generate an investing edge.
3. “Prices are continuously molded by fears, hopes, and unreliable estimates, capital is always at risk unless you buy better than average values.”
“There are always good companies that are overpriced. A disciplined investor avoids them. As Warren Buffett has correctly said, a good investor has the opposite temperament to that prevailing in the market. Throughout all the crashes, sticking to value investing helped me to preserve and grow my capital.”
That an asset should be purchased at a sufficient discount to intrinsic value (which provides the investor with a margin of safety) is the second bedrock principle of value investing. Irving Kahn is saying that price is a very different concept than value since prices are determined in the short term by the emotional state of investors and speculators. There is always a risk that price will be less than value just like there is always the opportunity that price will exceed value. Irving Kahn is also saying that you can pay too much even for a quality company and that avoiding conventional wisdom is wise. Seth Klarman points out that “value investing is a marriage between a contrarian and a calculator.”
4. “Security prices are as volatile as ocean waves – they range from calm to stormy.”
“No one knows when the tide will turn. Those who are leveraged, trade short-term and have bought at a high prices will be exposed to permanent loss of capital. I prefer to be slow and steady. I study companies and think about what they might return over, say, four or five years. If a stock goes down, I have time to weather the storm, maybe buy more at the lower price. If my arguments for the investment haven’t changed, then I should like the stock even more when it goes down.”
That Mr. Market should be treated as a servant rather than a master is the third bedrock principle of value investing. When J. P. Morgan was asked for a market prediction he said: “It will fluctuate.” Business cycles are inevitable due to wildly gyrating emotions of the people who make up a market. As large numbers of people follow each other due to their herding instinct they will inevitably sometimes underestimate and sometimes overestimate the actual intrinsic value of a business. Markets cycling back and forth between fear and greed present a rational investor with an opportunity to benefit, if the investor purchases assets based on intrinsic value and doesn’t try to time market prices . This is a hard concept for many people to grasp. Buying at a discount to intrinsic value seems like timing to some people, but it isn’t because you are not predicting the future price of the asset in the short term. You wait for an attractive price rather than predict its timing. The bet is that you know something will happen in the future, but you do not know when. If you are having trouble with this idea, I suggest you read Seth Klarman’s book Margin of Safety. They key word for me is “wait.” When you are waiting you are not predicting when something will happen, just that it will very likely happen sometime. Irving Kahn is essentially saying that good things come to he or she who patiently waits for a bargain purchase to become more valuable.
5. “You must have the discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets.”
“The Depression taught me what frugality means and the importance of not losing money.”
That an investor must make rational decisions is the fourth bedrock principle of value investing. This fourth principle is by far the hardest part of value investing. The battle humans constantly fight to make rational decisions is never ending. You will never stop making some boneheaded mistakes, but you can, with work and attention, reduce both their frequency and magnitude. learning from mistakes, especially the mistakes of others which is less personally painful, is wise. Many value investors like to read biographies since it is a great source of stories about mistakes and successes of all kinds. The way to acquire good judgment is often through bad judgment.
6. “We basically look for value where others have missed it. Our ideas have to be different from the prevailing views of the market. When investors flee, we look for reasonable purchases that will be fruitful over many years.”
“Lemmings always lose.”
Irving Kahn thought like a contrarian in order to identify mispriced assets. Howard Marks says investing is a search for the mistakes of other people. Market inefficiency is a fancy academic term for mistakes. That people often acting like lemmings is an opportunity for the rational investor. It is mathematically impossible to follow the crowd and outperform the crowd. Charlie Munger noted at the 2015 Berkshire Annual Meeting that “If people weren’t often so wrong, we wouldn’t be so rich.” You must “think differently” and be right about what you are thinking differently about to outperform a market. In seeking to be contrarian, one must avoid what some people call “the hipster paradox” (attempts to be different often end up with people making the same decisions).
7. “Our goal has always been to seek reasonable returns over a very long period of time. I don’t know why anyone would look at a short time horizon. In my life, I invested over decades. Looking for short-term gains doesn’t aid this process.”
Because most people are impatient, a smart, rational and patient investor is able to arbitrage time and generate outperformance. Value investing is a process in which you get rich not only slowly but in a lumpy fashion. If you can’t handle a slow process, irregular returns and occasional periods of underperformance, you are not a candidate to be a successful value investor.
8. “Remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life.”
Vanguard has an example which illustrates the power and value of compounding. How reinvesting can pay off over time:
“Let’s say you begin with two separate $10,000 investments that each earn 6% a year (keep in mind this is a hypothetical example, and actual returns would likely be different and a lot less predictable). In one $10,000 investment, you withdraw your investment earnings in cash each year, and the value of your account stays steady, as you see with the flat line in the chart below. In the other investment, you don’t cash out your earnings—they get reinvested. The curved line below shows the power of compounding and time. If you keep reinvesting the earnings (and again, we’re assuming a steady hypothetical return of 6% each year) after 20 years your investment will have grown by more than $20,500. And if you’ve got an even longer time frame—for example, if you’re in your 20s and saving for retirement—after 40 years, your investment will have grown by more than $92,000.”
9. I don’t watch [the stock market every day], because I’m not a trader.”
“The public is spellbound by daily price moves. Less noticed are long-term economic changes that ultimately set future prices.”
“Investors must remember that their first job is to preserve their capital. After they’ve dealt with that, they can approach the second job, seeking a return on that capital.”
“If the art of investing were actually easy, or quickly achieved, no one would be in the lower or middle classes.”
If investing was easy everyone would be rich. For some people one of the hardest things to do as an investor is to not be overly focused on daily price variations. Watching prices wiggle back and forth can be mesmerizing. But watching prices move all the time can make people do nutty things. Unfortunately, many investors seem to think there is some sort of a financial prize for hyperactivity when it is in fact a penalty because of fees, costs and the potential for more mistakes. The best way to prevent mistakes from ruining performance is to have something that is a cushion against mistakes. One analogy I like is the safety driving distance between your car and the car ahead of it on the freeway. Even if the car ahead of you stops unexpectedly, you have build in a margin of safety. If you are building a bridge as the engineer you want to make sure that it is significantly stronger than necessary to deal with more than the very worst case. Preserving capital as an investor is best achieved by buying at a margin of safety since even if you make a mistake things can still work out well due to the cushion against error. And if the investment goes well you can earn an even bigger return obviously if you buy the asset at a bargain price.
10. “I stick to the 20 odd stocks that I hold.”
Irving Kahn was a focus investor who liked to hold only a relatively small number of stocks. Whether one concentrates stock holdings as a value investor like Irving Kahn or diversifies their investments is a personal choice. Both approaches can be successful in their own way. As was mentioned above, an investor’s choice regarding diversification is a variable in the value investing system.
For example, the value investor Joel Greenblatt has chosen diversification for his most recent fund. He has done so because he does not believe the people who invested in his fund have the courage to stay in the fund if they underperform for a significant period of time. Ben Graham was also relatively diversified as an investor but for different reasons. Famous value investor Walter Schloss was also someone who diversified his portfolio. In comparison, Charlie Munger and others believe in concentrating their investments. For example, in the fall of 2014 Bill Ackman’s Pershing Square International fund owned only six stocks.
11. “You don’t have to be fully invested all the time. Have patience, keep your standards.”
“You gain much more by slow investing and concentrating on what you know, than on fast investing, which is nothing more than gambling.”
Patience is an essential attribute of a Ben Graham-style value investor. And sometimes being patient means holding significant amounts of cash and not being fully invested. This cash position for a value investor is usually just a natural product of not finding businesses selling at prices that allow for a margin of safety. “Concentrating on what you know” is what is called staying with a circle of competence in value investing circles. The way to lower risk is to know what you are doing and the way to know what you are doing is to stay focused on areas where you have genuine knowledge and skills. “Getting rich slow” is too hard for most people to do.
12. “From some of the financial history books I read that discussed the market cycle, I learned that stocks in certain industries were especially volatile, and copper was one. I looked at the stock index list, and decided to short a copper company called Magma Copper. Because I had little money, I had to ask my brother-in-law, who was a lawyer, to open a brokerage account for me. With $50, I shorted the stock in the summer, and my brother-in-law said it wouldn’t be long before I lost all my money because the market was going up, and I was telling it to go down. In October 1929, when the stock market crashed, my $50 became nearly $100. That was the first trade of my life.”
“I’m a passionate reader. That’s why being an investor is the perfect job for me.”
“To be a successful investor learning is essential.”
“Net-net stocks were easy to find in the early days. All I had to do was to look over annual reports and study balance sheets. I tried to find companies that had dependable assets such as cash, land, and real properties. Then I made sure they didn’t have too much debt and had decent prospects. If these stocks traded at below their net working capital, then I would be interested in buying them.
I understand that net-net stocks are not too common anymore, but today’s investors should not complain too much because there were only a handful of industries in which to look for stocks in the old days. Now there are so many different types of businesses in so many different countries that investors can easily find something. Besides, the Internet has made more information available. If you complain that you cannot find opportunities, then that means you either haven’t looked hard enough or you haven’t read broadly enough.”
The best investors read a lot. It’s that simple. They also take time to think about what they have read. It is amazing how many people who don’t read. Particularly amazing to me are people who think buying books without reading them creates any value. They must imagine that the ideas in the unread books travel magically into their brains as they sleep or watch television. What Irving Kahn is also talking about here is the fact that value investing has evolved over the years. As time passed after the Great Depression, it became harder and harder to find publicly traded stocks trading at less than liquidation value. Some value investors started looking outside the major markets, others went looking in private markets and others started considering quality in the analysis of value. Charlie Munger points out that despite this evolution the value investing system continues to work well.
Notes:
Telegraph – 108-year-old investor, “I’m Still Winning”
WSJ – Jason Zweig on Irving Kahn
NPR – The 100 Year Old on Wall Street
- A Dozen Things I’ve Learned from Roelof Botha about Venture Capital and Business
- A Dozen Things I’ve learned from Julian Robertson about Investing
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