Irving Kahn, the American money manager who passed away earlier this year at the ripe age of 109, was often dubbed as the oldest living investment professional. And right up to last year, he showed up at his office a few times a week.
His astonishing longevity made him a rarity in the investment arena – he experienced both, the Great Depression as well as the 2008 Global Financial Crisis as an investor; not to forget WWII, the dot com bubble, the Nifty-Fifty debacle of the early 1970s, the fall of Long-Term Capital Management, Black Monday in October 1987 and other crises which impacted the stock markets.
He stands apart in other aspects too. Unlike many other renowned money managers on Wall Street, he never played golf, owned no weekend house, possessed no country club membership, was a reluctant traveler (trudging along only at the urging of his wife), and, by and large, lived a frugal lifestyle.
He was also one of the 284 candidates who took the first Chartered Financial Analyst (CFA) examination, in 1963.
But like most successful investors, he developed a singular style of investing which he consistently practiced through good times and bad, with unwavering conviction and confidence.
Benefiting from The Great Depression
Kahn began his investment career in 1928 during a roaring bull market. He dropped out of college and walked into a Wall Street firm, Hamershlag, Borg, and asked if they were looking for help. He got a job instantly. After one week of working there, he decided to quit because he thought the “people were crazy”. They were running around and screaming at each other during trading hours, and they were like clowns! I felt that I wasn’t learning anything. His boss convinced him to stay and sent him to the main office where he became a broker’s assistant, doing securities research. A year later he was convinced that the “market had gone crazy”. “I wasn’t smart, but even a dumb kid could see these guys were gambling,” he said in an interview with NPR.
Even though a novice then (at just 24 years old), he was convinced that the trend of traders bidding the price of stocks higher and higher had to end. When he realised that he could no longer assign a number to what companies were worth, he shrewdly and courageously decided to move against the tide. He borrowed money and decided to short sell, despite being told that only a fool would do so. In June 1929, he sold short 50 shares of Magma Copper, betting $300 that the price would fall. In October, the market crashed. He made $1,000 on that bet.
A decade later, by the tail end of the Great Depression, he’d made enough money to move his wife and two children out of public housing and into their own house in the suburbs.
When The Telegraph asked him to recount the key events that influenced his strategy as an investor, he cited the frenzy of the bull run prior to The Great Depression as “a good example of how great enthusiasm in a company or industry is usually a sign of great risk.”
During The Great Depression, he found stocks trading at tremendous discounts. He studied financial statements to look for stocks that were “a dollar selling for 50 cents,” pointing to the influence Benjamin Graham had on him. Graham spoke of a margin of safety when buying stocks and advocated buying assets worth $1 for 50 cents to minimise the downside risk of an investment.
Kahn attended Graham’s security analysis class after work. It was a 2-hour course one evening a week. At the class, a student enquired if he should buy the warrants of American and Foreign Power Company. Instead of an outright yes or no, Graham asked the student to calculate the total market value of Pennsylvania Railroad, a blue chip company. This exercise showed class how distorted the market had become and the student got his answer. Graham was proved right and AFPC was certainly not immune to The Great Depression.
(AFPC was a publicly-traded utility and a speculative favourite just before the market crash of 1929. At that time, AFPC issued a range of securities: bonds, common stock, two kinds of preferred stock, and warrants. Graham wrote about it in Security Analysis, using it as an example of the financial innovation and speculative excess that characterised that period.)
His strategy
More recently, during the 2008 crash, Kahn employed the identical strategy – looking for good companies selling at a discount.
In 2011, when turbulence in the global financial markets was deeply disconcerting, he told The Daily Beast that “There are a lot of opportunities out there, and one shouldn’t complain, unless you don’t have good health. Wall Street has always been a very poor judge of value.”
During The Great Depression, he said it was easy to make money if you had the right approach and knew where to look because some companies were in good shape and had nothing but cash. He cited the example of some export companies which were not severely affected but beaten down and had net cash per share that was much greater than their stock price. You didn’t have to be very smart to find value. All you needed was the right investment model.
He believed that if an investor complained that he could not find opportunities, it would mean that he has not looked hard enough or has not read broadly enough.
What helped Kahn narrow down on great picks was that he was always on the lookout for the next great technical or scientific development, and voraciously devoured reading material on the same - scientific journals, financial journals, technology magazines, annual reports, newspapers, and non-fiction books such as psychology and history. When asked how he generated investment ideas for so many years, he points out that it is really about absorbing various types of information from various sources. New York investor Carl Schecter, a friend of Irving Kahn and an investor with Kahn Brothers, told Barron’s: “It’s impossible to reverse-engineer Irving’s investment process. It’s an idiosyncratic mix of top-down economic insight and bottoms-up financial analysis.”
When he felt that the world’s growing population would need more food and clean water, he latched on to Monsanto (genetically modified seeds) and Osmonics (water purification equipment maker). When the stock price of Osmonics collapsed post the tech bubble, he picked it up and made a tidy sum when General Electric bought the company in 2003. Another investment was Isomedix, a firm that irradiated food to eliminate harmful bacteria, later acquired by Steris.
He also successfully invested in beer companies in the developing world based on the premise that it would become an affordable luxury as incomes grew.
If his approach had to be summed up in a line, it would be to seek superior long-term returns while avoiding risk of significant loss.
Throughout all the crashes, sticking to the principles of value investing has helped Kahn preserve and grow his capital. In fact, he always emphasised that the first task of an investor is to preserve capital. The second is to seek a return on it.
How did he do that? He pored over annual reports and balance sheets. He looked for little or no debt, lots of cash, dependable assets such as land, management commitment and the potential for growth. He then picked them when they were trading at a discount to their net working capital. If a stock price dipped further after purchase, he would buy more if his investment thesis was unchanged.
Kahn learnt from Graham that to succeed one has to study companies and conduct a thorough research. The key to building wealth was to achieve reasonable returns and suffer minimal losses. He emphasised that considering the downside is the single most important thing an investor must do before any consideration is given to gains.
Here are some takeaways from his investing style.
- Don’t depend on recent or current figures to forecast futures prices. Prices are continuously molded by fears, hopes and unreliable estimates.
- Capital is always at risk unless you buy better than average values.
- Many complex factors – accounting choices, human problems within management and with large shareholders – lie behind reported earnings.
- Don’t trust quarterly earnings. Verify reports through the source and application statement. Figures can lie and liars can figure.
- The analyst must both, practice, and to his client preach, patience. In an overpriced market an investor must be willing to wait because no one knows when the tide will turn. You don’t have to be fully invested all the time. Have patience, keep your standards.
- It is unlikely that in this ever-changing world any formula will successfully replace the study and objective analysis of individual securities.
- Invest for the long term. Remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life.
- Have the discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets. If you recognise this, you can resist the urge to buy into a rally and sell into a decline. People say 'buy low, sell high’, but you cannot do this if you are following the herd.