For this, it is a must to study companies and conduct thorough research on them before investing
“Considering the downside is the single most important thing an investor must do. This task must be dealt with before any consideration can be made about gains. The problem is that people nowadays think they are pretty smart because they can do something quite rapidly. You can make the horse gallop. But are you on the right path? Can you see where you’re going?,” he said in an interview with a financial website.
Kahn said an investor should initially focus on preserving capital, instead of targeting huge returns on investment from the outset. “If you achieve only reasonable returns and suffer minimal losses, will you become a wealthy man and surpass any gambler friends that you have. This is also a good way to cure your sleeping problems,” he said.
Kahn was born in 1905 and was the chairman of the New York-based private investment firm Kahn Brothers Group, which he founded in 1978 with two of his sons. Prior to his death in 2014 at the age of 109, he was one of the oldest active professional investors.
He was a follower of the value-investing principles of Benjamin Graham and was also his teaching assistant in the classes on security analysis that the great investor taught at the Columbia Business School.
Kahn assisted Graham and Columbia professor David Dodd in researching their investment classic,
Security Analysis, which was published in 1934.
Kahn’s unbelievable run in the investment arena was difficult to match for even the best of investors. During his investment tenure, Kahn saw it all ranging from the Great Depression to the 2008 Global Financial Crisis as an investor. He also witnessed the World War II, 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 that impacted stock markets very hard.
He had a very disciplined approach towards life, which was quite different from other investors. Unlike other money managers, he never played golf, didn’t own any weekend house, possessed no country club membership and was a reluctant traveller.
Investment philosophy
Kahn followed a particular investing style, which he consistently practised through good and bad times with firm conviction and confidence. He believed if an investor complained about not finding good opportunities in the market, it meant the investor had not looked hard enough or hadn’t read broadly enough.
What helped Kahn invest in some of the best stocks was his ability to look out for the next great technical or scientific development, which he spotted by voraciously reading scientific journals, financial journals, technology magazines, annual reports, newspapers and non-fiction books of psychology and history.
Asked how he generated investment ideas for so many years, he once pointed out that it was really about absorbing various types of information from various sources. Throughout all the market crashes, he stuck to his principles of value investing, which helped him preserve and grow his capital.
“Business cycles are inevitable due to wildly gyrating emotions of the people who make up a market. As a large number 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 presents a rational investor with an opportunity to benefit from, if he 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,” he said.
Kahn extensively read annual reports and balance sheets and looked for little or no debt companies with lots of cash and dependable assets, such as land. He also looked for companies having the potential for growth with a good management team.
He then invested in these companies when they traded at a discount to their net working capital. If the stock price of such a company in which he had invested in fell further after the purchase, then he would buy more if his investment thesis remained unchanged.
Kahn was a conservative investor, holding about 50% of his assets in cash and the other 50% in stocks. He shared many tips over the years on various platforms which helped investors to achieve success in the investment industry.
Let’s look at some of these tips:-
- Be a contrarian: Investors should have a contrarian approach towards investing, and should be prepared to go against the tide. “If we buy something which is generally well thought of by the Street and popular, then we’re probably doing something wrong,” Kahn once said.
He felt if investors were bullish on a company or the overall stock market, they would be buying shares and sending values up, which could lead to overvaluation. He felt overvalued stocks should be avoided, as they stood a good chance of falling closer to their intrinsic values over time. Also, if investors abandoned a stock, or were bearish on the entire market, they would have sold shares, sending prices lower possibly to the point of significant undervaluation and making such shares attractive for contrarian investors.
Kahn said investors should stick to their discipline and resist the temptations of following the herd. “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,” he said.
- Control your emotions: Kahn said successful investing required investors to control emotions, not sell in a panic and not hastily buy just because they have some promising news about an investment. “Millions of people die every year of something they could cure themselves: lack of wisdom and lack of ability to control their impulses,” he said.
He suggested investors to take time out to figure what investment strategies make sense to them, and then stick with them. “Stick with companies you’ve invested in through ups and downs, as long as you believe in them and see rosy futures,” he said. Kahn felt investors shouldn’t depend on recent or current figures to forecast futures prices, as they were continuously influenced by fears, hopes and unreliable estimates.
- Study companies: Kahn believed it could be easier for investors to stick with their convictions if they studied the companies in which they were invested and knew them very well.
He felt having all the information about a company would help one to hang on, if the market suddenly dropped, knowing that their holdings’ futures remained promising or they might sell, understanding that a new development had made their previous investment thesis obsolete.
Kahn felt investors should read annual reports of various companies, including the financial statements like balance sheets, income statements, and statements of cash flow. He also suggested investors read the letter to shareholders and to review other important information from these letters. “Aim to know much more about the stock I’m buying than the man who’s selling does.” he said.
- Don’t trust earnings: Kahn felt many complex factors such as accounting decisions and problems within management were hidden behind reported earnings. “Don’t trust quarterly earnings. Verify reports through the source and application statement. Figures can lie and liars can figure,” he said.
- Look for smaller gems: Kahn also advised investors to look beyond the one or two largest companies in a given industry. He felt if investors could look beyond those big players they might find smaller gems.
- Seek a margin of safety: Kahn felt investors should always seek margins of safety because if they bought overvalued securities, they might fall in value, causing them to lose money. “Capital is always at risk unless you buy better than average values. Better than average values” are undervalued securities that are more likely in the long run to grow in value, approaching (and perhaps surpassing) their intrinsic value,” he said.
Kahn believed investors should try to focus on preserving their capital while they try to grow it. “Chasing after high-flyers puts your money at too much risk,” he said. He felt the hardest thing for investors to do was to not be overly focused on daily price variations.
He believed watching prices go back and forth all the time could make investors fall in the trap of making wrong decisions. “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,” he said.
He felt preserving capital as an investor was best achieved by buying at a margin of safety as even if investors made a mistake things could still work out well due to the cushion against error.
- Have patience: Kahn used to say it was important for investors to remain patient while investing. He felt patience was an essential attribute of a value investor. “The analyst must both practise, 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,” he said.
He believed investors could gain much more by slow investing and concentrating on what they know, than on fast investing, which is nothing more than gambling. He felt sometimes being patient meant holding significant amounts of cash and not being fully invested.
“The 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. 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,” he said.
- Invest for the long term: Kahn said investors should look to invest for the long term and trust in the power of compounding. “Remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life,” he said. Kahn believed that as most investors were impatient, a smart, rational and patient investor could arbitrage time and generate outperformance.
- Be disciplined: Kahn felt there were always good companies that existed in the market that were overpriced but a disciplined investor avoided them. He said markets could be very volatile at times and stock prices could fluctuate a lot. “Security prices are as volatile as ocean waves – they range from calm to stormy,” he said.
He felt a good investor had 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,” he said.
- Investing is not for everyone: Kahn believed if investing was easy, every investor would have a success story to tell, which is not the case. “If the art of investing were actually easy, or quickly achieved, no one would be in the lower or middle classes.” he said.
Kahn felt value investing was one of the best ways to step apart from the crowd and protect oneself from the unpredictable behavior of the stock market. “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,” he said.
(Disclaimer: This article is based on various interviews and speeches of Irving Kahn.)
