A tribute to Irving Kahn: a legendary value investor

The article below, Investment lessons from Irving Kahn was originally published for the UK Motley Fool website back in 2010. The reason I am replicating it here and not amending it is that I’m proud to say that after it was first published I received a very kind email on his behalf from Andrew Kahn, his grandson, who worked with him at Kahn Brothers.

In it he wrote: “Mr Kahn read your article and was very pleased with its accurate assessment of the firm and your attention to the often-overlooked aspects of value investing”.

I’m sad to say that Mr Irving Kahn passed away in 2015 at the age of 109. However, his reputation remains as does the firm he founded and the books he helped write.

Let me quote again from the email I received: “Regarding books to which Mr. Kahn has contributed, he was Ben Graham’s teaching assistant during the period in which Mr. Graham wrote Security Analysis, and, to that extent, he contributed a considerable amount of research to that text. Another book that comes to mind is a small 50-page monograph titled Benjamin Graham: The Father of Financial Analysis that he wrote in the 1970s with Robert Milne for the Financial Analysts Research Foundation. At the time the Research Foundation was the publishing imprint of the CFA Institute, but it is now known as the ‘Research Foundation of the CFA Institute’.

It is therefore my hope that by reading the article you’ll learn from the wisdom of Irving Kahn and therefore avoid catastrophic investment mistakes. Should you wish to delve deeper you can read the books he helped write.

Investment lessons from Irving Kahn

This centenarian has the secret of long profits

At 104 years old Irving Kahn can aptly be described as the grand old man of value investing. While he may not be able to tell us much about the secret of longevity, he has much to teach about profitable investing.

Unbelievably, after 80 years on Wall Street not only is he alive, he is still active. Currently, he’s Chairman of Kahn Brothers Group, a privately-owned investment advisory and broker-dealer firm that he founded in 1978. It has approximately US$550 million funds under management.

Background

He is a value investor right to his marrow. This should be hardly surprising as he learnt from the master, serving as the teaching assistant to Benjamin Graham at the Columbia University Business School.

He was an original founding member of the New York Society of Security Analysts in the 1930s. He was also a co-founder of the Financial Analysts’ Journal and a director of Grand Union Stores, Kings County Lighting, West Chemical, and Wilcox & Gibbs.

Investment philosophy

On the website of the Kahn Brothers it explains that the company employs:

  • As bottom-up stock selection approach
  • Invests in undervalued equity securities that are usually out-of-favour

To determine which security to invests in it uses:

  • Asset valuations
  • Operating performance metrics
  • Long-term fundamental business prospects.

Moreover, “unlike many investment managers, we spend a considerable amount of effort evaluating the downside risk of every investment.”

Interview

In an interview Irving Kahn gave in 2005, he and his son Tom, Kahn Brothers president, outlined in more detail Kahn Brothers’ views on investing.

They regard value investing as an ‘art’ rather than a science, involving qualitative factors as much as quantitative. For that very reason, just as the best artists can occasionally produce poor work, even the best investors will make mistakes.

However, to reduce this risk and ensure a ‘margin of safety’, they follow these rules:

  • Favour those ‘out of favour’. Invest in companies that are either little-known or out of favour. The former tend to be smaller companies.
  • Low or no debt. They like companies with little or no debt and avoid highly leveraged companies.
  • Management stake. They prefer management that owns a lot of stock as they have the same incentive as shareholders to maximise the value.
  • Red flags. Companies that have volatile cash flows, high leverage and poor management should be avoided.
  • Earnings potential. Go beyond the latest set of results to determine the earnings potential of a business.
  • Patience. They are long-term investors with a typical 3-7 year, or longer, time horizon. If there are very few value stocks to be found, they are comfortable holding cash.
  • Identify catalysts. The market’s recognition of value is often dependent on a catalyst —an event that corrects the margin of safety discount. The identification of potential catalysts is therefore an integral part of the research process. Without a catalyst, a prospective investment can remain underpriced indefinitely and thereby result in a mediocre return.
  • Research. Do your own homework and pay no attention to what you see in the papers.
  • Be a contrarian. Maintain a strictly contrarian approach on the basis that half the price of a common stock is usually fashion.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.