We lost a legend this week as Irving Kahn passed away at 109 years old. He was still working a few days a week as recently as 2014 as picking stocks was his passion in life.
When Kahn was 104 he was asked if he planned to keep working and he said: "I would pay you if you took it away from me. I'd try and buy it back."
Kahn worked for Ben Graham as a teaching assistant in that now legendary Columbia University classroom and helped on both Security Analysis and The Intelligent Investor. He was present at the birth of value investing and stayed pretty much true to Graham principles of investing throughout his entire career.
When I was putting together notes for the tribute I wrote up for Irving Kahn, I ran across an old quote from him on why most investors underperform. In it he said:
"Why are results so often below average? I believe there are two reasons. First, the institutional client illogically expects security selection to be limited to the major corporations conventionally selected by others. This conventional bias dooms performance to an approximation of the averages. Second, the institutional investors believes he should have his hand held a few times a year to confirm his own reactions to the current scene."
This was particularly timely as shortly before I was made aware of his passing I got an email from FactSet that outlined the top holding of hedge funds. It is remarkable how many of them own the same stocks. Twenty four of the top 50 funds own Apple (AAPL). Twenty three own Microsoft (MSFT). Twenty six own Actavis (ACT).
With only very minor differences in sector weighting, the combined holding of the hedge funds look very similar to the industry breakdown of the S&P 500. Everybody is buying and selling the same securities and it looks like a lot of folks are charging 2 and 20 for closet indexing. As John Templeton once advised us you cannot outperform in a meaningful manner if you continue to do exactly what everyone else is doing.
My own research and studies have pretty much confirmed this. I spent last weekend doing a bunch of screening and testing. I back tested a bunch of screens and found that the top performing ones were my perfect stock screen -- the Walter Schloss approach, the Novy Marx Quality Value and cheap community bank stocks.
All four handily beat the market over the long term by significant margins and with the exception of the community bank screen had much smaller drawdowns. Community banks had a significant drawdown in 2008 but the portfolio only has six stocks so a little rational position sizing and that portfolio also had tiny drawdowns.
When I run those screens today there are no big, well-known popular stocks on the lists. The biggest stock on the perfect stock list that is trading at an acceptable discount to book value is Gulf island Fabrication (GIFI). I like the stock and it has finally pulled back to cheap enough levels so I am a buyer but it is not exactly a household name. LeapFrog Enterprises (LF) is near the top of the Schloss screen. I like the stock but it is not a household name. Kelly Services (KELYA) and Sears Hometown Outlets (SHOS) are the largest companies on the Novy Marx screen. While the names may be familiar to many, they are not exactly conversation starters, either.
Unless you live in the town where they are located it is highly unlikely that you have heard of the little banks we have been buying. Even the somewhat larger names I talk about like Cape Bancorp of New Jersey (CBNJ), HomeTrust Bancshares (HTBI) and ESSA Bancorp (ESSA) are unknown to most investor. The last two banks I bought were under $20 million of market cap. I suspect no one who does not live near the home office has ever heard of them -- much less bought the stock.
You will never earn higher returns if you own the exact some stocks as everyone else. If you portfolio is full of the hot and popular stocks, history tells us that you will be lucky to match the market. Most likely you will follow the story from stock to stock, trade too much and end up badly underperforming the indexes. As Kahn advised in an interview just last year:
"I would recommend that private investors tune out the prevailing views they hear on the radio, television and the internet. They are not helpful. People say 'buy low, sell high', but you cannot do this if you are following the herd."
My favorite Irving Kahn quote is one that should be prominently displayed near every investor's computer. It will save you a ton of money and make you even more over time.:
"You don't have to be fully invested all the time. Have patience, keep your standards."
Irving Kahn left behind a legacy for investors that they should take to heart.