One of the best interviews with the Kahn brothers was with the Ivey Value Investing Class in 2005 and there’s one part in particular that encapsulates the mindset required to be a successful value investor. Here’s an excerpt from that interview:
25.57 The only thing I can say is we maintain a really strict contrarian approach. So if something is very popular and everybody loves it and we’re buying it we have to say to ourselves what are we doing wrong here. Because I’d say half of the price of a common stock is ‘fashion’ basically so what we’re doing is we’re buying long skirts at the thrift shop when mini skirts are in favor. So we’re buying the long skirts for a dollar or two and then waiting till long skirts come back into Saks and if you can do that you’re halfway home you know you’re almost halfway home if you can just stick to being a contrarian.
A few years ago Vanguard performed a study to see how the Barclays Aggregate Bond Index would be affected by an overnight 3% rise in interest rates (something that has never actually occurred). They calculated what would happen if rates suddenly rose from 2.1% to 5.1% and showed the impact going out 5 years:
You can see the immediate loss would be around 13% (they also noted that the worst 12 month loss ever in bonds was -13.9% in 1974). But because the yield on bonds would now be much higher, the expected return going forward would now be around 5.1% annually, meaning the breakeven would be just over 3 years. So not exactly a crash of epic proportions.
The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.
A split “wouldn’t change the intrinsic value of the company and doesn’t provide any real benefit,”
“we want shareholders who focus on the investment itself, rather than on the currency it’s denominated in.”
Hedge funds that have relied on people to make bets are hiring quants like never before in search of answers to lackluster returns. They’re playing catch-up to firms such as Renaissance Technologies and Two Sigma Investments, among the leaders in using complex mathematical models for investing.
What is your sell discipline?” Okay, and I say. We sell a stock for one of four reasons. The first and of the highest quality reason, is that we bought a stock at X ’cause we thought it was worth X plus 30 or 40 percent, and it goes up 30 percent. Nothing has changed. We sell.