Wider than Milliseconds: Identifying a Margin of Safety

Value Investing

“Don’t depend on recent or current figures to forecast future prices; remember that many others knew them before you did” –Irving Kahn

Technological advances have hastened the flow and broadened the accessibility of data to financial market participants. One such innovation, high-frequency trading (HFT), has brought added liquidity to markets and, on balance, improved the price discovery process. But HFT is also emblematic of our investing culture’s progressively short-term orientation, leaving one to wonder if there’s still room for a more deliberate approach to investing. The most successful value investors, those who look to buy a dollar of assets for 50 cents, take the time necessary to properly contextualize the flood of information. A long-term perspective and careful analysis allows them to build a portfolio of assets that delivers superior returns over time.

One such investor was Irving Kahn, CFA, a disciple of legendary value investor Benjamin Graham and, along with Graham, a founding member of the New York Society of Security Analysts. On the eve of the stock market crash of 1929, Kahn was struck by the rampant speculation among investors and began shorting stocks. When stock prices collapsed, he was rewarded.

Kahn’s contrarian nature soon led him to Graham, who was teaching at Columbia University. Kahn served as Graham’s teaching assistant, worked for his investment partnership, and contributed to Graham and David Dodd’s Security Analysis and later to Graham’s The Intelligent Investor. It was under Graham that Kahn embraced the concept of seeking a “margin of safety” when investing, and this became a guiding philosophy for the firm he founded in 1978.

Kahn was among the first to earn the Chartered Financial Analyst designation, and he was a founding member of the Financial Analysts Journal (FAJ). In a 1977 FAJ article titled, “Lemmings Always Lose,” the stock picker took a few jabs at indexing and presented his “guidelines for intelligent investing,” which included the quote at the start of this post along with the following:

  • Prices are continuously molded by fears, hopes and unreliable estimates
  • Remember that many complex factors—such as accounting choices and the human problems within management and with large shareholders—lie behind reported earnings
  • Don’t trust quarterly earnings. Figures can lie and liars can figure

Kahn concluded, “The analyst must both practice, and to his client preach, patience.” Instead of chasing performance and reacting to the most recent figures, value investors should focus their analysis on putting information in context to identify investments that offer a margin of safety. This work can take longer, but is less reliant on the fastest execution of an algorithm. Kahn recently died at 109, but his career of eight decades serves as a testament to the timelessness of the value investing principles he espoused.

Charles de Vaulx, chief investment officer at International Value Advisers, is another renowned value investor with a focus on margin of safety. De Vaulx credits Kahn, along with Warren Buffett, Walter Schloss, and Bill Ruane (other Graham students) with helping to bridge the education gap among generations of value investors. The technology and trading platforms have evolved significantly since Graham and Kahn began teaching about security analysis, but the underlying principles of value investing have remained largely unchanged.

In a recent email, de Vaulx noted that there are few true bargains for value investors in the market today. However, he optimistically proclaimed, “The good news is that greed and fear remain with us, along with certain institutional constraints, including the tyranny of the benchmark, so value investing and individual stock picking remain more relevant than ever.” Irving Kahn would almost certainly agree.

At the 68th CFA Institute Annual Conference in Frankfurt, de Vaulx addressed the relevancy of Graham and Dodd’s value investing principles in today’s markets

The CFA Institute Annual Conference is an unrivaled opportunity to access high-quality, unbiased educational content that equips investment professionals with the latest thinking on critical industry issues. The 72nd CFA Institute Annual Conference will be held in London on 12–15 May 2019.

The content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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