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Robert Abbott
Robert Abbott
Articles (278)  | Author's Website |

The Kahn Brothers: Unlocking Value

Irving Kahn's family evolve and survive using their own value philosophy

“I stopped wasting time on what [other] people claimed a stock was worth and started looking at the numbers.” --Irving Kahn

Imagine being Benjamin Graham’s teaching assistant at Columbia Business School.

That was the world of Irving Kahn, who would go on to become a value guru himself, following in the footsteps of Graham but finding his own philosophical pathway.

Today, Kahn is gone, but his family carries on, with his son and grandson at the helm of Kahn Brothers (Trades, Portfolio).

Who are the Kahns?

Legendary investor Irving Kahn was born in 1905 and died 109 years later in 2015. Over that lengthy lifespan, he correctly predicted the 1929 crash and doubled his money. But that was just the start, as he and his sons created a hedge fund that continues today.

Ironically, not long after successfully shorting equities in the 1929 crash, he learned about Graham and value investing, which permanently changed his approach.

While a young man, Kahn sought out Graham, a trader at the Cotton Exchange in New York. Graham, in turn, recruited Kahn to be his part-time teaching assistant at Columbia Business School. Through Graham’s classes he met not only Warren Buffett (Trades, Portfolio), but also his future wife, Ruth Perl. Incidentally, both Kahn and Buffett used Graham’s surname as the middle names for their sons.

In adapting Graham's ideas into his own investing strategy, Kahn also made his own contributions to the body of knowledge that guides value investors. The Economist magazine says he introduced the concept of “margin of safety,” which has now become a pillar of value investing.

According to the New York Times, in 1978, at the age of 73, Khan and his sons, Thomas and Alan, founded their own private investment firm, Kahn Brothers. His grandson is now prominent in the firm as well.

What is Kahn Brothers?

Kahn Brothers (Trades, Portfolio) Advisors LLC describes itself as an investment advisor in its March 2017 Form ADV Part 2A.

Kahn Brothers Advisors, in turn, is a wholly-owned subsidiary of Kahn Brothers Group; originally the firm was Kahn Brothers & Co., but the name it uses has evolved as the firm's structure has changed.

It serves high-net-worth individuals as well as pension funds, charities and foundations (institutional investors). Unlike many other hedge funds, it offers non-discretionary management, allowing clients to personalize their investment parameters.

On its website, the firm emphasizes its client orientation: “Beyond our stated mission, we focus deeply on the needs and wellbeing of our clients. Our clients receive an unusual degree of customization and personal attention, akin to a family office. We purchase the same stocks for our clients as we do for ourselves and our families.”

Kahn continued to maintain a strong presence at the firm until age 108; he visited the office regularly until 2014, the year before his death at 109. His 75-year-old son, Thomas, is the president, treasurer and chief compliance officer.

According to the 13F filed on Dec. 31, 2017, the firm reported $6.3 billion in discretionary assets under management. GuruFocus puts the firm’s equity holdings at $637 million.

Strategy

The firm says its investment philosophy has evolved over time, from Graham’s “discount to net asset purchase” model into “contrarian value,” a strategy focused on margin of safety and capital appreciation over the long term.

On the website, it says these goals, margin of safety and long-term capital appreciation, go hand in hand. This is at the center of its stated mission, which is to deliver superior returns while limiting the risk of permanent loss of capital.

The firm goes into more detail in its Form ADV Part 2A, in which it is refered to as a modified Graham and Dodd value investing style.

While the firm primarily invests in public equities, it may also go into other securities, including ADRs (American depository receipts), investment fund shares, warrants, right and fixed income and derivative securities. The firm also reserves the right to engage in shorting, although not frequently.

To make investment decisions, the firm uses bottom-up, fundamental analysis. It also applies a qualitative approach by gaining a “detailed understanding” of candidate companies; the firm wants to know the industries and the positions of candidate companies compared to their competitors. Whenever possible, they engage directly with management.

The Kahns make a point of saying they do not use technical analysis, and state they believe the technique is “largely without merit.”

Instead, they look for companies with little or no long-term debt, reasonable amounts of cash, strong net working capital positions and share prices at or below intrinsic value.

Their valuation measures include book value, tangible book value, sum-of-the-parts, sales, EBIT, EBITDA, earnings per share, net working capital and cash flow.

They select one target at a time, according to asset valuations, operating performance or cash flow. Alternatively, they might find a security trading at a discount and then look for catalysts that might unlock the unrealized value and cause the price to rise.

A writer at ValueWalk says Kahn's investment philosophy could be summed up in two words: “unlocking value.” The writer says Kahn considered investing a complex mixture of art and science, and thus required qualitative analysis and quantitative analysis.

In addition, he did not give much importance to portfolio diversification, saying he would rather have a concentrated mix of undervalued, high-growth potential stocks.

In an interview with the Telegraph shortly before his death, Kahn had advice for other investors:

  • “Investors must remember that their first job is to preserve their capital. After they’ve dealt with that, they can approach the second job, seeking a return on that capital.”
  • “When investors flee, we look for reasonable purchases that will be fruitful over many years.”
  • “I would recommend that private investors tune out the prevailing views they hear on the radio, television, and the internet. They are not helpful.”
  • “You must have discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets.”

From shorting stocks to buying cigar butts to protecting capital—Irving Kahn and his family have evolved over the years, from counter-speculation to discount buyers to capital preservation. It appears to serve them well, as they are about to mark their 40th anniversary.

Holdings

This GuruFocus chart shows the sectoral holdings of the Kahn’s equity portfolio:

Irving Kahn sectors

These are the top 10 equity holdings:

The word “contrarian” comes up in the Kahn’s philosophy; this list helps confirm that. The second-largest holding in a concentrated portfolio of 31 stocks is a British oil company at nearly 10%, a newspaper company near 9% and a smartphone manufacterer written off by most of the market at 8% of the total portfolio.

Performance

No long-term performance numbers show up in online searches, however, TipRanks does have a chart showing results for the past five years:

Irving Kahn performance

As the chart shows, the firm has turned in a middling performance over the past five years, below the S&P 500 Index and above the hedge fund average.

If the equity assets under management chart is used as a proxy (which has limitations), it suggests the firm has also done a middling job since 2005 through to today:

Irving Kahn equity holdings

It experienced a drop in the wake of the 2008 crisis, which may have been in response to results for that year. If that was the case, there was a relatively quick return to the status quo. Other than that, there have been no periods in which the firm dramatically lost or gained clients.

Conclusion

Irving Kahn had a legendary life, one which gave him an important place in the value investing community. His development of the margin of safety concept ranks highly among the set of ideas that comprise value thinking and investing.

Value investors should follow his lead in several areas. He was not so much a stock picker as a risk manager, at least later in life. He stressed that investors' first job must be to maintain their capital. Only after satisfying that need should they start looking for returns. Put another way, it is an endorsement of only buying stocks with a strong margin of safety.

And investors might find their work more financially and intellectually satisfying if they thought of themselves as unlockers of value, or at least able to identify situations in which value is being unlocked.

Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995, and in 2010 added options, mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the Unseen Revolution. In Big Macs & Our Pensions: Who Gets McDonald's Profits?, he looks at the ownership of McDonald’s and what that means for middle class retirement income.

In an eclectic career, Robert Abbott was a radio news writer and announcer, a newsletter writer and publisher, a farmer, a telephone operator, and a construction worker. When not working, he has been a busy volunteer, which includes more than a decade of leadership roles at the Airdrie Festival of Lights, one of North America’s leading holiday light displays. He lives in Airdrie, Alberta, Canada.

Visit Robert Abbott's Website


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