When I sat down to write my book about why smart investors usually fail if left to their own devices, I thought back to a phone call I received more than a decade ago. You attract some crackpots when you’re a journalist, so I’m always a bit wary of an unknown number. Every once in a while, though, if you’re lucky, the person on the other end of the line is really special.
That was the case on the Monday morning after a column I had written appeared in Barron’s Magazine. The faint, raspy voice of the man who wanted some more details sounded like Methuselah and I wasn’t that far off. When we finished chatting he asked if I could send him some of my source material.
“Sure—what’s your email?”
There was a long pause. He asked if I could fax it instead. Even in 2005, though, I had no idea where to find the machine tucked away in our newsroom. I insisted on using email and he slowly—very slowly—recited his address to me.
“I-R-V-I-N-G … then there’s a period … K-A-H-N … then there’s a thing that looks like an “a” with a circle around it …”
I finally got the whole thing but wondered who this guy was. Googling his name, I found out that I had been speaking to a living Wall Street legend. Then aged 98, he not only was the oldest money manager still in business but had gotten his start working for Benjamin Graham, the father of value investing and a second father to Warren Buffett. He was Graham’s research assistant when he wrote the 1934 classic Security Analysis.
Before that, back in the summer of 1929, he made his first big stock trade while still a clerk, selling short Magma Copper, the Google of its era. The market peaked just weeks later and crashed that October, doubling his money.
I recounted this tale to a colleague a couple of years later in the thick of the global financial crisis and she asked why I didn’t give him a call and ask him what he thought about the world. It turned out he was still at it and pleased to share his wisdom. He was telling his clients at the time to ignore the headlines and buy beaten-down, high-quality stocks. As we know, that turned out to be great advice.
What I also found interesting was his take on his masterful 1929 trade. Kahn relied on his perceptions rather than hard analysis as he didn’t know yet how to value a stock. Young traders were zipping in and out of the market.
“They were all borrowing money and having a good time and being right for a few months and, after that, you know what happened,” he said in an NPR Interview.
I also sought out Roy Neuberger, then 106 years old (he retired at the tender age of 99). The fund manager had shorted RCA, the Apple of its day, in 1929. Too frail to speak, his protégé Marvin Schwartz, a 68-year old whippersnapper, told me the secret to his success.
“In almost each and every instance, he advised us to buy in what would be a passing negative period,” he said.
Neuberger wrote in his memoirs that memories of 1929 helped his firm, Neuberger Berman, trounce competitors after the 1987 stock market crash.
I was too late to speak with yet another long-lived investing legend, Sir John Templeton, who had passed away just a year earlier at the age of 95. Back in September 1939, when Nazi tanks were rolling into Poland, he borrowed $10,000 to buy 100 shares in every issue on the New York Stock Exchange trading for less than a dollar. He made a killing. In early 2000, when only old fogies who “didn’t get it” weren’t in the market, Templeton sold all of his technology stocks just ahead of that bubble’s bursting. His motto was “to buy when others are despondently selling and to sell when others are greedily buying.” The right time to make the plunge was “at the point of maximum pessimism.”
Being profitably contrarian is the stuff of investing legends, but what about mom and pop? Any financial advisor worth his or her salt should discourage clients from any overt market timing. I show in my book, Heads I Win, Tails I Win: Why Smart Investors Fail and How to Tilt the Odds in Your Favor, that the largest component of retail investor underperformance is zigging when one should zag—two percentage points a year or so.
But another form of contrarian timing can be a great boon to a nest egg. Frequent portfolio rebalancing forces an investor to buy low and sell high at the margin. Adding a value or dividend twist is even better. The key is to take all cognitive bias out of the equation and to do it on autopilot. Low-cost target date funds and smart beta to the rescue!
Ah, but the typical investor continues to lag a typical mix of stocks and bonds by three-to-four percentage points a year. What gives?
Beta can be as smart as a whip but individuals still make dumb decisions with their portfolio. For example, value funds outperform plain vanilla stock funds but the dollar-weighted return in those funds is lower than for their broader counterparts. The more trying the strategy the harder it is to fight the urge to cut and run when markets are at extremes of panic or exuberance.
It’s no coincidence that the most successful investor today and, measured in total wealth, of all time is Warren Buffett. His investment vehicle represents permanent capital. It never pays dividends or faces redemptions. On the not infrequent occasions that investors have fretted that he was losing his touch, they simply could sell the shares on the stock exchange to someone who felt otherwise. Buffett isn’t bothered or affected by the ensuing fluctuations in Berkshire Hathaway’s stock price or, for that matter, about the gyrations of the broader stock market overall. He has cited an allegory that his mentor Benjamin Graham put in his classic The Intelligent Investor as the advice that is “most conducive to investment success.”
Graham said one should imagine market prices as coming not from millions of people but a single, emotionally unstable business partner, Mr. Market. Sometimes he’s euphoric and other times despondent. Sometimes he will want to sell you his interest at a low price and other times he will want to buy yours at a ridiculously high one. Luckily, he won’t be offended if you ignore him.
An advisor’s clients may, on the other hand, be offended if he or she urges them to stay the course a bit too stridently. That balance is hard to strike and, despite the memories of "the last time," it never gets easier.
One reason so many investors take the wrong road is that both giddy times and awful ones seem to last just a little bit longer than our patience. That, in turn, leads to a conclusion that Sir John Templeton called the four most dangerous words in investing: “This time is different.” When it comes to extremes of sentiment, it never really is but sure seems that way. As Irving Kahn, who passed away at age 109 the month I began writing my book, said to me eight decades after he had kept his nerve and made a killing in the Great Crash and was about to do so again: “History mostly repeats itself, but it’s never exact.”
Spencer Jakab writes and edits the “Heard on the Street” column for The Wall Street Journal. This article was excerpted from his new book "Heads I Win, Tails I Win." He has also written about investing for the Financial Times, Barron’s, and Dow Jones Newswires.