Legendary investor Irving Kahn died on Tuesday. Kahn was a student of Ben Graham and the founder of Kahn Brothers. Kahn even assisted Graham on the classic book, “Security Analysis.” Kahn is one of the original CFAs and he took the exam the first time it was offered in 1963.
“I prefer to be slow and steady,” Kahn said in a 2014 interview with the U.K. Telegraph. “I study companies and think about what they might return over, say, four or five years. If a stock goes down, I have time to weather the storm, maybe buy more at the lower price. If my arguments for the investment haven’t changed, then I should like the stock even more when it goes down.”
“I learned from Ben Graham that one could study financial statements to find stocks that were a ‘dollar selling for 50 cents,’” Kahn told the Telegraph. “He called this the ‘margin of safety’ and it’s still the most important concept related to risk.”
“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.”
“You must have the discipline and temperament to resist your impulses. Human beings have precisely the wrong instincts when it comes to the markets. If you recognise this, you can resist the urge to buy into a rally and sell into a decline. It’s also helpful to remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life.”
Irving Kahn was 109 years old.
The SPY was up 0.70% this week. Greece agreed to a 4-month extension with its creditors and then gave the market a strong push late Friday. Economic data continues to be solid, the Markit Flash PMI report was 53.5, which is a 7-month high. Europe is starting to show some slow signs of economic growth.
In our 2/7/2015 update we wrote that “if job trends remain strong at some point workers will get a bigger piece of the pie,” and on Friday WMT announce that it will begin increase wages for employees. The point was that if a strong job market leads to wage inflation, that will cut into fat profit margins.
Will Denyer of Gavekal Dragonomics issued a report that shows that the ratio of the US stock market value to the GDP measures at 155%, topping the 150% level in 2007 but short of the 180% level in 2000. When comparing the US stock market level to global GDP, the measure comes in around 37.5%, which normally has been a historical resistance point.
Denyer said that the indicator does not mean the market turns down tomorrow, or the day after, and that easy money policies can continue to push up asset prices to level that may not be justified in a normal environment.
To add to the overvaluation argument, Robert Shiller said he as thinking of lowering his own exposure to US equities in favor of depressed European companies. Shiller’s CAPE ratio is now at 27.5. It was 15 in 2009.
Low interest rates have helped support high stock markets in the US. Michael Feroli, chief US economist at JPMorgan says the bank’s models indicates that recent increased employment could push up wages and inflation leading to a faster rise in rates than anticipated.
The offset to some of the valuation arguments above is the global economy is improving, recession risks appear low, and the market continues to remain technically strong. So while the chance of a correction at anytime continues, as long as there is no recession on the horizon the risk of a bear market is low.
The market rallied 3% and oil shot up 7%, on top of a 6% gain the prior week. Employment numbers were very strong and treasuries were down on the week as 10-year yields climbed 0.26 to 1.94%.
US companies have been operating at very high profit margins for several years now as wages have stayed close to flat. If the economy continues to accelerate and if job trends remain strong at some point workers will get a bigger piece of the pie, and that will likely result in profit margins beginning a long anticipated reversion to the mean.
February is off to a good start so far as the market is up 3.34% this month. But that was after a disappointing January when the market fell just under 3%. We are often told that a down January means a down year. Since 1950, the SP500s median rise has been 0.6% from February to December when the market fell in January. Last year, the market was down in January and the market had a big rally the rest of the year. So last year this “wisdom” did not work. Nor did it work the two times prior when the market fell. So if you can’t rely on the January indicator you have to find some other robust market indicator, maybe like the Super Bowl indicator!
This does not mean there won’t be a correction. After all, there are some valid arguments that point to some overvaluation. It just means that a down January does not necessarily mean a down year.