Monday, December 15, 2008

Notes from Jim Grant's Video

Jim Grant writes the Interest Rate Observer biweekly, which is a very highly regarded publication of the buy side. This is a one-hour video in which he gives a 20 min speech on Ben Graham - his idol, and then spends the rest of time on Q&A. Worth a watch. He has also published a book recently - Mr. Market miscalculates - which I plan to buy soon.

  • Ben Graham lost 70% between 1929 and 1932. Still an outperformance as Dow lost 89%, so one can imagine the carnage. 
  • Graham's partnership went into 1929 crash in a levered position, so got hit. 
  • Recovered everything by 1936. 
  • Lost another 50% in 1938. 
  • So perseverance is key. Debilitating loss is no reason to quit investing. This is why Graham performed better than others - because he didnt leave the markets. 
  • Rule No 1: Dont lose money. Rule No 2: Dont forget rule no 1. 
  • Intrinsic value is a very dangerous concept. 
  • Market is equally disinterested in valuation at top or bottom. 
  • Graham was not interested in integrating macroeconomics in his security analysis, though he acknowledges that he should have paid attention to the backdrop of 1920's. 
  • By 1940, Graham advised institutions to invest in bonds yielding 2% and not in stocks - at the end of the second edition of his 750 page book that dealt with security analysis. Even he succumbed to fear. 

  • Mark-to-market accounting: Very self-serving the protestations of people who are now complaining on mark-to-market. They didnt complain during the upswing. Sachs (of GS fame) in his 1932 senate testimony had this view on mark-to-market accounting: Goldman Sachs Trading Corporation had blown up in 1932. One of its investments was in a company that was later to become General Mills. Mr Sachs and his accountants determined that they can carry the investment at cost price or any price right down to $1. So they took $1. Mr. Sachs, in his testimony, said that intellectually that is the correct price, whatever one believes in the future prospects of the company. (In the book 1929 - the Crash by Galbraith, there is a fascinating description of all the GS Trading Corporation) 
  • Real estate is almost always illiquid, but Wall Street has almost always made money off it. 
  • Wall Street is in a very dangerous position right now, political reprisal can be heavy. 
  • Bailout: Very troubling the way it is being implemented. Administration and treasury believe that there wont be second degree impact of the bailout, without having thought through what they are doing. They are scaring people by comparing it to 1929. Between 1929 and 1932, nominal GDP fell by 50%. Today, nominal GDP is still growing, so situation is vastly different. (This is a very important point. Real GDP growth is a concept based on some statistical calculation of inflation - and there can be hundreds of inflation numbers depending on the statistician. What we can see is nominal GDP, and stocks are priced in nominal terms, not real terms. When HDFC's CEO says that loan growth is 3x real GDP growth, he is wrong, because loan growth depends on nominal GDP growth, not real GDP growth. He is implicity assuming some constant inflation number that he doesn't specify). 
  • A big source of fear is Wahington saying "Not since 1930's." Cant they say "Not since 1974"? 
  • In 1974, hundreds of companies were selling below net cash. But there was no crash in credit, unlike today. Dow peaked in 1966, was going down till 1974, and didnt get back to old peak till 1982. 
  • Federal Reserve founded in 1914, and it took a century to reach $1 trillion balance sheet. In last 3 weeks it's balance sheet has balloneed from $1 trillion to $3 trillion. Inflation not possible today when credit is being destroyed. But who knows what happens tomorrow. Dollar is uncollateralized. Paper without any real value. 
  • Before WWI, gold standard. Then gold exchange standard. After WWII, Bretton Wodds. After 1971, dollar was free of gold. For past 37 years, dollar has been the reserve currency. Never before there has been so long a run of paper money without an inflation crash. So the system has actually worked for quite a long time. 
  • Paradox of dollar strength. Unpredictable consequence of dollar strength might be that people lose faith in all currencies - nothing is collateralized. Euro is a confederation of states. Ireland is having its difficulties. What if Spain, Portugal, France, Germany find the monetary regime too restrictive and decide to go on its own way. Since 1971, currencies haven't been collateralized, and the world doesn't mind. But the world didn't mind CDO for a long time, now it does. 
  • Private equity has devalued the "Your word is your bond" creed of Wall Street by walking out of so many deals. Hedge funds have been much better. 
  • One of the unintended consequences could be - a new wave of entreprenurial banking partneships, as the bigger banks become government departments. 

1 comment:


Value investing provides a degree of safety that growth investing lacks.