Tag Archives: Ben Graham

What I learned from Ben Graham




As always, I try to also post the criticisms of investing legends:

Victor Niederhoffer, tireless critic of Benjamin Graham, Graham’s investment idea, and Warren Buffett, is blown up once again —to the tune of some 75% losses for his funds —as reported for a story in this week’s The New Yorker. Whereas Niederhoffer’s latest catastrophic losses might serve as schadenfreude for some students of value investing, this self-described Ayn Rand Objectivist is a living testament to the lethal nature of some spectacularly subjective biases, including a disdain for anything resembling a margin of safety.

The New Yorker article is a bit heavy on Niederhoffer’s personal life, but is still worth a read. Here’s the link:


Several years ago, Victor Niederhoffer was questioned during a radio interview about his rejection of the value investment paradigm as espoused by Benjamin Graham. The interviewer asked Niederhoffer how he might then explain the half-century success of Graham students such as Walter Schloss and others, given his rejection of Graham’s ideas. Niederhoffer replied that such success was “random.”

In Niederhoffer’s book, Practical Speculation, an entire chapter is devoted to refuting Graham’s pursuit of bargain issues. Only Niederhoffer hardly gets around to doing so. Instead, this sophisticated statistician attempts to stigmatize Graham and dwells on a small, essentially anecdotal sampling to prove his points about the lameness of value investing. One fellow Niederhoffer knew bought a stock below book value and watched as the stock proceeded to trade lower.

See? Graham’s ideas are useless.

When he is done expounding on the value investment discipline’s futility and ineffectualness, Niederhoffer allows as how he is troubled by the discipline’s ostensibly cynical premise: a dollar bought for fifty cents means that the seller is exploited. It seems odd that this cultivated observer of free-enterprise fails to recognize a couple of cold, hard facts: the business that fails to sell at half-price is likely to be sold for even less, and buyers of these ailing businesses are, in effect, upholding a competitive counterpoint to stronger businesses that might otherwise have a stranglehold in a capitalist system.

“Random”, the quality that Niederhoffer attributes to successful value investors and any successful value investments as defined by Benjamin Graham, might more aptly be attributed to Niederhoffer’s own quest for an intellectually sound speculative framework. This tendency is displayed in living color by Niederhoffer and other participants on dailyspeculations.com, the website Niederhoffer hosts, as these traders engage in frothy examinations of the parallels between non-related phenomena, such as the evolved habits of exotic animals seen while on safari, and “trading”. Niederhoffer himself is especially fond of drawing wisdom from Captain Jack Aubrey, the main hero in Patrick O’Brian’s 18th century British Navy epics, as that wisdom might pertain to the markets. But after reading Practical Speculation, it is painfully obvious that if Captain Aubrey ever sashays into Niederhoffer’s trading-room and hands him a copy of The Intelligent Investor, Niederhoffer will politely accept the book, and promptly throw it overboard when the good Captain is out of site.

It’s easy to take potshots at this outspoken speculator gone off his trolley. But in the spirit of inquiry that Niederhoffer offers in his book, MSN articles and website, it seems reasonable to ask whether two catastrophic losses and one near-catastrophic loss offered to investors over a 10 year investment period —nearly 4 years of which were spent on hiatus— are more or less “random” than the market-beating investment success that Schloss, et al, offered to investors for over 50 years using a value framework. In any case, the simple fact is that the alternatives to a value framework in the securities markets frequently lead to misery, and by all accounts, Victor Niederhoffer is currently altogether miserable. In the manner that Walter Schloss’ 50-plus years of risk-averse investment returns are “random”, it may be safely said that Victor Niederhoffer’s self-inflicted misery is also randomly rendered.


and http://www.bearcave.com/bookrev/practical_speculation.html

Ben Graham’s Valuation Technique; NYU

One often thinks of prices as determining values, instead of vice-versa. But as accurate as markets are, they cannot claim infallibility.–Ben Graham

Notes on a Lecture on Valuation Technique by Ben Graham in 1947

These notes are a supplement to our previous and ongoing discussion of valuing growth stocks found here http://wp.me/p2OaYY-1se

Old set of notes:graham_valuation_technique or retyped notes for easier reading: Valuation Technique by Ben Graham from Class Notes

Despite being a brilliant man or because of his insight into himself and human nature, Graham had the ability to remain humble and accept his limitations of analyzing securities, especially growth stocks. He felt picking growth stocks required shrewdness which could not be considered a typical trait for an analyst.

Graham asserts that there is no definite, proper value for a given bond, preferred, or common stock. Equally so, no magic calculation formula exists that will infallibly produce a specific intrinsic value with absolute accuracy.  (Source: Benjamin Graham on Investing by David Karst)


Los Angeles hedge-fund manager Jamie Rosenwald has launched a value-investing class at New York University. Smart lessons, savvy stock picks.

For years, Sudeep Shrestha, 31, a native of Nepal who works at one of Wall Street’s most prominent hedge funds, watched the investment action from the sidelines. For an accountant in the private-equity division, there was no easy path from the back office to the fist-pumping and cork-popping in the front. When his business-school catalog arrived, including a class in value investing, Shrestha sat up. He waited about two seconds before logging on and enrolling.

The class, at New York University’s Stern School of Business, would make a table-pounding case for stock-picking—in particular, seeking undervalued, underloved issues—at a time when the efficient market hypothesis had convinced a big swath of investors that it was impossible to beat the market. The teacher was a little-known hedge-fund manager from Los Angeles who promised to bring his friends to class to help with lessons. By the time Shrestha completed Global Value Investing: Theory and Practice, he was sold on value investing, and convinced that the market is very inefficient, indeed.

To win, “you need to buy $1 for 50 cents, buy $1 for 50 cents,” he hummed to himself, over and over. So did the two dozen other M.B.A. candidates in the class taught by Jamie Rosenwald, a first-time teacher and co-founder of Santa Monica, Calif.-based Dalton Investments. If the lessons learned translate into market-beating returns, NYU’s first value-investing class won’t be its last by a long shot.

VALUE INVESTING TRADITIONALLY has been associated with Columbia University, 112 blocks to the north. Benjamin Graham, the father of value investing, taught at Columbia; Warren Buffett was his student, and the Columbia Business School runs a popular value-investing program through its Heilbrunn Center for Graham and Dodd Investing. (David Dodd co-wrote Security Analysis, the bible of value investing, with Graham.)


Makoto Ishida for Barron’s

Rosenwald, of Dalton Investments, and his wife donated $1 million to NYU’s endowment. A tenth of it will be invested in one or two stocks a year, based on recommendations made by the students he teaches.

Still, plenty of renowned value investors attended NYU. Larry Tisch, the late co-chairman of Loews (ticker: L), was a graduate and major benefactor. Joe Steinberg, president of Leucadia National (LUK), went to NYU, as did Bill Berkley, founder of insurer W.R. Berkley (WRB). Rosenwald, an engaging 54-year-old, attended NYU, too. “I was jealous that Columbia had street cred,” he says.

Although value investing is undergoing one of its periodic lapses in favor, Rosenwald knew it could beat the market over the long haul. He had only to point to nine of Graham’s successful protégés, discussed by Buffett in an influential 1984 article titled, “The Superinvestors of Graham-and-Doddsville.”

Waiting for the market to come around to your way of thinking is a long game, and Rosenwald has it in his genes: His grandfather was Graham’s financial-services analyst. When Jamie was 12, Grandpa Rosenwald made him fill out spreadsheets, using graph paper and a slide rule, as an exercise in assessing company valuations. A couple of years later, he made Jamie read Fred Schwed’s jeremiad against Wall Street, “Where are the Customers’ Yachts?”

THE LESSONS STOOD ROSENWALD  in good stead. Dalton, with $2 billion under management, runs value-oriented hedge funds, and its principals have a reputation for investing in profitable contrarian situations—California apartment buildings after the savings-and-loan crisis, Shanghai real estate after SARS, and distressed mortgages. Now they are backing a fund investing in apartments in hard-hit markets such as Las Vegas. “In chemistry terms, Jamie is the activation energy,” says a fund manager who asked not to be named. “When a reaction should happen, he’s the catalyst.”

Rosenwald steered a fund investing in Japanese management buyouts that produced nice returns despite a tough slog. Eventually, he merged it into Dalton Asia, which he runs with his young co-manager, Tony Hsu. Since its January 2008 inception, Dalton Asia is up 45%, versus a 23% decline in the MSCI Asia Pacific benchmark.

When NYU gave Rosenwald the green light to develop a class, he thought about how best to structure it. There would be six sessions of three hours each. The bulk of the grade, he figured, would reflect attendance, since life is mostly about showing up. The final would be a stock pitch. Rosenwald and his wife, Laura, would stake $1 million for NYU’s endowment, a tenth of which would be invested in one or two stocks a year, chosen based on students’ recommendations.

Rosenwald believed that students, like the companies they would invest in, needed skin in the game. At the first session, he made the enticing offer of a tuition refund if they didn’t learn at least three important things from the class. But since value investing pays off over the long term, they would have to wait 20 years to get their money back. The students grinned.

By definition, most investors can’t beat the market. But market-beating practices can be taught, beginning with a change in one’s mind-set. Over succeeding weeks, Rosenwald laid them out. The key was to think of yourself as an owner, choosing managers and making sure the numbers were in your favor. He explained to the class Graham’s principles, among them the need to choose stocks that have a margin of safety, and trade at prices that are low relative to book value and earnings.

Rosenwald also walked his students through Buffett’s investment requirements—that businesses be simple and understandable, have a history of predictable earnings, and generate high returns on equity as well as high and stable profit margins. The best companies have so-called economic moats: assets that warrant premium prices. They also have trustworthy managers who actually buy the company’s shares. Students had to think like owners from Day One; Rosenwald himself won’t buy a stock without meeting management first.

Rosenwald added a twist: Overseas markets, he told the class, were a good place to hunt for bargains.

Other lessons: Buying companies at 50 cents on the dollar dramatically lessened a risk of loss. Intensive research also abridged the risk, and  reduced the need to diversify. As day follows night, stock prices eventually reflect fundamentals. The students waded through Berkshire Hathaway’s annual reports and shareholder letters from renowned investor Seth Klarman of the Baupost Group.

One night, a young man who worked for a big property developer asked Rosenwald if he should diversify. Rosenwald’s eyes grew round. “Are you making so much money in your late 20s that you can afford to diversify, or are you making a small amount of money now that will grow over time?” he asked.

The latter, the student acknowledged. “Then there’s zero reason to diversify,” Rosenwald counseled. “You should bet it all on black, where you have done your own research.”

Even if the investment didn’t pan out, the student would have learned a valuable lesson about the importance of thorough research. The great investor Leon Cooperman, Rosenwald told the class, believed that outstanding investors had the following characteristics: They were intense, wanted to be the best, and knew the P&L (profit-and-loss statement) cold. They could identify their own comparative advantages and capitalize on them.

To bring the lessons home, he invited his fellow value investors to class. David Abrams of Boston’s Abrams Capital, who got his start with Klarman, told about an early and costly mistake, when he persuaded his boss to buy a fifth of a company that turned out to be a fraud. “Be very wary of book value,” Abrams warned the students. “The problem with Excel [spreadsheets] is that [they] give you a very false sense of precision.”

Bob Robotti, another prominent investor, got his start as an accountant. “You have to understand the numbers,” Robotti said. “But you don’t have to be Warren Buffett to do this right.”

THE LAST DAY OF CLASS was a festive one: Rosenwald’s colleague, Tony Hsu, would listen to student pitches and decide which stock the NYU endowment would buy. Then, Rosenwald would take everyone to dinner. Each stock should return 10% a year plus inflation, a bogey that Rosenwald lifted from another celebrated investor, Mason Hawkins of Southeastern Asset Management.

First up was Shrestha, whose pleasant, square face beamed above his crisp blue shirt. He pitched Leucadia, “a minor Berkshire” that invests in undervalued companies. Unlike Berkshire, however, it turns them around and sells them. He pulled up Leucadia’s Website, whose stripped-down look is eerily similar to Berkshire’s.

“Sudeep, it trades at $22 a share,” said Rosenwald. “What is the value exactly?”

Shrestha pointed out that Leucadia’s mining investments had turned off investors. As a result, it traded at a discount to book. In the past 30 years it had traded at a discount only three times. The chairman and president collectively owned a fifth of the company. One issue, he pointed out, was that they were elderly. (A few weeks later, Leucadia addressed that concern by buying 71% of the investment bank Jefferies Group [JEF] it didn’t own; Jefferies’ CEO would become CEO of the combined company.)

The students lined up enthusiastically to pitch. One touted the contingent value rights of the drug company Sanofi (SNY);  another pitched Genworth Financial (GNW), and still another talked about the value in American Residential Properties, which did a private offering over the summer.

Then came Neil Dudich, a portly, well-spoken student. Dudich described the charms of trucking company Arkansas Best (ABFS), whose ability to compete during the recession was curtailed by an ill-timed contract with its unionized workforce in 2008. Since then, the stock had collapsed by 80%, to 0.6 times tangible book, a fraction of its 10-year average. The market value was now about equal to the price Arkansas Best paid for a logistics firm early this year. Arkansas Best was about to negotiate a new union contract that Dudich believed would be more favorable, and the market was “losing sight of the mid- and long-term.”

Dudich, 35, thought that he knew what he was talking about. He worked for the union representing movie and TV directors. In the following days, Hsu picked Arkansas Best and Leucadia for the NYU endowment.

THE NEXT WEEK, ROSENWALD was on a plane to Asia to check on investments such as Transcosmos (9715.Japan), a Japanese outsourcing company whose founding family “lives for dividends,” and Fosun International (656.Hong Kong), often referred to as China’s Berkshire.

The investments were outside the U.S. but followed the same principles: “Find something worth $1 trading at 50 cents; research, research, research; and then buy it and sit on it,” Rosenwald says. “I wouldn’t want to be taught that there’s no way to make extra money in the world, that all knowledge is known and in stock prices. My grandfather would say that’s ridiculous.”


Ben Graham Meets An Austrian Economist

 Information Overload

Columbia business student to Richard Pzena of Pzena Investment (www.pzena.com) why do you think there will be value opportunities with so much more available information?

Pzena, “Because of this…as he slaps a 700-page 10-K on a desk in front of his lecturn. Nobody reads these because there is too much information. You must know what to look for.

Austrian Economics and Value Investing

Ben Graham meets Mises

Lessons and Ideas from Benjamin Graham by Jason Zweig:Lessons-Ideas-Benjamin-Graham_Zweig_AIMR

Value Investing from a Austrian Perspective, A paper on Ben Graham and Mises: http://mises.org/journals/scholar/Leithner.pdf


More Lessons

February 28, 2004 by

 The Australian web site of Leithner & Co., Pty. Ltd.contains a wealth of material combining economic theory, financial economics, and Benjamin Graham’s views on investing. Some interesting places to start:

Interview with Chris Leithner


Monday, July 11, 2011 at 8:45PM

Today we had the pleasure of interviewing Dr. Chris Leithner. He has lived in Australia for the last twenty years and is the author of The Evil Princes of Martin Place.  The book delineates the evils of all central banks and has some unique perspectives on Australia’s central bank, the Reserve Bank of Australia (RBA).

We took this opportunity to ask Chris about his thoughts on central banking, investing and his views on the RBA, the Australian dollar and Australian stocks.

The Dollar Vigilante (TDV): Thanks for taking the time to speak with us, Chris.  To begin, give us some background on yourself.

Chris LeithnerChris Leithner (CL): Sure, I came to Australia from Canada in 1987, in order to take a postgraduate degree. After a few years of further study in the UK, I returned to Oz in 1991. After a couple of years, I became a jaded academic; and after a few more I became an ex-academic. I learnt that the adage “those who can, do; and those who can’t, teach” has more than a ring of truth to it. Partly for that reason, and also because in the 1990s I also discovered Austrian School economics, Ben Graham and their commonalities, in 1999 I formed Leithner & Company (http://www.leithner.com.au). It’s a private investment company, based in Brisbane, which adheres strictly to the “value” approach to investment pioneered by Graham and to the economic insights of Carl Menger, Ludwig von Mises and Murray Rothbard.

TDV: How did you first get exposed to Austrian economics?

CL: Increasingly repelled by the absurdities and outright falsehoods of the economic and financial mainstream, I found Austrian Economics in exactly the way that the Austrian School shows how so many things happen: by accident rather than by design. I found it almost everywhere except at university; and as I think back, the more of it that I found, the more repugnant academic life became. I read Mises, Rothbard and others on capital, value, interest rates and the business cycle. I also read Lionel Robbins, The Great Depression (1934) and Wilhelm Röpke, Crises and Cycles (1936). Although Robbins later disavowed Austrian methods and insights, I realised that both he and Röpke provided clear and forceful expositions of the mechanics of the Austrian interest-rate and business-cycle model. Amazingly, within a couple of years of the Great Depression’s nadir, they published more theoretically and empirically rigorous accounts than (for example) Ben Bernanke’s Essays on the Great Depression, Princeton University Press, 2004.

Not only has the mainstream learnt nothing since the 1930s: it has unlearnt what’s worth knowing!

TDV: Yes, it’s not what they don’t know but it is what they know that just ain’t so.  So, why did you write The Evil Princes of Martin Place?

CL: I sought to demonstrate to an audience of interested laypeople, both in Australia and other countries, that there’s little new under the sun: the “Global Financial Crisis,” as the events of 2007-2009 are commonly known in Australia, is merely the latest in a long series of economic and financial crises that have punctuated the history of the past 250 or so years. Like its predecessors, three of which (namely the Panic of 1907, the Depression of 1920-1921 and the Great Depression of 1929-1946) the book analyses in detail, interventionist policies – in particular, legal tender laws, fractional reserve banking and central banking – are the GFC’s ultimate causes. Accordingly, only when we recognise that monetary central planning is the ultimate source of our financial and economic distemper, and when it either collapses or is consigned to the dustbin of history, and when 100%-reserve banking and sound money replace fractional reserve and central banking and fiat currency, will the ruinous cycle of boom and bust become as thing of the past.

TDV: Tell our audience generally what the book is about

CL: Sure, Part I (Chapters 1-5) uses basic logic and evidence to isolate the causes of the GFC, Panic of 1907, etc. It demonstrates, in short, that these crises are failures of government – and not of liberty. Following Herta de Soto, it demonstrates that deposits are not (and can never legitimately be) loans, that the history of fractional reserve banking is the history of bank crises and failures. Following Rothbard and Mises, it also shows how fractional reserve banks misappropriate and counterfeit.

Part II (Chaps. 6-9) analyses counterfeit money, the central bank and the welfare-warfare state. It demonstrates, following a long line of scholars, that fractional reserve banking is logically absurd, utterly fraudulent – and hence legally untenable. It also outlines the basic operations of central banking (e.g., open market operations, etc.). Conceiving the central bank as a monetary central planner, it also demonstrates (following Mises, who did it did for central planning generally) that monetary central planning inevitably fails. Finally, following Hoppe, who demonstrated in Democracy: The God That Failed (Transaction Books, 2002) that private property (i.e., individual ownership and rule) and democracy (i.e., collective ownership and majority rule) are incompatible, it outlines the invidious moral and ethical consequences (which it calls the “monetary roots of democratic pathologies”) of fractional reserve and central banking.

Part III (Chaps. 10-14) provides historical analyses of where we’ve been, where we are now and where we’re headed. It puts the Depression of 1920-21 and Great Depression into an Austrian context; so too with Australia’s “miracle economy” of 1991-2007 and the Commonwealth Government’s reaction to the GFC. It concludes that its reaction has merely set the stage for a later and bigger crisis.

Finally, Part IV (chaps 15-16) outlines where we should go – namely outlaw fractional reserve and central banking – and provides further reading for those who are interested.

TDV: We find all of your subject matter interesting but the main reason I wanted to interview you was to give the TDV audience some perspectives on what is going on in Australia right now.  Tell us some of your thoughts about Australia’s central bank, the Reserve Bank of Australia.

CL: Australians have become a bit cocky in recent years, to the point where “Australian Exceptionalism” or something akin to it swells many hearts; it’s not just The Lucky Country: to many people, it’s apparently The Country That Deserves to Be Lucky.

TDV: The same thing has been happening in Canada.  It’s amazing what living in a place with some natural resources in the ground and a currency performing relatively well can do to puff out the chests of some people!

CL: Haha, yes.  One of my intentions in The Evil Princes of Martin Place is to remind them that the laws of economics are universal across time and space – and therefore, that, just as fractional reserve and central banking inflated the booms that have burst in Europe and the U.S., so too they’ve inflated the booms that will bust in China and Australia.

TDV: Explain to us how the RBA is different, or similar, from the other central banks we are more familiar with like the Fed, BoE and BoJ

CL: For all practical purposes, it seems to me that central banks’ similarities (which The Evil Princes emphasises) are far more important than their differences. As an analogy, the Fierce Snake (Oxyuranus microlepidotus), Common Brown Snake (Pseudechis australis) and Taipan (Oxyuranus scutellatus) are the world’s three most-venomous snakes. For all I know (I don’t), their diets, reproductive habits and habitats, among other things, differ. But what’s most relevant from my point of view is that each is very poisonous – and is an Australian native. Similarly, a mainstream economist might assert that over the past decade the RBA has targeted the CPI more formally than the Fed. Both, however, relentlessly undertake the open market ops that ignite the boom that eventually busts, and it’s that commonality that I try to keep uppermost in mind.

TDV: The Australian Dollar (AUD) has been on a wild ride the last few years… how do you explain this from your Austrian viewpoint and from what you know about the AUS central bank?

CL: Because Leithner & Co. invests almost exclusively in Australia and New Zealand, I’ve never thought about it.  Well, that’s not quite true: the $A is a fiat currency; and as such, its purchasing power almost constantly falls. But I have no insight whether it will melt faster than the £, €, $US, etc. I suspect, but obviously don’t know, that taking short-term or even medium-term positions on the price of the $A vis-à-vis another currency is either a waste of time or a rod for one’s own back. Certainly I don’t know anybody who’s made a living – let along accumulated significant wealth – trading the $A or any other currency.

Your question prompts me to reflect that, when it comes to the currency, I am very Grahamite; that is, I concentrate on the micro (the security) rather than the macro. Your question also brings to mind Buffet’s observation in 1994: “If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do.” In effect, in 2009 Glenn Stevens, Ben Bernanke and all the sordid rest DID shout what their monetary policies were going to be, and it hasn’t changed either my approach to investment or my highly jaundiced attitude towards central bankers and central banking.

TDV: Give us an overview of the current political/central banking climate in AUS… what’s your thoughts? Should we be buying AUS stocks? AUD? Or selling?

CL: Well, let’s first take the mainstream’s prevailing attitude towards central banking in general and the RBA in particular: central planning rules! Not just in Oz, but in all Western countries (and Eastern ones, for all I know) the state has embedded its protections of fractional reserve and central banks so deeply within its legislation and regulations – in other words, it has extended such enormous privileges to these banks for such a long time – that virtually nobody now recognises bankers for what they have long been: massively featherbedded white-collar wharfies (for decades until a decade or so ago, longshoremen were the most notoriously protected, overpaid and arrogant workers in Australia). The events of the past couple of years have alerted the man in the street to the reality that something is rotten in Denmark — or, more precisely, Australian and other banks — but he can’t quite put his finger on it.

In Australia, economists, investors and journalists babble endlessly about the level at which the Reserve Bank should “set” the “official interest rate” (by which they mean the Overnight Cash Rate). Alas, almost nobody bothers to ask why it should be set, or whether it actually can be fixed. After all, the benchmark price of (say) wheat isn’t set: it’s discovered throughout the day at the Chicago Mercantile Exchange. Similarly, the spot price of copper is constantly discovered and rediscovered at the London Metals Exchange. More generally, the impersonal forces of supply and demand determine many prices. Yet, for reasons rarely discussed and never justified, virtually nobody baulks at the notion that a short-term money market rate of interest must be “set” by a committee of price-fixers and central planners in Martin Place, Sydney.

Hence, an inconvenient question: given that most “right thinking” people like mainstream economists and financiers (correctly) believe that the production of goods such as motor cars, frozen vegetables, etc., should occur within a régime of market competition, why do the Good and the Great insist – some of them quite vehemently – that “we” must exclude the production of money from market forces? Why, in an allegedly free society, must the government monopolise the definition of money? Why must its production and regulation be entrusted to a deified government monopolist called the central bank? Nobody in mainstream Australia is ever able to answer these questions; instead, they ridicule or simply ignore them.

Yet even to consider these questions is to grasp that the Global Financial Crisis is not a “market failure.” Rather – and in a way that parallels the collapse of Communist economies – the GFC is the inevitable consequence of the hubris of central planning. Communism epitomised general economic central planning, and it eventually collapsed. Central banking, whether in Australia, Britain, China or the U.S., is monetary central planning; as a result, it too will ultimately be consigned to the dustbin of history. From the repudiation of the gold clause and confiscation of gold in 1933 to the closing of the “gold window” in 1971, the chairman of the Board of Governors of the Federal Reserve System, as well as his counterparts in the Reserve Bank of Australia, etc., have increasingly deprived market participants of market signals – that is, of real information in the form of unfettered rates of interest. In particular, market participants have been deprived of a key warning signal and great source of discipline (the right to exchange dollars for gold). Central bankers, in short, have caused credit markets to emit false signals; as a result, these markets don’t tell the truth about time.

TDV: We totally agree, of course.  And also find it so bizarre that hardly anyone questions having communist style central planning embedded at the very heart of the so-called capitalist system.  What is your take on Australian stocks?

CL: In Leithner & Co.’s current Newsletter to its shareholders, I note a paradox: those who didn’t see the GFC coming (and remained wilfully blind after it erupted) – the very people who incurred big losses in 2007-2009, which they’ve not recouped – today remain resolutely upbeat about the future. They were diametrically wrong then; why should anybody think they’re less wrong today?

In sharp contrast, the doughty few who anticipated trouble and who have consistently generated profits since 2007 remain downcast today. It’s demonstrably false to assert, as the mainstream has since 2007, that “nobody saw it coming.” What’s certainly true is that the few who foresaw the GFC and now see that we’re merely in the eye of the storm, were then and today remain, from a mainstream point of view, “nobodies.”

A second point is that in a Newsletter dated 26 June 2009, I posited assumptions and conducted an analysis that yielded nine estimates of the All Ordinaries Index’s “fair value.” If earnings fall to their long-term trend and bearish multiple emerges, then the All Ords’ fair value is 1,688 – roughly half the level of its low in March 2009 and one-third of its level (4,700) in early July 2011. If earnings remain constant and the “bullish” multiple suddenly prevails, then fair value is 5,512 – a modest 67% above the March 2009 trough. Mid-range assumptions with respect to both earnings and the multiple generate an estimate of 3,127 – just below the March low. Re-reading that analysis and considering its premises, I think its conclusions remain sound: Australian investors need to incorporate into their plans the possibility that Australian indexes fall by 50% or more.

A third point is that, recent decades in Australia, have not, in economic and financial terms – and as the Commonwealth Government, RBA and their sock-puppets in the media and universities strenuously insist –  been truly stable. In The Evil Princes I noted that for seven decades Communism in the Soviet Union was apparently secure. But it was hardly durable, as its sudden and unexpected (to the Western mainstream) collapse demonstrated. I also show that since the early 1990s the much-vaunted “fundamentals” of the Australian economy have hardly – despite the mainstream’s ubiquitous and often strident insistence – been sound. Since 2007, it’s become obvious in Europe and the U.S. that the “stability” of the past few decades was – like the “strength” of the Soviet Union – apparent rather than real. The truth is that the long Australian boom since the early 1990s has not reflected the success of the mainstream’s interventionist policies. The ructions since 2007, however, have revealed the artificiality of the conditions these interventions created.

Alas, like the Bourbons of old, today’s politicians, central and fractional reserve bankers have forgotten nothing and learnt nothing from the financial and economic catastrophes they’ve repeatedly fomented – and thereby expose the rest of us to the next crisis. Unfortunately, the lesson of history seems to be that the politicians people admire most extravagantly are (like Franklin Roosevelt) the most audacious liars; conversely, the ones they erase from memory are, like Warren Harding, those who dare to tell them the truth.

Accordingly, since 2007 governments around the world have intervened massively and lied flagrantly. Their frenzied “fiscal stimulus” and hysterical “monetary stimulus” have ignored the lessons of the “Good Depression” of 1920-1921 and reprised many of the errors committed during the Great Depression of 1929-1946. Most notably, major central banks are presently moving heaven and earth to suppress market rates of interest; the appropriate course is to abandon the intervention and to let rates rise. Similarly, Western governments are increasing expenditure and incurring huge deficits; the correct policy, of course, is to slash spending, taxes and deficits, and to use the resultant surplus to retire debt. Since 2007, in short, central bankers and politicians – as much in Oz as in Europe, China and America – have been energetically inflating the next bubble and thereby stimulating the next crisis. My prognosis is therefore sombre.

TDV: We agree with you on that count as well.  You certainly, more than 99.9% of money managers out there, really know what is going on thanks to your grasp of Austrian economics.  For those interested, please let them know about how they can take advantage of your investment services.

CL: A short summary of our results since inception can be seen here, and an extended analysis of our results during the past decade and its strategy for the next ten years can be seen here.

Leithner & Co. accepts new investors. It caters primarily to professional and sophisticated investors as defined in sections 708(8) and 708(11) of the Australian Corporations Act. In plain English, that means investments of at least $A500,000. Also, because Leithner & Co. is a company and not a fund, its investors own shares in a private company rather than units in a unit trust (or what Americans would call a mutual fund). Unlike units, these shares are illiquid. So not just as a result of its investment philosophy, but also as a consequence of its structure, Leithner & Co. probably isn’t suitable for most people.

Learn more:http://www.leithner.com.au/archives.htm

Other Austrian Value Investors


Another Investor who combines his value investing philosophy with Austrian economics: http://www.bestinver.com/prensa.aspx?orden=estudios

James Grant

Note what Jim Grant says in the video interview, “The value that you see is the result of manipulated interest rates? We are in a BUBBLE of perceived “SAFE” Haven assets (think 30 years bonds at sub-2.5% or two year bonds at 0.003%)