Award Winner: They Survived the Depression

EDITOR’S NOTE: SmartMoney Staff Writer Reshma Kapadia has been honored by FOLIO: as a Gold winner in its annual Eddie awards contest, which recognizes editorial excellence across the magazine industry. Kapadia’s May 2009 story “The Survivors,” earned top nod in the Banking/Business/Finance Single Article category. The story offers the extraordinary perspective of three nonagenarian money managers who were actively working on Wall Street during the Great Depression—and are still managing money today.

The FOLIO: awards, now in their 10th year, are the magazine industry’s largest competition, covering nearly 200 categories in both editorial and design. Of the nearly 2,000 entries submitted to this year’s contest, SmartMoney was one of only 28 print publications honored with a Gold award.

Here is Kapadia’s look at the pros who survived the Depression.

IRVING KAHN SITS AT HIS CLUTTERED DESK, PEERING AT his computer screen through thick, dark glasses. The Dow inched up 38 points today, a small move in light of its 332-point drop earlier in the week. But Kahn has made a career of betting on beaten-down stocks, and he’s hard at work poring over annual reports and studying balance sheets looking for companies that have lots of cash, not much debt and good long-term growth prospects. General Electric has a solid business and looks pretty good at these prices, he muses. General Motors? Not so much.

Like a lot of us, Kahn has seen good times and bad, bull markets and bear markets, recessions and recoveries. But he’s also seen something most of us haven’t: the Great Depression. Kahn, who still shows up at work every day and puts in a good six hours, worked as a stock analyst and brokerage clerk on Wall Street in the 1930s. He’s 103 years old.

That’s right — 103. As pundits half their age dominate the airwaves with prognostications on whether the next Great Depression is just around the corner, a small group of overlooked folks who not just lived through it but worked through it — on Wall Street — are still here. What’s more, they’re still at it, running their own sizable portfolios and, in a few cases, managing money for clients. Despite innumerable bull and bear markets, 17 presidents, and countless economic policies, they’ve remained remarkably true to their investing philosophy. They’ve also remained remarkably true to their methods: Forget BlackBerrys; most of them hardly touch their desktop computers. And you won’t find CNBC blaring in their offices throughout the day; that’s more noise than news to these gentlemen. Instead, you’ll find stacks of reading material (these guys actually read a firm’s annual report before investing) and a lot of old-fashioned...what do you call it? Oh, right. Math.

This cohort has perspective most of us lack: They know what the Depression looked like and how it felt. They saw bread lines on the street and despair in the faces of friends and strangers. Some lost money in the stock market, while others made enough to make it through the Depression rather comfortably. A few began their 80-year careers working for a legendary investor whose investing principles are still taught in business schools. And their take on today’s markets might surprise you.

Now, lest this sound like an “in my day, we walked to school barefoot in the snow” admonishment, rest assured these veteran investors are all quick to acknowledge that times are indeed tough. At just over 8 percent, unemployment is at its highest level in decades, and some number crunchers argue that if it were calculated to include discouraged workers who have given up their job search, it would be more like 15 percent. Stocks fell 40 percent in 2008, the worst annual return since 1937. When these Depression-era investors reflect on what they faced in the 1930s, it’s clear they view today’s crisis differently — we’re certainly not seeing bread lines or a resurgence of tenement living — but the tactics they used to cope are remarkably similar. So we sat down with three of these old hands, in their Midtown Manhattan offices and their Park Avenue homes, to hear their stories and note their strategies, then and now.

AFTER DROPPING OUT OF CITY College to work on Wall Street in 1928, Irving Kahn had a front-row seat to investors’ successes and failures during the Depression, especially those of mentor and friend Benjamin Graham. Investing buffs know Graham as the legendary father of value investing, whose disciples include Warren Buffett. After taking a beating in the 1929 crash, Graham set out to find the least risky way to make money — conveying his findings in the landmark book Security Analysis and through investing courses. (Not to mention racking up millions over a multidecade investment career.) Kahn helped him on all fronts, crunching numbers and researching stock picks. In fact, when you talk to Kahn, it often seems as if he sees the Depression through Graham’s eyes, peppering his recollections with self-effacing comments, such as, “I can tell you about myself by telling you what I did for Graham.”

Like many investors (and many New Yorkers), Kahn is supremely skeptical — be it of a company’s prospects or of inquiries from a curious reporter asking about the similarities between now and the 1930s. Kahn, who sounds more like a professor than a money manager, actually asks more questions than he answers, dodging most queries about himself. When prodded, the public school-educated son of Polish immigrants says the problem after the Depression was not so much the lack of money to invest but rather “knowing how to use it without losing it. There were too many bargains.” A bargain isn’t a sure thing, and Kahn learned from Graham to buy only investments he deemed “riskless.” He also learned when to get out even if that meant leaving money on the table.

Kahn hasn’t deviated from that philosophy, even now that he’s chairman of his investment firm, Kahn Brothers Group. He still shows up five days a week to hunt for overlooked companies with good businesses and little debt that are trading for less than the value of their assets. Kahn’s youngest son, Tom, 64, runs the firm, which has returned an average of 10.9 percent a year since 1994 through the end of 2008, better than the S&P 500’s 6.8 percent average. After that kind of performance in his nearly eight decades as an investor, the elder Kahn can clearly afford the finer things in life. But he steadfastly prefers hamburgers at low-key neighborhood joints over the haute cuisine at the many pricey restaurants near his Upper East Side home. At 103, he has succumbed to taking a cab to the office but takes the bus home — using his senior citizen’s discount. After so many years in the business, it’s a wonder Kahn continues the grind. But his son Tom says, “Investing is his hobby. It keeps him alive.” That’s quite a tonic, but the Kahn genes also have something to do with it. The family — including Kahn’s 107-year-old elder sister and their 99-year-old “baby” brother — has been the subject of several studies on aging.

Despite the constant comparisons with the Depression, Kahn says it’s “absurd” to think the U.S. is headed for a repeat of the 1930s when people “felt so helpless.” Back then, the Feds refused to aid banks and were powerless to adjust interest rates or insure accounts. In fact, Kahn points out, up through 1971, the Federal Reserve couldn’t even lend money if it wasn’t backed by gold. Today our government is creating billions of dollars — literally — to help get the economy back on track, we have programs to insure individuals don’t lose their bank deposits, and there’s a general sense that Washington will do what it takes to help both Wall Street and Main Street. That’s not to downplay the troubles ahead, and Kahn is the first to suggest ultrasafe government bonds for part of a portfolio. But as an investor who has seen dozens of economic downturns, Kahn plainly says this is just part of the natural cycle of the market. “Investors have no reason to feel bearish,” he says. “True value investors are glad the markets are down.”