Sunday, November 9, 2008 2 comments ++[ CLICK TO COMMENT ]++

Jim Grant's Security Analysis 75th Anniversary Edition Speech

I have a video treat for Jim Grant fans; and Benjamin Graham fans; and value investing fans; and well, you get the point. I haven't seen anyone linking to this video anywhere so it's as exclusive and insightful as anything you'll find on this blog. I'm happy with this find.

I never heard of the Museum of American Finance but it looks like a neat little museum covering a niche area. Jim Grant made a speech about Benjamin Graham's life in honour of the 75th anniversary of Security Analysis. For those not familiar, Security Analysis is the Benjamin Graham and David Dodd textbook that sprang value investing and the securities analysis profession. A new edition was released this year and Jim Grant provided some commentary. For those with too much money to spend--certainly excludes anyone investing in Ambac ;)--there seems to be a limited leatherbound edition on top the usual edition. The speech is about Graham's life and should provide a historical context--especially given the current meltdown. However, what I find most interesting, is the latter question & answer part near the end.

Even if you are not a fan of Jim Grant and could care less about Benjamin Graham, you should check it out for Grant's historical perspective. I like Grant but don't agree with many of his views. For what it's worth I think Grant is wrong when it comes to the current credit implosion and would definitely put him in the 'liquidationist' camp of Hoover/Mellon/Jim Rogers/Marc Faber. Jim Grant is definitely one of the most knowledgeable people I have encountered in investing.

The good thing about this video is that it has a lengthy Q&A with some historical comments from Graham. Instead of the same-as-always questions you see on television, some of the questions here allows Jim Grant to expand his thinking. It's hard to hear the questions so I suggest turning up the volume for the latter part of the speech.

There is a lot of little nuggets and insightful information. For instance, Benjamin Graham was hedged (long and short) going into the 1929 bust but he was using leverage and his short positions weren't large enough. Graham supposedly had $2.5 million long with $2.5 short, but he also had $4.5m unhedged with $2m debt. I suspect that a lot of market-neutral hedge funds are running into the problems that Graham faced during the Great Crash.

Here is an example of what I mean by a little nugget. Jim Grant, in the Q&A, points out how rapidly the Federal Reserve's balance sheet has expanded lately. Roughly, it took around 75 years (roughly 1989) since its founding in 1914 for the Federal Reserve to hit a balance sheet value of $100 billion. Then it took 10 years (roughly 1999) to hit $500 billion. After that it only took 8 years to hit $1 trillion. And now, in two weeks the FedRes balance sheet went from $1 trillion to $2 trillion. You can see why Jim Grant is concerned about the US$.

I probably disagree with 30% of what Grant says, including the theological battle over mark to market accounting :) I also can't believe that Grant thinks that hedge funds have better integrity than the Street since hedge fund managers are general partners and have a big chunk of their net worth invested in the fund. In any case, Grant raises a lot of issues that are very important.

Do check out other audios and videos at the museum's website. There is a lot of great stuff on the site, including some excerpts from their magazine. I just looked at a few but the article excerpt on the Great Crash of 1907 was a fun read; so was this piece on the crisis Alexander Hamilton had to deal with (Alexander Hamilton is probably the most socialist (or modern liberal) of the American Founding Fathers--there was no such thing as socialism back then, of course, but he is the closest in my opinion.)

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2 Response to Jim Grant's Security Analysis 75th Anniversary Edition Speech

November 20, 2008 at 5:44 PM

You said:

"I also can't believe that Grant thinks that hedge funds have better integrity than the Street since hedge fund managers are general partners and have a big chunk of their net worth invested in the fund."

Why is this a surprise to you? Hedge funds have, an average - with some notable exceptions - signficantly outperformed the market this year. The GPs have substantial skin in the game and have proven to be much better risk managers than the big Wall Street firms, commercial banks or insurance companies where the top managers generally have little or no skin in the game and a heads I win, tails you lose compensation proposition with their shareholders.

I don't get YOUR skepticism.

November 21, 2008 at 11:56 AM


Hedge funds outperforming the markets is not good enough. Most of them promote absolute returns. One of the main reasons for paying so much is to receive solid returns through all market conditions. Clearly that hasn't happened and that's probably why you are seeming massive redemptions by hedge fund investors.

Anyway, I think the hedge fund managers have similar conflict of interest as management of public businesses. Many hedge funds charge 2% MER plus 20% of profits. So what is a profit-seeking fund manager to do? Well, of course, try to hit risky home runs. There are many HF managers who have become wealthy by gambling and posting high returns for a short period and taking in huge profits off the profits. They did this, not by skill, but by leveraging themselves.

There are many HF managers who will become millionaires while the investors end up with massive losses. In fact, I can guarantee this. I'll bet nearly all the hedge funds that have gone bankrupt--since they can block redemptions for up to 2 years in some cases, this could take a while--where the manager would end up making millions. Sure, they would lose their own personal holdings, which tends to be large, but they drew so much profit before that it's still advantageous for them.

Hedge funds are basically the subprime borrowers of the investment world. They ended up borrowing way more than they clearly could own given their illiquid and sometimes dubious investments that back the borrowing.

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