from the Great Depression
February 17, 2009
Great price tags on a number of investments are the silver lining of the current recession, according to James Grant, founder of Grant’s Interest Rate Observer.
Grantshared his“Thoughts on the Financial Markets and the Current State of the Economy” with the Boston Security Analysts Society on February 11. He spoke at length about the virtues of value investing, as exemplified by the Depression-era strategies of Floyd Odlum of Atlas Corporation.
Today’s investors can learn from Odlum’s strategy of underpaying for assets, Grant said.
Odlum and Atlas Corp.: Bad economic times offer opportunities
Odlum, Grant explained, was a master of finding opportunities. “We can have no finer role model,” Grant said. “First and foremost, he was a value investor — a member of that eccentric tribe that believes it’s better to underpay than to overpay.”
Odlum made a fortune during the Great Depression by buying publicly traded shares of investment trusts (predecessors of today’s closed-end mutual funds) at a steep discount. It’s a strategy that Grant called “buying dollar bills at 50 cents.” Odlum would buy an entire investment trust, liquidate its assets at a profit, then repeat the process with more trusts. He did this 22 times from 1930 to 1933, doubling his investment from roughly $50 million to $100 million.
Grant doesn’t recommend that investors follow Odlum’s strategy exactly. For one thing, the values of closed-end funds haven’t fallen as much as they did during the Great Depression. Odlum bought investment trusts at discounts to net asset value of more than 40%. By contrast, closed-end funds sold at a discount of only 6.1% at the end of January, down from a recent peak of 26% on October 10.
Odlum’s tactics would also be illegal today, because he secretly bought out fund directors at a premium to enlist their help in getting minority shareholders to sell.
But Odlum would still find opportunities in today’s environment, said Grant, because “great investors adapt to the times,” and the core tenets of Odlum’s investment philosophy still apply today.
“Odlum was bullish on America, as many of us are — and ought to be,” Grant said. “But he put money on it only when he was sure of the odds.” That meant paying a price low enough to create a margin of safety.
“That was the silver lining of the Great Depression — plenty of great price tags,” Grant said. He sees opportunities today as well, though fewer than in the 1930s.Display article as PDF for printing.
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