Saturday, 5 March 2016

Andre Kostolany, bon vivant and speculator

“When the golden boys of Wall Street return to selling vacuum cleaners the world will be a much better place” - Andre Kostolany

It’s hard to top that line. A few weeks ago Andre Kostolany would have celebrated his 110th birthday. His books on the markets are one of my favourite reads as he writes with such clarity and humour that they are almost page turners (as far as finance books go). He wasn’t a value investor or a "fundamentalist" rather a true contrarian and speculator but somehow buying securities below intrinsic worth was inherent in his style. He often relied on his imagination or the “story” part to make an investment case vs running cash flow models. He said that “success on the stock market is an art and not a science”. The reason I really enjoy his writings is due to the historical perspective. Speculating in German government bonds in the 1940s, yes he has done it; being short in 1929, tick that box; speculating in wool in the 1940s, likewise. It’s very rare to read or listen to someone with 70+ years investing experience, and investing is a subject where experience is certainly important. Combined with his stories of famous bankers, investors, writers, musicians and witty one liners it’s no wonder his books (10+) sold millions of copies all over the world. But it’s unlikely that you’d have heard about him unless you live in continental Europe.

Andre Kostolany was born in 1906 to an industrialist family in Budapest, Hungary as the youngest of four children. His family was very well known in the country and was close to Edward Teller or the Zwack family in Hungary to name a few. He studied philosophy and art history until one day one of his father’s investor friends based in Paris asked his father without any pretentiousness:“what would you like that child to become? A poet?! Send him to my office for real world experience, he'll learn a lot more". Andre Kostolany admitted that he was right. That’s how he moved to Paris, fell in love with the markets and began his life as a speculator. He has experienced a huge amount of volatility - successes and failures - and got wiped out on occasions early in his career, only to be bailed out by friends and associates. He chalked these lessons down to experience. One of the early lessons he learnt in the markets was basic supply and demand: “in the markets what matters is the relative size of the supply of paper [securities] to fools”.

Following the German invasion in 1940 he left Paris for New York, where he was based for the next 10 years. Prior to his escape he was asked about his political leaning and was often quoted saying that “my brain is to the right, my heart is to the left but my money is already in the US” [approx. $200k, which is a few $m in today's worth]. In the US he became the head and key shareholder of an investment company (Ballai and Cie Financing Company). After his time in the US he returned to Paris where he met his wife and settled down, although never had children. He was getting restless about the next steps of his life and upon the advice of a psychologist he began writing books on investing, markets, economics and personal anecdotes collected over a lifetime. I believe his published book count is well over 10 but none in English to my knowledge unfortunately (mostly in European and some Asian languages). He took on a major "celebrity status" after publishing his regular newspaper column (over 400 articles) in the German “Capital” magazine. He often appeared in German TV shows discussing current economic and market topics (watch from 5.40min mark for his definition of a crash). Kostolany split his time between Paris, Munich and the Cote d’Azur. To add to his many accomplishments he also founded a German investment company that is still around today.

His last wish was to be able to write the first article in the January 2000 edition of the Capital magazine. Unfortunately after a very long and colourful life he passed away in September 1999 at the age of 93 (you can read his obituary here). There is a very nice TV ad, which was shot in Budapest where he appears in. It’s a short video with an important life lesson at the end. Highly recommended to watch.

I’ve summarised some thoughts he had on investing, markets, economics and psychology and so on that I thought were interesting. You'll see that many of his views are actually very close to famous value investors':
  • On optimism: “Those who don’t believe in miracles are not realists”, and “If I was young enough, say only 70, I’d found the school of optimists”, and “I don’t know what tomorrow brings, but with over 70 years of experience at least I know what happened yesterday and what’s happening today; most of my colleagues don’t even know that”
  • On the value of money: “Money matters to me from only one perspective, it gives me independence. Independence means that if someone isn't convenient for me to meet I can tell them to take a hike. I don’t have a boss, employees, customers or clients whom I’ve to please. I’m an independent man"
  • On the unpredictability of the stock market in the short term: “The relation between the stock market and the economy is like a man walking his dog. It is very difficult to determine the direction of the dog which will get easily distracted. The dog will sometimes sprint ahead, lag or just run around randomly but over time both the dog and the owner will get to the same place. While the owner walks 1km, the dog runs 3 to 4 times that. The dog is the stock market and the owner is the economy”
  • On the weighing vs voting machine: “In the stock market it all depends on whether there are more fools than securities or more securities than fools"
  • On being contrarian: "The short and mid term prospects of the stock market are 90% influenced by the psychology of the participants. The stock market is nothing else than the alternating movement of papers from the weak hands to strong hands. The market will behave differently depending if the securities are held by weak or strong hands. If the stock market doesn't react positively to good news, instead it falls the papers are held by weak hands. If it starts to rise regardless of bad news the papers are held by strong hands. If the stock market becomes a daily topic at parties, work, bus stops a crash is imminent. I can tell you that the more people approach me on the streets about the markets the more fearful I become"
  • On success in the markets: "You need four things to be a successful speculator: (i) thought or an idea, (ii) belief or conviction, (iii) money and (iv) patience"
  • How to invest and get wealthy in the markets: “I have stopped giving tips to others but if I can make a recommendation it would be that an investor should first go to a pharmacy and purchase large doses of sleeping pills. Upon the successful completion of that task they should acquire a portfolio of high quality securities then go to sleep for many years. Otherwise the inexperienced investor's emotions will be distracted by the market volatility"
  • His recommendation for speculating in the market: “Anyone who has a lot of money to speculate should, who has little money should not and who has no money must”
  • On success and failure: “49% of my speculations went wrong while I only acted correctly in the other 51%. The result is in the 2% difference”, and “On the stock market the most important thing is luck. I cannot attribute my success to intelligence but to luck. Of course I had ideas or visions from which I made money and also had less successful periods when I was losing but in the end the balance was positive”
  • Successful speculations: “In 1946 I was buying German government bonds in US dollar, pound sterling and Swiss francs. Amongst these were 5.5% Young bonds issued in French francs, which at the time you could have bought for 25% of face value. I’ve loaded up on the bonds as I had the conviction that the first post-war Chancellor (Konrad Adanauer) would do everything to re-establish Germany’s credibility, which turned out to be right decision. These securities were revalued and bought out at 35,000 francs”
  • On raising a family (he never had children): “If I’d have children, the first one must be a musician, the second a painter or sculptor, the third a writer or at least a journalist but the fourth must be a speculator to support the other three. The ability to see into the future can bring millions of dollars”
Image source

Weekend reading

Annual letters from Warren Buffett and Bill and Melinda Gates

How Super Angel Chris Sacca Made Billions, Burned Bridges And Crafted The Best Seed Portfolio Ever (Forbes)

China’s state-owned zombie economy (FT)
Reforming a sector burdened by debt and overcapacity is critical to restoring growth in the economy

Macro Roundtable on China (SumZero)

How the Panama Canal Got Its Groove Back (Priceonomics)

Creating Effective Incentive Systems: Ken Iverson on the Principles that Unleash Human Potential (Farnam Street)

CAPE Strategy Update (Minority Report)


A Crisis In Ponzi-Land (The "Drop-Down”) (Part III in Kuppy’s MLP series; Adventures in Capitalism)

Weitz - Valuable Losses (Wealthtrack)
A rare interview with Great Value Investor Wally Weitz on finding opportunities where others are seeing losses

The Road Less Traveled: Special Situations Investing (Value Walk)
Great presentation on how to find special situations ideas from Buckley Capital

Douglas Coupland: The rise and fall of the mall (FT)
Recalling the golden age of the shopping mall and why we may look back on the 1990s as the last good decade

A huge U.S. dairy is tackling the farm pollution problem by turning cow manure into fuel. Will others follow suit?

Here's a whole year's worth of weather in one video (Science Alert)
We all know that 2015 was the hottest year on record. But what did that look like exactly? Thanks to all the handy satellites stationed around Earth we now have the ability to watch our weather 24/7 from space. And that also gives us the chance to take a broader perspective and look back on the year that was, thanks to this beautiful time-lapse from weather monitoring organisation EUMETSTAT.