Walking down memory lane, finding investors who have trodden on the paths least traveled and have succeeded is one of my favorite past times. It is a great way to learn from the vicarious experiences of others and it is of course a great way to validate my experience against the experience of others. At some point, you need to know where one stands relative to the markets and the experience of other successful investors. Which is why it is always good to measure up against some form of benchmark. It is also a great feedback mechanism through which we strive to make ceaseless improvements on ourselves.
As Otto von Bismarck says :
“Fools say they learn by experience.
I prefer to profit by others experience.”
I tend to agree with the statement above. There is always something to learn, there is always something to add to one’s repertoire of knowledge and experience by looking through the eyes of those that have gone before us. This holds true for investing as it does in life.
And for me personally, I have always wondered why deep value investing has not caught on with the general investing public. For one, I feel that it takes tremendous fortitude to buy into companies which are temporarily depressed. The key word here is “temporary”. The herds tend to extrapolate that temporary depression to infinity and beyond, attaching “permanence” to a stock that may mean revert soon enough. And then, there are those investors who are hell bent on emulating Warren Buffett which is essentially the purchase of moated companies with sustainable competitive advantages at fair prices, even when they do not possess the necessary skill sets to actually value a company.
And the thing is this. There is an academic angle when it comes to deep value investing. Ben Graham’s strategies have been tested academically one time too many. And they have been proven to work beyond any reasonable doubt. You just have to be disciplined, be patient and stay the course.
And so every now and then, I come upon a story, a story that serves to inspire and deserves to be shared for the benefit of others.
If you search through the annals of time and history to find outstanding deep value investors, you may come across an odd name. Floyd Odlum, a lawyer turned investor who not only survived the great depression unscathed but was also rumored to be a rare individual to make money in the 1929 Great Depression.
Did I arouse your curiosity? If so, let us continue.
When you ask investors who are some of the more popular investors they have heard of. Invariably, one will mention Benjamin Graham, Warren Buffett or some new generation value investor such as Bill Ackman. But if you ask them whether they have heard of a man named Floyd Odlum. The answer is invariably no, Rarely do individuals know who Floyd Odlum is or what he does for that matter.
Who is Floyd Odlum?
Source : Wikipedia
Floyd Odlum, was born on March 30th, 1892 to a poor methodist family. Described as sandy haired, lean, thrifty and with a preference for plain clothes, Floyd started his career as an attorney in Salt Lake City and for a while struggled as a lawyer. In the early 1920’s, ‘Little Od’, as he was called, was offered a job in a New York law firm, Simpson Thatcher & Barlett, who were attorneys for the Electric Bond & Share Company. There, he made some valuable connections in the utility industry. He became closely connected to George Howard, a lawyer turned head of United Corporation, an investment holding company which had a portfolio of utility companies.
And Floyd Odlum also became the go to attorney to handle the legal affairs of the Electric Bond & Share Company, entrusted to him by then head of Electric Bond & Share Company, Sidney Z. Mitchell. As fate would have it, Floyd through his associations with utility companies began to have an in depth understanding of the industry and later on in life, he would exploit that knowledge and make a name for himself as “possibly the only man in the United States who made a great fortune out of the Depression”.
Speculative Start In The Stock Market
As with all starts in investing for most people, they are often not perfect. Floyd Odlum was introduced to the stock market and he thought of it as a great avenue for speculative profits. And so he did. He risked $40,000 on the stock market in his first speculation and lost most of it. It was perhaps one of those critical turning points in Floyd’s life that made him rethink his ideas on speculation and investing.
A New Start
By 1923, Floyd morphed from a speculator into an investor with “plain common sense”. He ignored the rumors floating around in the market and began to study economic trends and other sensible information. That very same year, Floyd reorganized himself into a partnership of pooled capital contributed by his friend and their wives. With a small amount of capital amounting to $39,600, he formed the United States Company to make purchases of undervalued utility companies and other general securities. This time round, his effort paid off in a large way. In 2 years, the original capital had multiplied 17 fold to what I estimate to be $673,200 in 1925.
And all of this happened while Floyd Odlum was still holding onto a full time job as an acting attorney for Electric Bond & Share Company. By this time, Floyd’s career as a professional investor was beginning to take shape into one with remarkable success where he would become known as one of the most successful investors in the depression era of 1930’s.
The Great Depression
By the summer of 1929, the markets showed signs of overheating. Buyers were buying with impunity and with little regard for current market levels and the stock markets recorded higher highs with each passing week as the reckless buying went on unabated.
To most market watchers and pundits, the markets still seemed to have “legs” in them. Or should we say “wings”?
To a few contrarians of those bygone days, the markets were however a ticking time bomb. The highs recorded by the stock market was unsustainable and Floyd Odlum concurred with this view of market overvaluation. Floyd sold off his market positions and sat in cash, waiting for the right time and opportunities to deploy them once again.
At this point, he had an estimated control of $14 million in cash and quick assets – assets which can be easily liquidated. This was somewhat bolstered by a rights issue. With $14 million in cash and cash equivalents, Floyd sat patiently on the sidelines as the market went into a buying frenzy until the DJIA peaked and proceeded to crash by more than 80% from its peak.
Source : Bigtrends
Floyd Odlum On The Prowl For Deep Value Securities
Before the crash, Floyd Odlum had been studying a number of investment trusts. Investment trusts typically held marketable securities or stocks of other publicly listed companies and/or debt securities. He found that these companies were quoted at a price way above the value of the securities on the balance sheets of these investment trusts.
However, when the crash occured, he found that some of these investment trusts were quoted at prices less than the value of the securities which they held on their balance sheets.
Floyd rationalized that if all of the outstanding shares of these companies were purchased, he was essentially buying into these entities at a deeply discounted prices. He estimated that he was buying cash and cash equivalents for 60 cents on the dollar. These were practically deep value cash bargains.
But he did not pay cash for these investment trusts. What he did was exchange shares of his company, Atlas Corporation for shares in these investment trusts. This one time endeavor of “being greedy when others were fearful” eventually allowed Floyd Odlum to control $150 million in pooled capital.
Looking at what Floyd did over his career as an opportunistic capitalist, Ben Graham would have approved of Floyd and his methods. After all, while Ben Graham was experimenting with special situations and other arbitrage strategies, Floyd Odlum was practically milking the markets for profits. If anything, a key takeaway of Floyd’s career as an investor is this. Always strive to buy your dollars at a discount and it pays to be a deep value investor with “plain common sense”.
As always, may you and your family be blessed with prosperity, health and happiness!
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