“The most common mistake of investors is the temptation to take profits and the unwillingness to take losses.‘‘ — Max Heine
Max Heine: Background & bio
Max L. Heine was the founder of the Mutual Shares Corporation. He managed numerous leading mutual funds over his career and founded the Heine Securities Corporation.
Born in Berlin, Max Heine emigrated to New York during 1934 and immediately entered the securities business. He joined L. J. Marquis & Company where he soon rose to the position of partner.
Max Heine founded the Mutual Shares Corporation in 1949. Nearly three decades later Max Heine joined Herzog Heine Geduld Inc., members of the New York Stock Exchange, as chairman. During 1980 he added Mutual Qualified Income Fund Inc. to his Mutual Shares Corporation and then, during 1985, the firm acquired Mutual Beacon Fund Inc., which offered management services for the more substantial investor.
Max Heine was a traditional value investor. His strategy was to buy undervalued stocks targeting a 15% annual return, despite market fluctuations.
Max Heine died in February 1988 at the age of 77 after being struck by an automobile.
Max Heine: Mutual Shares Corporation & investment philosophy
When Max Heine founded the Mutual Shares Corporation in 1949, it was one of the first first open-ended mutual funds in the world. Heine set out to create a vehicle that could hold his eclectic mix of investments, which included distressed debt, unloved stocks, and special situations.
Even though Max Heine really invested the mutual fund, his Mutual Shares Corporation was more of a hedge fund by today’s standards. Indeed, through a blend of arbitrage, shareholder activism, distressed investing, spinoffs, Mutual Shares was the only funds to earn a positive return during the 1973/74 bear market. Max Heine had correctly calculate that bonds in the bankrupt Penn Central railroad were trading below liquidation value — he figured out that the steel in the tracks alone was worth enough to pay off the bonds.
Today, Mutual Shares Corporation is owned by Franklin Resources, Inc.
But perhaps Mutual Shares’ biggest contribution to value investing was its education of two great value investors; Michael F. Price and Seth Klarman.
Seth Klarman Interview from Alpha Magazine:
How did you decide value investing was for you?
I was fortunate enough when I was a junior in college — and then when I graduated from college — to work for Max Heine and Michael Price at Mutual Shares [a mutual fund founded in 1949]. Their value philosophy is very similar to the value philosophy we follow at Baupost. So I learned the business from two of the best, which was better than anything you could ever get from a textbook or a classroom. Warren Buffett once wrote that the concept of value investing is like an inoculation- — it either takes or it doesn’t — and when you explain to somebody what it is and how it works and why it works and show them the returns, either they get it or they don’t. Ultimately, it needs to fit your character. If you have a need for action, if you want to be involved in the new and exciting technological breakthroughs of our time, that’s great, but you’re not a value investor and you shouldn’t be one. If you are predisposed to be patient and disciplined, and you psychologically like the idea of buying bargains, then you’re likely to be good at it.
What traits in Heine and Price influenced you?
Max Heine was great at not looking at what something was called, what its label was. He looked at what it actually was. For example, back in the late ’70s, Mutual Shares was buying the bonds of bankrupt railroads, and I think a lot of people would have said, “They’re bankrupt,” and “Who needs railroads?” Max and one of his partners knew how many miles of track the railroad had, what the scrap steel on the track could have been sold for and which railroads might have wanted pieces of those networks. They also knew what the real estate rights above the terminals were worth.
Michael Price was fabulous at pulling threads. He would notice something, and then he would get curious and ask questions. And one thing would lead to another thing, and that would lead to another thing. I remember a chart that Michael made of interlocking ownership of mining companies that was an extension of a thought where one good idea led to another and had the potential to lead to many more if the threads kept being pulled. That was a great lesson — to never be satisfied. Always be curious.
He didn’t like debt on balance sheets, he didn’t like goodwill. He just was a clear thinker. He didn’t like the Wall Street machine. He wouldn’t play the IPO game, where everyone rushes to flip IPOs. He would never do that. He had a great nose for value. In the 1930s, he was given $1,000 to buy furniture for their apartment as a wedding gift from an uncle. Instead of buying furniture, he went out and bought ten thou- sand dollars worth of bankrupt railroad bonds at ten cents on the dollar, which then went up five times in value. He was a value guy from day one and trying to find cheap stocks through all the nooks and crannies of Wall Street.
Max had his own network of brokers, friends and bankers, who were in the flow of dealing in cheap stocks, like Tweedy Browne, Carr Securities, First Manhattan and other individuals, all descendants of Benjamin Graham. We had our little niche, and you took that niche and combined it with special situations, and it really worked well. We would come up with these little stocks that nobody owned, nobody followed and we had this performance at Mutual Series that was terrific. People would write us up and look at the portfolio and say how strange and different it looked from all the other portfolios out there, filled with bankrupt Penn Central bonds, and little companies that made wheel barrels and wood products that everyone forgot about. But those are the ones that don’t move with the market. Those are the ones that have clean balance sheets and do okay.
This is a great Forbes article on Max Heine entitled “Getting a dollar for 50 cents”. It’s well worth a read and gives some more examples of the kind of investments Heine was looking for.
Max Heine: Articles
- Michael Price at Columbia: Profitable Lessons
- Seth Klarman Interview from Alpha Magazine
- When the Rules Don’t Work: What Max Heine Said
- Max L. Heine, 77, Founder and Head Of Securities Firms