Before a WSJ profile brought him to popular attention, almost no one outside the hedge fund world had heard of David Abrams, the Baupost Group alum who has built an $8 billion hedge fund essentially on his own and has been in the top three percent of hedge fund managers since 2009. But that doesn’t mean his work hadn’t been recognized by peers. When the sixth edition of Graham and Dodd’s value investing classic Security Analysis was published at the height of the financial crisis, David Abrams was asked to contribute to the new edition alongside investing greats Warren Buffett, Seth Klarman, James Grant, Howard Marks, Bruce Berkowitz, and more. While his comments are specifically meant to introduce the final section of Graham and Dodd’s original book ‘Additional Aspects of Security Analysis. Discrepancies between Price and Value,’ David Abrams goes further and gives us some insight into how he thinks about modern value investing.
Paying less than something is worth is the only successful long-term strategy, says David Abrams
“I’ve observed a great many investors over the years, and I’ve never seen a consistently successful one whose strategy was not based on a value approach—paying less for something than it is worth, either today or in the future,” David Abrams wrote. “Some people like to buy things that will grow and others are drawn to assets that beckon from the bargain counter, while still others like to engage in arbitrage activities… but every successful investor I’ve ever known makes a calculation that compares an asset’s purchase price to its present or future value.”
David Abrams himself is happy to buy all of those things, as long as the price is right. As he explained at the October 2008 Graham and Dodd Luncheon Symposium held at Columbia University, the balance of good and bad prices outweighs the question of good and bad assets, and he’s willing to go where he can find the best deals. Back in 2006 he told the Wharton Journal “Wall Street tends to hate, hate, hate businesses that are shrinking and Warren Buffet says they’re cigar butts. That’s okay – cigar butts – give them to me. I’ll take ’em.”
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If you didn’t know David Abrams track record that could sound like typical bull market talk just waiting for the next correction, but Abrams continued outperformance shows that he really knows how to pick winners, and as with other value investors a big part of that is focusing on the fundamentals and not getting caught up in whatever the market is doing.
“We do things the exact same regardless of the market. We look at things, we look for a margin of safety, we look at the math, we look at all the things that one would look at to analyze individual securities, and when they’re really cheap we buy them,” David Abrams said at the Columbia luncheon. “When they’re not that cheap we don’t buy them, and we’re happy to hold cash.”
David Abrams isn’t saying that investing is easy, quite the opposite. One of the constant refrains in the writings we were able to find is that successful investing is mostly a matter of hard work and good judgment. But he also thinks that investment strategies need to be based on fundamentals if they’re going to last the test of time. Like Baupost he isn’t interested in leverage (he says that he even paid off his mortgage as quickly as possible as a young professional), and Abrams Capital typically invests long, relying on a small team of analysts to identify assets that the rest of the market is avoiding and saving cash for days when there’s blood in the streets.
People either get value investing or they don’t, says Abrams
While the awareness of value investing has grown in recent years, David Abrams says that the size of the overall market has grown even faster, and value investors are still a sliver of the overall action, so they aren’t exactly tripping over each other. In an analogy similar to Graham’s Mr. Market, Abrams says that people fall for the Great Illusion of the Market, that just because buying a stock is now as easy as ordering a book from Amazon, and just because a handful of people made a killing because they happen to be invested in companies like Amazon early on, investing must be easy.
So instead of ever more sophisticated investors making life harder and hard for value investors, he sees huge flows of capital moving from fad to fad as irrationally as ever, to the great benefit of value investors willing to put in enough time to prepare for the next shift.
“To me, it’s sort of like the E equals mc squared of money and investing. That all things being equal the lower the price of something you have both less risk and more return,” says David Abrams. “People either get that instantaneously or they never get it. The good news … is that most people just never get it which is really what keeps us in business.”