The Jewish Origins of Value investing

“So God said to Noah, “I am going to put an end to all people, for the earth is filled with violence because of them. I am surely going to destroy both them and the earth. So make yourself an ark of cypress wood; make rooms in it and coat it with pitch inside and out.”

Noah was the first value investor.

To be sure, value investing has on the surface little to do with the bible, being an investment paradigm developed in the 1920s by Columbia University Professor Benjamin Graham. Under closer analysis, however, it becomes clear that value investing is an inherently Jewish approach to business and that it incorporates many, if not all, of the main investment insights deriving from the bible and the Talmud.

Investment Vs. Speculation

Value investing main idea goes against conventional wisdom in that it refers to stocks as partial ownership of a business, rather than as vehicles of speculation. It is a matter of attitude: in an investment attitude you tend to look at the asset itself as the primary source of gain. For example, when buying a farm or a McDonald franchise, your main concern is the amount of cash generated by the business, in the form agricultural production or sales of hamburgers. Short-term price movements are irrelevant, except when you decide to sell your activity. On the other hand, when speculating you are unconcerned with the fundamentals of the business, but with making a quick gain hoping to find a buyer who will pay more for your asset than your initial cost. Success in speculation depends not on sound analysis, but on your ability to predict accurately the market’s mood. Evidence shows that speculation, while not necessarily unethical, tends to be financially unrewarding. Sound value investing, instead, over time has generated remarkable fortunes such as the one of Warren Buffett, who became the second wealthiest person in the world just by the thorough application of these principles.

The story of Noah, which toiled for years investing for his family’s future through the construction of the ark (while missing out on all the fun around him…), is reminiscent of the value approach and its long term orientation. The behavior of the rest of humanity, engaged in hedonism and short-term gain, reminds me of speculation. The bible seems to warn us about the faith of each approach: prosperity for the former, doom for the latter.

Diversification and Asset Allocation

“Give a portion to seven or even to eight, for you don’t know what disaster may happen on earth” (Ecclesiastes 11:2).

“And he divided the people with him, and the flocks and the herds and the camels into two camps, and he said, If Esau falls upon one camp and smites it, the camp will remain will escape”. (Genesis 32:8-9).

Rebbe Yitzchak said, A person should always divide his money into three: one third in land, one third in commerce, and one third at hand.

These quotations leave little doubt about Judaism’s stance on diversification: the wise investor should embrace it. This is a common approach in value investing as well. On the other hand, you should avoid the other extreme: excessive diversification is probably a bad idea. The examples from the bible after all speak about diversifying into two, three or eight assets. The typical mutual fund nowadays diversifies into more than 50/60 stocks and this is excessive as it make is impossible to know intimately each individual investment. This brings us to the next principle:

Invest only in what you understand

“A house is built by wisdom, and it is established by understanding; by knowledge the rooms are filled with every precious and beautiful treasure” (Proverbs 24:3-4, HCSB).

Value investing consists in acquiring mispriced securities, that is, buying stocks at prices significantly below their intrinsic value. While market price is known, intrinsic value is not: it must be estimated subjectively. It is a function of the long-term profitability of the business and is driven by a multitude of factors. Only intimate knowledge of the business may grant the investor sufficient confidence to invest with peace of mind. As obvious as this may sound, buying stocks based on rumors, hearsay or following a superficial analysis is all too common and is typically a source of great pain.

To further develop the concept of Jewish investing, we may introduce the concept of Kashrut or dietary laws. Just as kosher food must be carefully selected, prepared and screened for all possible impurities, “kosher” investments entail performing a thorough due diligence on the companies we wish to invest in, considering all the possible sources of “impurities”, such as accounting irregularities, regulatory threats or dishonest management teams.

Be contrarian when facing cyclicality and market fluctuations

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” – Warren Buffett

“There will come seven years of great plenty throughout all the land of Egypt, but after them there will arise seven years of famine, (…) Let Pharaoh proceed to appoint overseers over the land and take one-fifth of the produce of the land of Egypt during the seven plentiful years. And let them gather all the food of these good years that are coming and store up grain under the authority of Pharaoh for food in the cities, and let them keep it. That food shall be a reserve for the land against the seven years of famine that are to occur in the land of Egypt, so that the land may not perish through the famine.” – (Genesis, 41)

A wise attitude vis-à-vis cyclicality and volatility is quintessential in value investing and has been advocated in the bible as well. The idea is the resist the natural human tendency to overindulge during good times to then face the inevitable crisis without protection. Both value investing and the bible suggest a more equanimous and even contrarian approach, taking profit during prosperity and euphoria and using surplus in times of crisis.

Use a margin of safety

“The more vulnerable the business is (…) the larger margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.’ – Warren Buffett

“The Torah is conceived as a garden and its precepts as precious plants. Such a garden is fenced round for the purpose of obviating willful or even unintended damage. Likewise, the precepts of the Torah were to be ‘fenced’ round with additional inhibitions that should have the effect of preserving the original commandments from trespass.” – J. Israelstam

The rationale of a margin of safety is to be aware of the limits of human intellect and of the presence of some degree of irreducible uncertainty in the world. In value investing, acquiring a business for a fraction of its intrinsic value, ensures protection against unforeseen events and errors in valuation; it also increases the payoff if the thesis is correct. In Judaism, the point is not risking a direct transgression of the Law: rules and commandments are intentionally exaggerated in order to reduce the likelihood of a material offense. While the wisdom of such an approach may well be disputed, the principle is the same.

Be generous

“If you’re in the luckiest 1pc of humanity, you owe it to the rest of humanity to think about the other 99pc.” – Warren Buffett

“And when your brother will become poor and you will extend your hand to him.” – (Vayikra 25:35)

As most other religions, Judaism too repeatedly stresses the fundamental importance of charity to promote some rebalancing of wealth, but also to benefit the character of the giver. Value investors have, by and large, upheld this tradition, often donating immense sums to charity. Warren Buffett’s pledge to donate over 99% of his net worth (over $63bn) is just an example among many others.

To conclude

The examples above are just a few pointers of the similarity between value investing and Jewish ethos. Both approaches stress the importance righteousness, rationality, and self-control in human affairs. It is no surprise then that the Jewish people has prospered financially not only investing in the stock market, but in virtually every area of business and commerce, for these principles are universal.

It also should be pointed out that most value investors, including Benjamin Graham, Seth Klarman, Bruce Berkowitz, Bruce Greenwald, Lawrence Tisch and Joel Greenblatt, are Jewish. Warren Buffett, an agnostic, would be the exception. However, considering his friendliness toward the Jewish people and the State of Israel, we might well include him in the list ad honorem. Mr. Buffett, for example, has been instrumental in obtaining the opening of the Omaha Country Club to the Jews back in the ‘50s and has chosen an Israeli company (Iscar) as his first and only private investment outside of the United States.

Let us then hope that value investing continue its ascent in the business world and build also on its initial successes in its second deserving homeland: Israel.