In this week’s free PiggyBack Letter (PBL) we are piggybacking Robert H. Heilbrunn. We can view Mr. Heilbrunn as an original PiggyBacker. Of his time’s value investing greats, including Benjamin Graham, Warren Buffett, and Walter Schloss.

Your Analyst,

Johan Eklund, CFA
PiggyBack

An Original PiggyBack Investor

“Knowing when other full-time investors are likely to outperform your own part-time efforts may be the most fundamental of all value insights.”
— On Robert Heilbrunn in Value Investing: From Graham to Buffett and Beyond, 1st ed. (2001), by Bruce Greenwald, Judd Kahn, Paul Sonkin, Michael van Biema

For this publication's “piggyback investing”, the above quote is a key lesson reminder:

With experience, "IQ-intelligent", curious investors can gain above-average current market knowledge. With some luck being at the right place and time, such investors find early success and outperform.

But increasing technical expertise often builds egos. Curiosity fades. Such investors will find out they lack market wisdom. Markets will ruthlessly compete away most current outperformance abilities (edges). It is a matter of time. Stubborn "expert" investors may double down as they are risking not just capital, but also misplaced overconfidence. The market never cares and now has a new playbook.

Adaptive investors recognize that many edges are likely outside their current investing competence. Many times, talented and resourceful contemporaries may offer us greater learning and investing opportunities. U.S. businessman and value investor Robert H. Heilbrunn embodied such wisdom.

**Robert Heilbrunn**. From circa 1990s group photo (with Markus Stoffel and Harriet Heilbrunn). Photo credit: The Rockefeller University (unknown photographer)

Who Was Robert Heilbrunn?

While leaving a philanthropic legacy, there are no great lengths written on Robert Heilbrunn (1908–2001) the value investor. He is often mentioned briefly as a supporting character in the value investing lore around Benjamin Graham (1894–1976). Graham is, more often than not, mentioned as an early role model for his student, later associate, Warren Buffett’s (1930–) investing success.

Depression-Era Lessons From Ben Graham

His short Value Investing: From Graham to Buffett and Beyond chapter starts with a young Heilbrunn inheriting his father in 1929. At the Great Depression’s onset. This included responsibility for the family's leather trade and a stock and bond portfolio.

The leather business, like many others, crumbled. Heilbrunn decided to liquidate it in his first two years. The rest of the family fortune saw a more exciting future. 1929 was one of modern history’s worst times to start managing U.S. securities. And Heilbrunn lacked experience. Heilbrunn’s father had however mentioned one investment advisor to trust: Ben Graham.

"At first he seemed very cold. After all, people were jumping out of windows and selling apples in the street and I think he was afraid I was going to ask him for a loan. When he found out that all I wanted was investment advice, he agreed to help me."
— Robert Heilbrunn on approaching Benjamin Graham to become his investment advisor
Source: Columbia University speech in 1993

The book continues how Graham and Heilbrunn early in the Depression could sell some of Heilbrunn's father’s better bonds. At near par (near 100% of principal value). Only to start reinvesting in deeply distressed, even bankrupt, corporate bonds.

Today this would have been called a crash course in deep value or distressed debt. Graham’s Great Depression operations are interesting since few investors were willing, or even able, to pick up any securities. The investing public at the time generally wanted or had to liquidate, to reduce leverage and make ends meet. Buying more illiquid and distressed securities was a very contrarian move.

Later in the 1930s, when Heilbrunn had value investing experience he took Graham’s investing class. Unlike Walter Schloss, and later Warren Buffett, Heilbrunn was never employed by Graham at Graham-Newman. But he got to operate as an independent research contractor for the group. His Graham-Newman investment legwork included the insurer GEICO (a later major acquisition of Buffett’s Berkshire Hathaway).

Among Early Value Quants

With growing value investing expertise, Heilbrunn wrote some articles in his name. A Practical Approach to Common Stock Valuation, in a May 1958 issue of The Financial Analyst’s Journal (paywall link), was a case study on the improved returns from purchasing U.S. Steel stock in less expensive parts of its trailing valuation range. Metrics studied included Price/Earnings (P/E) and dividend yield.

Conceptually, this is not that far from today’s factor investors. It just lacked the scale and statistical validation help of databases and computers.

Early Grahamites, such as Heilbrunn, operated in less efficient markets. Lacking access to high-quality data, they would still be willing buyers based on common sense analysis. But at more conservative, deeper discounts than we commonly find today.

Still, the human urge to chase bull market story stocks was about as a hard inner battle then, as it was in the recent 2021 roaring bull market:

“The experienced investor as well as the neophyte is influenced in varying degree by the tremendous quantity of bullish sentiment in the form of newspaper and magazine articles, speeches, reports, analyses and the like, which emanate from the financial district... It is especially important and very difficult in such times not to be influenced by these pressures from sticking to fundamentals and continuing to make decisions strictly on the basis of the facts.”
— Robert Heilbrunn
Source: Robert Heilbrunn (1958). A Practical Approach to Common Stock Valuation, Financial Analysts Journal, 14:2, p. 49–51.

Assessing the Abilities of Others, Including Warren Buffett

Eventually, the more lasting result of Heilbrunn's value investing experiences, with Graham and on his own, became his ability to recognize the long-term investor potential in some of his peers.

“He put money into Buffett’s partnership a year or so after it started, and he also entrusted some funds to Schloss after initially deciding against it. In later years he added other prominent value investors to his portfolio of managers. These decisions paid off handsomely, and Heilbrunn was able to retire, more or less, from direct active investing.”
— On Robert Heilbrunn in Value Investing: From Graham to Buffett and Beyond, 1st ed. (2001), by Bruce Greenwald, Judd Kahn, Paul Sonkin, Michael van Biema

PiggyBack Takeaways

With experience, we may realize how little we know what others know. Then we may start seeing some of our peers, role models, and competitors as great investing opportunities.

This does not mean that we have to become fully passive, fund investors. Think of it more as expanding our current abilities. By allocating capital with or in the spirit of unique investors and entrepreneurs, we can get in on:

More attractive fundamental setups (that we might not have found ourselves)
Hard-to-access or exclusive term deals
Superior investment execution

If available in public markets, as minority investors we can piggyback with liquidity.

So lose some of that active investor ego. Like Robert Heilbrunn, we should be on the lookout for our hard-to-copy investing superiors.

Heilbrunn’s Legacy

Robert Heilbrunn passed away in 2001, but his legacy in the value investing community lives on. Donations from the Heilbrunn and Lerner families helped fund The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School. This center is important for practitioner-relevant, value investing research.

PiggyBack recommends the Value Investing With Legends podcast. It offers enjoyable learning from some of today’s value investors on the center’s radar.

Affiliate Marketing: This article section contains affiliate marketing links, labeled “(paid link)".

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PiggyBack’s Value Elsewhere

Selected free value investing content and other recently enjoyed curiosities.

Listen:

I Beg to Differ (~47 min)

“I believe most investors have their eye on the wrong ball. One quarter’s or one year’s performance is meaningless at best and a harmful distraction at worst.”

Howard Marks, Co-Chairman of Oaktree Capital, goes back to key principles on why investing outperformance requires long-term, contrarian thinking (Recommendation).

The Bear Has Arrived (~1h 22 min)

Jeremy Grantham, co-founder & Chief Investment Strategist of GMO, on the pandemic hangover. Trey Lockerbie hosts for TIP Network (Recommendation).
(Yes, still multi-year relevant. The summer bear market rally did not improve a poor fundamental return outlook for U.S. stocks. It brought back a valuation headwind.)

Will Thorndike: The Power of Long Holding Periods (~59 min)

William Thorndike, investor and author of capital allocation case bible The Outsiders, has launched a new podcast called 50X on a long-term compounding research project. Here, Thorndike serves a great introduction to 50X’s deep dives into Transdigm’s () capital allocation. Hosting the host: Patrick O'Shaughnessy of Invest Like the Best (a colleague in 50X's pod network).

Reads:

I Beg to Differ (~20 min)

Farnam Street Investments: July 2022 Client Letter (~10 min)

Pattern recognition on how investments in publicly listed businesses with strong microeconomics are not victims of periods of tanking stock prices, but potential great long-term beneficiaries. (Hint: disciplined, valuation-driven capital allocation.) Via Jake Taylor, CEO Farnam Street Investments. Autozone () serves as example.

Understanding Jane Street (~20 min)

Interesting analysis on competitive dynamics and technical mechanics in play at proprietary trading shop Jane Street. By The Diff’s Byrne Hobart (Recommendation).

Charts:

Off-Topic ChartStorm: Valuations in Focus (~5 min)

Reminders that global stocks remain less stretched than U.S. and that U.S. small-caps are breaking. Via Callum Thomas Weekly S&P500 #ChartStorm (Recommendation).

Is Everyone Out There Cray-Cray? (~1 min)

Clifford Asness, co-founder of AQR Capital Management, provides a (rhetorical?) question. The below chart shows the global relative cheapness of the “value” factor. In simple terms, the statistically lowest valuation multiple stocks trade at near modern history record discounts, to the highest multiple “glamour” ones.

Clifford Asness @CliffordAsness

https://t.co/ujEqj5vWv6

In hindsight, the bursting and aftermath of the first Internet Bubble was a decent time to be picking up “old economy” value stocks. Eventually, the more robust shiny tech stuff muddled through and could be had at “low conviction” prices.

DISCLAIMER: This publication and all related communications are for informational and educational purposes only. All readers are assumed to accept the full version of this disclaimer, available at the following link.

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Johan Eklund, CFA
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