C&B Notes

Bargain Hunting

While a portion of a recent article by Jason Zweig is excerpted here, the entire article is well worth the 10 minutes it takes to read the whole story.  Zweig draws on a few memories from his (unique) childhood to illustrate a number of concepts core to concentrated investing, including variant perception, patience, and preparation.

In financial markets, information asymmetry often favors the sellers; those who have held an investment have access to inside knowledge and may be far better informed than those who are interested in buying it. In the art and antiques business of the 1970s, however, that information asymmetry was inverted: Buyers could often know far more than the sellers.  I thus learned a lesson, as a child, that has never left me and that has stood me well when, as an adult, I sought to understand the financial markets:

 Things are not what they seem: Much of what most people think is treasure is, in fact, trash. And much of what they think is trash is, in fact, treasure.

To tell the difference, art dealers and value investors alike must develop what the great investor Michael Steinhardt has called variant perception.  You have to know much more than most of the other people in the market, and that knowledge becomes most valuable when it is at odds with the common perception of the other participants.  When I was a kid, that variant perception was based on vast amounts of study and preparation, along with stubborn — almost ornery — patience.

Realizing that rare books were chronically undervalued and easily overlooked, I spent a few days one summer, probably around the age of 13, going through our encyclopedia and writing down the dates when America’s greatest writers first published their works.  Author by author, one to an index card, I listed all their major books by date (some, like Mark Twain, required more than one card).  Then I memorized all the dates, flash-card style.  That way, I knew, I would be able to spot first editions almost instantaneously.   In the 19th century, book publishers typically didn’t designate that a book was a first edition on the title or copyright page; but if you knew which year great books were published in, you could work your way through a crate full of dusty old volumes at remarkable speed. Knowing which ones didn’t matter enabled you to focus your attention on those that did…

At another auction, I went through what must have been two dozen boxes of old books until my hands were so dusty it looked as if I were wearing tan leather gloves. At the bottom of the last box was one book bound in magnificent red Moroccan leather.  I opened it without even looking for the title.  The inner covers were lined with superb Florentine marbled end papers, and the pages were edged with gold leaf.  It wasn’t just a first edition of A Connecticut Yankee in King Arthur’s Court by Mark Twain (1889); it was one of 250 presentation copies the publisher had printed, and tucked inside the back cover was an original Christmas card drawn by Dan Beard, Twain’s illustrator.  This copy had evidently been given to Beard by Twain, although the book wasn’t autographed.  I stuffed it back under the rest of the books it came with; we bought the entire box for $40 and gave all the other books away.

But vast preparation and expert pattern recognition were only half the battle; patience and stubbornness mattered at least as much.

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