Andrè Kostolany: The Great Stock Market Operator Never Heard Of

The Amazing Life of a Speculator Who Dared Buying Defaulted Czarist Bonds and Got Away with It

This post will introduce a stock market operator I fortunately encountered early on in my investment career, who saved me a lot of money and had a lasting impact on my philosophy to investing. His name was André Kostolany, a legend in Germany, but unbeknownst to the Anglo- Saxon investment community.

“At the stock exchange 2 + 2 are never 4, but 5 - 1. Better be prepared to stomach the -1.” (André Kostolany)

It is the story about a speculator whose fame was not founded on the net worth accumulated during his investment career, which remains a mystery. But rather on the amount of practical experience he gained during his 70-year investment journey and his witty and funny way of expounding it to his audience.

“The logic of the stock market is that you often have to be illogical - and that is the great art of speculation and stock market analysis.“ (André Kostolany)

Kostolany was known for his pleasure-seeking lifestyle while “playing” the financial markets. A one-minute Audi commercial from 1999 neatly encapsulates his personality, philosophy, and investment style. It even nails the trough of the long-lasting bear market in the commodity sector in one sentence. 

Kostolany was by no means a value investor in the spirit of Graham and Dodd, but an intelligent speculator. He was a diehard contrarian that did not invest in a scientific manner, like running DCF models.

He rather ran his operations on a philosophy of creative imagination. He was convinced that investing was not a science, but rather an art form, and to be successful one should rather be a philosopher than a finance guy.

"At the bottom, the hard-nosed have the certificates and the shaky have the money; at the peak of the boom, the hard-nosed have the money and the shaky have the certificates." (André Kostolany)

Over time Kostolany developed a unique investment style that would enable him to spot idiosyncratic investment opportunities hiding in plain sight. Buying securities significantly below intrinsic value and selling them close, or even above, fair value. 

“It is not because of his own cleverness, but because of the stupidity of others, that the successful stock operator earns money.” (André Kostolany)

In Germany Kostolany came to fame because of his witty columns in the German business magazine "Capital". He also wrote numerous entertaining books about his philosophy to stock market investing and frequently appeared in German TV shows discussing current economic and market events. 

Who was Andrè Kostolany?

André Bartholomew Kostolany, was a Hungarian Roman Catholic of Jewish descendance, born in Budapest in 1906. He was the youngest of four children born into a very wealthy industrial family.

"Spend as much time when buying a stock as you would buying a used car." (André Kostolany)

Kostolany was a student of philosophy and art history who greatly disdained economic sciences. A field of study the vast majority was only interested in obtaining an easily achievable master. Big firms, on the other hand, eagerly hire economists mainly because it is a guarantee not to take on illiterate staff.

"If you make money on the stock market with the advice of a professional, it is a success; without the advice it is a great success. And if you make money just against the advice of the experts, it is a huge success." (André Kostolany)

According to Kostolany, economists are especially ill prepared as stock market operators, because of their dogmatic and inflexible nature. To become successful, they must forget everything learned at the university. Ironically, did Kostolany also acquire a Master in Economics. A degree he would never admit to in public and shamefully cache in a drawer collecting dust.

“Who does not own shares, when their prices drop, will not own shares when prices soar.” (Andrè Kostolany)

After finishing university in 1924, Kostolany’s father sent him to Paris where he did an internship for Adrien Perquel, an old friend of the family. Perquel was a well- respected, successful, and wealthy stock market operator in Paris and Kostolany started out as an office boy and later a stockbroker. A career he neither desired nor admired. He viewed stockbrokers as remarkably simple personalities and never really intended to build his career on it. 

"Two difficult things to do on the stock market are to accept a loss and not realize a small profit. But the hardest thing is to have an independent opinion; to do the opposite of what the majority is doing." (André Kostolany)

One of Kostolany’s favourite anecdotes is him on his first day on the trading floor of the Paris stock exchange. An older man was scrutinizing him and later asked whom he was working for. "Well for the Firm XY", Kostolany replied. "Aha", said the old man, "Your boss is an old friend of mine. Thus, I had better give you the most important piece of advice on how this business really works. Everything depends on if there are more idiots than stocks or more stocks than idiots on the trading floor".

“A man can choose different ways to get rid of his fortune: the fastest is the casino, the most pleasurable is with beautiful women and the most stupid is at the stock exchange.” (Andrè Kostolany)

After finishing his trainee program at Perquel's firm, Kostolany would be hired at Amerongen & Compagnie. This was the real starting point of Kostolany's career. Briefly, he would work as a broker, later as a financial consultant, and finally start speculating on his own account.

Kostolany’s First Successful Speculation

Kostolany’s first successful bet on the stock market came about in the late 1920's. He was getting sceptical about the health of the long-lasting bull market in stocks and bonds. He saw prices getting exhausted on the upticks, and finally entered a bearish position. It is said that the stock market crash of 1929 made Kostolany a very wealthy young man almost overnight.

"Those who have a lot of money can speculate, those who have little must not speculate, and those who have no money at all must speculate." (André Kostolany)

But he would not hold on to his wealth awfully long. Already a year after his successful speculation “a la Baisse”, he would get annihilated in a similar position. 

He was short numerous European stocks and bonds when President Hoover surprised the markets by forgiving Germany a substantial part of their reparations. Stocks and Bonds roared immediately, not only leaving Kostolany with huge losses but also heavily indebted. 

“I can’t tell you how to get rich quickly; I can only tell you how to get poor quickly: by trying to get rich quickly.” (Andrè Kostolany)

Kostolany himself regarded this time as the darkest moment in his life, and even showed suicidal tendencies. But with the help of close friends, and taking on a regular job in the brokerage business again, he was able to pay- down his debt and stage a comeback.

Towards the end of the 1930's Kostolany became deeply concerned about the relentless ascent of Adolf Hitler in Nazi Germany and its dire consequences for Europe. 

"The stock exchange, that is, the financial market, is actually a theater that keeps performing the same play, but always under different titles."  (André Kostolany)

Again, he entered bold bets shorting numerous European stocks and bonds. This time successfully. Stocks and bonds crashed and Kostolany, who made around 200'000 Dollars (roughly 4 Mio, in today terms), cashed out. He would immediately wire most of the money to the USA. 

Colleagues and business partners in Pairs were less concerned about the precarious situation Europe was facing. Even after the break- out of WW2, and the invasion of France. They reasoned that the war was a contained and short affair. 

“I am an oversea trader. I trade what others oversee.” (Andrè Kostolany)

One sunny day a business partner approached Kostolany asking him to prepare a list of promising companies. Kostolany was vexed by the request and asked for the reasoning. It turned out that the man had information about the eminent occupation of Paris by Nazi Germany. He was speculating that the whole racket would be over soon, and the stock market finally staged a comeback. 

Kostolany agreed to the request. But instead of compiling the list, he stormed back home, packed his back, bought a car, and immigrated to the U.S.A via Vigo on a Spanish cruise ship.

Kostolany lived in New York for several years where he worked for the G. Ballai and Cie Financing Company. He had high esteem for the North American capitalist system and described his time in New York as wonderful. But the reality was that he never really settled on the other side of the Atlantic and always longed to go back to Paris.  

“The greatest speculation of all time would be to buy a politician at his intrinsic value and sell at his self- perceived value.” (Andrè Kostolany)

During his time in the U.S. Kostolany completely changed his view on short selling and investing in general. Apparently, he could not bear anymore being cheerful when others were battered and decided that in the future he would only bet “a la Hausse”. He also decided to reduce his trading activity.

Shortly after the end of WWII Kostolany returned to Paris. From there on his residency would be split between Paris, Munich, and Côte d'Azur where he had real estate.

"Often you have to close your eyes at the stock exchange so that you can see better." (André Kostolany)

He immediately went back to business loading up on Young Bonds, defaulted German bonds that had been issued to foreign investors in foreign currency by the German Reich.

Adolf Hitler defaulted on them stating that those bonds were illegitimate. Kostolany was convinced that Germany would fulfil their obligations eventually, paying them back at par including accrued interest. 

He picked the issues in French franc at 25% to par value. Colleagues and friends thought he was going nuts, and Germany would never redeem those bonds. But Kostolany was not perturbated at all, waited patiently and eventually would make a fortune when Germany redeemed those bonds in the early 1950’s.

“Speculating on the stock market has been. and always will be, a hard way to make an easy living.” (Andrè Kostolany)

He reiterated the coup d’état in the 1980’s investing roughly 40’000 Deutschmark in Russian czar bonds still trading on the Paris bourse around 2- 5% to par value. It was the same playbook as with the young bonds, but with a significantly bigger discount. The Soviet government defaulted on foreign bonds denominated in French franc that had been issued by the czarist empire, deeming these bonds as illegitimate. 

With the fall of the Soviet Union in the early 1990’s, and the Russian aspiration of tapping international capital markets, Russia eventually repaid at 100% face value or 500 French francs each, at a cost of around USD 600m. It is said that Kostolany’s invested amount turned into 4’000’000 Deutschmark.

Kostolany's Beliefs

Kostoalny viewed the financial markets as a mad house. According to him you could not find more morons than on a square foot trading floor. A fact that really fascinated him, and the reason he would show up regularly. 

“Germans are not cut out for the finance business. The nation of romanticist, philosophers and musicians becomes unromantic and lose their inclination to philosophy and fantasy when it comes to money.” (Andrè Kostolany)

For describing the daily action on the financial markets Kostolany used a similar metaphor to Benjamin Graham’s Mr. Market. He compared it to a stroller walking his dog. 

The stroller will never know exactly how and when he will reach his destination. There are factors that are known and can be estimated with reasonable accuracy. Think: Age, vitality, motivation, etc. of the stroller.

Estimating the path ahead is more complicated, but manageable (known unknowns). Think: Sidewalk in good condition, no major obstacles on the way, etc.

But, figuring out what the dog is going to do is a sheer impossibility (unknown unknowns). It will go all over the place: Run ahead, drop back, walk close, disappear into bushes, even shagging other dogs.

But regarding Kostolany the stroller should not be disturbed by this fact, as one thing is clear: The dog will always end up at its master’s side finally.

“At the beginning of my career I was convinced that the stock exchange was the biggest invention of mankind. I still am.” (Andrè Kostolany)

Kostolany warned against acting upon insider Information. He equalled those kinds of information to ruination and advised never ever to listen to tips.

Having said this, he would immediately hand out one tip to his audience. Head to a drugstore, buy sleeping pills, then buy a basket of the best German bluechip stocks and take a long nap. When they finally woke up he assured a positive surprise.

Kostolany was not concerned about the growing mountain of public debt at all. A small amount of inflation (2-3%) keeps the debt pile palatable. He likened to compare inflation with the consumption of nicotine and alcohol. In small dosages it is rather productive and useful. A few glasses of wine and cigarettes a day are stimulating. But better not become a chain smoker and alcoholic.

"The mass psychology on the stock exchange is like in the theatre: One yawns, and in no time at all everyone yawns. One coughs, and immediately the whole hall coughs." (André Kostolany)

Kostolany was a critic of the gold standard, the monetary system that fixes exchange rates to the price of gold. He believed that wherever it was implemented, it would suppress economic growth and finally lead to cyclical crises. Consequently, he was also a very vocal critic of the monetary policy of the Bundesbank during the late 1980s and early 1990s, which he viewed as too restrictive.

"On the stock market, half a truth is a whole lie." (André Kostolany)

Kostolany was wary of market scams and hype. At one of his last appearances on the German broadcasting system in the late 1990’s, he warned about the hype on the “Neuer Markt”, the growth segment of the German stock exchange.

He was laughed at by the moderators, guests and audience and was treated like an old and senile granddad. He did not care and reiterated his warnings repeatedly and passionately during the whole show. 

He was finally vindicated, but unfortunately would not witness the breakdown personally. Andrè Kostolany died on September 14th   1999 at the age of 93.

Source:

Defaulted Imperial Russian Bonds Draw Interest - The Washington Post

HOW TO MAKE A FORTUNE OFF DEFAULTED DEBT (by Sven Lorenz)

Der Traum vom mühelosen Reichtum (by Christian von Hiller)

Andre Kostolany, bon vivant and speculator

Dahlit Brin Dissertation Band2 Teil2

Zeitzeugen des Jahrhunderts - André Kostolany im Gespräch mit Johannes Gross  (Youtube)