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 T H E R E ’S
A LWAY S
S O M E T H I NG
T O DO
 T H E R E ’S
A LWAY S
SOM E T H I NG
T O DO
the
peter cundill
investment
approach

McGill-Queen’s University Press Montreal & Kingston • London • Ithaca

© The Cundill Foundation 2011
isbn 978-0-7735-3863-4 (paper)

Legal deposit first quarter 2011

Bibliothèque nationale du Québec

Printed in Canada on acid-free paper.

McGill-Queen’s University Press acknowledges the support of

the Canada Council for the Arts for our publishing program.
We also acknowledge the financial support of the Government
of Canada through the Canada Book Fund for our publishing
activities.

Library and Archives Canada Cataloguing in Publication

Risso-Gill, Christopher, 1948–

There's always something to do : the Peter Cundill
investment approach / Christopher Risso-Gill.

Includes index.
isbn 978-0-7735-3863-4
1. Cundill, Peter. 2. Value investing.
3. Securities. I. Title.

hg4521.r58 2011 332.6 c2010-907157-3

This book was designed and typeset by studio oneonone in Sabon 11/16.5

Frontispiece: Peter at base camp on the 1989 Everest expedition

 Contents

Foreword prem watsa / vii

1 The Eureka Moment / 3

2 Getting to First Base / 7
3 Launching a Mutual Fund on Value Principles / 17
4 Value Investment in Action / 33
5 Going Global / 45
6 Swapping Continents / 51
7 A Decade of Success / 57
8 New Dimensions / 65
9 Investments and Stratagems / 71
10 Surviving a Crash / 85
11 Distressed Corporate Securities and Defaulted
Sovereign Debt / 97
12 Dealing with Adversity / 113
13 Per Ardua ad Astra / 121
14 The Perfect Match / 133
15 Entering the Big League / 139
16 There’s Always Something Left to Learn / 149
17 Dancing with the Witch Doctor / 159
18 The Russian Bear / 165
19 The Canadian Buffett / 173
20 Fragile X / 179
21 What Makes a Great Investor? / 185
22 A Kind of Retirement / 191

glossary / 197
appendix 1: Some major figures in
Peter Cundill’s investment world / 219
appendix 2: Investments held by Peter Cundill
entities as of 31 July 2010 / 223
appendix 3: Net-net work sheet / 225
appendix 4: Mackenzie Cundill Value Fund / 227
appendix 5: Transcription of journal page, p. 2 / 229
Index / 231

vi
 Foreword
Prem Watsa

christopher risso-gill has written this wonderful book on Peter

Cundill, my friend of thirty years, which I recommend highly. Like
Warren Buffett and John Templeton, Peter Cundill was a legendary
practitioner of the “Value Approach according to Ben Graham.”
Like many “value” investors, Pete’s “road to Damascus” occurred
in late 1973 when he came upon Security Analysis written by Ben
Graham (the same thing happened to me a year later, in 1974). Fully
charged, Pete took control of the All-Canadian Venture Fund in 1975
– a value investor’s dream – which had fallen from $6.00 per share
in 1969 to $2.00 in 1974. Changing the name to Cundill Value Fund,
he went on to establish one of the best long term investment records
in the business – a track record of 15.2% per annum compounded
over the next thirty-three years! An investor who invested $10,000
in this fund in 1974 and kept it there was worth more than $1 million
in 2007 – an increase of more than 100 times! Of course, this success
resulted in the Cundill Funds growing from $8 million in 1974 to
nearly $20 billion when Mackenzie Financial purchased the man-
agement company in 2006. Peter popularized the concept of “Buy-
ing a dollar for 40 cents” – which is still the slogan of the Cundill
Value Fund.
 Pete was always a sporting and fitness enthusiast although it was
not until he was thirty-eight years old that he ran his first marathon
– Buffalo to Niagara Falls. He was hooked after that, completing an-
other twenty-two marathons over the years, all over the world.
Fortunately for us – and for Christopher Risso-Gill – Peter Cundill
kept a daily journal for forty-five years. Chris’s book reminds us why
the investment business is so fascinating: it’s always changing and
there’s always something to do! True to his value investment philos-
ophy, Pete’s first investment was Bethlehem Copper, a company with
no debt which he bought for less than cash per share, thereby getting
a producing copper mine for free. Within four months, the stock dou-
bled and he was on his way. He then purchased Credit Foncier, which
had a liquidation value of $150 per share, for $43 per share. He sold
it at a multiple of his cost and the long term value investment philos-
ophy was firmly ingrained in his mind.
True to form, Pete never bought a share of Fairfax for its first fif-
teen years – because it was too expensive! However, when we hit an
air pocket, he loaded up on Fairfax and now has been a long term
shareholder for the past ten years. We have benefitted greatly from his
wisdom.
In 2001, Peter Cundill was presented with the Analysts’ Choice
Career Achievement Award as the greatest mutual fund manager of all
time. During the ceremony, Pete was characterized as the Indiana
Jones of fund managers – which he quite liked! More significantly, he
was recognized as follows: “Peter Cundill has excelled as few of us can
imagine and influenced a generation of investment managers while at
the same time creating wealth for his investors.”
In 2006, Pete was diagnosed with Fragile X, a degenerative neuro-
logical disorder. Unlike most, he took it in stride. He never moped,
he founded the Cundill History Prize at McGill University, his alma
mater, and he continued, as he had always done, to live his life pas-

viii
sionately and to help others in their lives. He has always had a certain
gleam in his eye when talking about investments. As Kipling said in
his poem “If,” Pete has always “filled the unforgiving minute with
sixty seconds worth of distance run.”
On 16 September 2010, we had a dinner for Pete to celebrate his
life’s accomplishments. The best and the brightest from the Ben Graham
value school of investment attended the dinner, including Charles
Brandes, Michael Price, David Winters, and the Cundill team, now led
by Andy Massie and Lawrence Chin, both able successors to Pete. It
was a fitting tribute to Peter Cundill’s achievements. He inspired us
over the past thirty-five years with his investment acumen and since
2007 he has also inspired us with his courage and determination to
handle whatever cards were dealt him.
I know you will enjoy reading this book.

prem watsa
Toronto, 2010

ix
This page intentionally left blank
 T H E R E ’S
A LWAY S
S O M E T H I NG
T O DO

“There’s always something to do. You just need to

look harder, be creative and a little flexible.”

Irving Kahn
A page from Peter’s daily journals, 1963–2007. There are well over 200 of these
handwritten books.
 1
The Eureka Moment

one evening in december 1973 Peter Cundill boarded a flight

from Toronto to Vancouver to return home for Christmas. He was
nursing a monumental hangover and plagued by a growing sense
of frustration that, having reached the mature age of thirty-five
and accumulated considerable business and investment experience,
all his efforts to come up with a satisfactory formula that would
identify undervalued shares in the stock market with a reasonable
degree of safety and consistency seemed to have led him down a
series of blind alleys.
By chance he happened to be clutching a copy of Super Money
by George Goodman; the book had been pressed into his hand by a
colleague just as he was leaving the agf Management office in down-
town Toronto and, as he settled into the flight, he began rather idly to
leaf through it. Within minutes his attention was riveted and he could
barely contain his excitement. That night he wrote in his journal:

Goodman devotes chapter 3 to Benjamin Graham and

Warren Buffett and “the margin of safety.” It struck me like
a thunderbolt – there before me in plain terms was the method,
the solid theoretical back-up to selecting investments based
on the principle of realizable underlying value. My years of
 apprenticeship are over: “this is what i want to do for
the rest of my life!”

Peter refers to this as his moment of “epiphany” and so in many

ways it has turned out to be.
What was revelatory in this chapter was surprisingly simple. A
share is cheap not because it has a low price earnings multiple, a juicy
dividend yield, or a very high growth rate, all of which may often be
desirable, but because analysis of the balance sheet reveals that its
stock market price is below its liquidation value: its intrinsic worth as
a business. This above all is what constitutes “the margin of safety.”
It would, however, be wrong to think that at this point Peter was in
any sense an investment debutant; he rightly came to regard the entire
period that preceded the epiphany moment – when the penny, so to
speak, dropped – as a learning curve involving a great deal of hard
labour acquiring the skills which make it possible to read a balance
sheet with real understanding and a forensic attention to detail. These,
of course, are the tools of the profession, but what seems to be com-
mon to nearly all the great investors is an attitude of mind that in some
measure derives from family background and circumstance.
In Peter Cundill’s case there were some distinctly unusual features.
The family originally hailed from Yorkshire in the north of England,
where they had lived for many generations as prosperous tenant farm-
ers until they became impoverished by the long decline in agricultural
prices that followed the end of the Napoleonic wars in 1815 and the
gradual landlord encroachment that was a feature of the industrial
revolution in England.
The result was that Peter’s great-grandfather arrived in Montreal in
the early 1860s with little more than a sound education and good
commercial instincts, but determined to escape the poverty trap that
had engulfed his family in the “old world.”

4
 He succeeded remarkably quickly, building up a very successful
business importing goods from Britain to supply the needs of the
fast-growing Canadian economy and the tastes of the increasingly
well-to-do citizens of Montreal and beyond. He married well and
was very soon adopted into the Anglo-Montreal establishment. His
eldest son, Peter’s grandfather, was initially even more successful,
becoming a real “tycoon,” who was known in New York City, to
which he moved, as the “King of Camphor.” By the time Peter’s father
was born in 1902, the family boasted all the trappings of substantial
wealth: a large house in a fashionable part of Manhattan, a mansion
on Staten Island looking across to the newly built Statue of Liberty,
a seaside home in Connecticut staffed by numerous servants, and
governesses and tutors for the children.
As a result Peter’s father, Frank, was brought up as a young gen-
tleman of wealth and privilege who could expect to choose the career
that he would pursue without much regard for earning his bread. He
chose the Navy, but by the time he had completed his cadet training
his father’s business was beginning to feel the effects of the discovery
of synthetic camphor and he abandoned the idea of a career as a naval
officer to help his father. Grandfather Cundill, however, was not
familiar with the adage “always change a winning game” and he
persisted as the business went into terminal decline, exhausting his
capital and credit until in 1927 he was forced into bankruptcy.
The fairy tale life evaporated overnight and the family retreated
to Montreal to live with great-grandmother Cundill. Although Frank
was devastated, he immediately rolled up his sleeves and made his way
out west to Alberta, for a time becoming a cowboy and rodeo rider,
before returning to Montreal and finding a job with Kingstone Macken-
zie Securities, eventually becoming a trader for them. He survived the
crash of 1929, by his own admission largely because he had very little
money to lose, but the memory of it and the anguish he witnessed

5
remained with him for the rest of his days. In 1937 he bought a seat
on the Montreal Stock Exchange, becoming an independent floor
trader, and felt financially secure enough to marry early the follow-
ing year. Peter was born that October.
By 1940, before Peter was even out of diapers, Frank had left for
the war and the small family would not be fully reunited until 1946,
when Peter was nearly eight years old. In the meantime money had
been extremely short and mother and son had led a semi-nomadic
existence, moving from the home of one relation to another; of no
fixed abode. While not uncomfortable or necessarily unhappy, be-
cause most of the relations were well off and all were kindly disposed,
they lacked a home they could really call their own.
Even after Frank was demobbed it was some time before the fam-
ily’s economic circumstances began to improve. The contrast between
their standard of living and that of most of their friends and relations
was readily apparent during Peter’s boyhood and early adolescence.
Peter’s professional preparation began with a Bachelor of Com-
merce degree from McGill, after which he decided that what he wanted
was to embark on a career in the investment industry. In this he was
probably influenced more by the example of his uncle Pete Scott, who
was a partner of Wood Gundy and eventually became its chairman,
than by his father. But he paid attention to Frank’s remark that the
investment business was a gamble and, if he were going to be a gam-
bler, he would do well to have a professional qualification to fall back
on, should the need arise. It was sound advice. Peter qualified as a
chartered accountant, serving his articles at Price Waterhouse. This
was to be invaluable, not because he ever practised but as his basic
working tool.

6
 2
Getting to First Base

as soon as peter qualified he joined the well-respected Montreal

investment firm of Greenshields, where he formed an immediate
bond with Frank Trebell, its youthful general manager, and secured
a coveted place in the firm’s Special Projects department. The group
was in the initial stages of promoting the formation of the Mortgage
Insurance Company of Canada (micc) and as a ca, albeit newly qual-
ified, Peter was charged with producing the projections for the busi-
ness plan and then presenting them at board level to the prospective
investing institutions, which included Alcan, the Bank of Nova Scotia,
Air Canada, and the cn Pension fund. The fundraising was a success
and resulted in Trebell taking Peter under his wing.
This was to have momentous consequences as Trebell was already
planning his next move along the corporate ladder and wanted to take
Peter with him. The result was a move out west to Vancouver where,
through his relationship with Maurice Strong, who was then the ceo
of Power Corporation, Trebell had engineered a takeover of the York-
shire Trust Company, a mini-financial services conglomerate that
was also Vancouver’s oldest financial institution, founded at the end
of the nineteenth century, coincidentally with Yorkshire money from
the wealthy textile city of Huddersfield. Peter moved to Vancouver
as Trebell’s executive assistant, although in reality his role was more
in the nature of business development. His focus had started to grav-
itate away from mortgages, fixed interest instruments, and real estate
towards equities, which he now believed were likely to offer the most
attractive investment returns over the long term. He was prompted to
confide in his journal:

My primary objective is to make money for my clients and

then to make my business profitable. I believe that the way to
achieve this is through associating with truly competent people
with unshakeable business integrity, to ensure strict financial
controls, a culture of thoroughness, a measured capacity for
action; i.e. no seat of the pants stuff and a spirit of humility and
cohesive teamwork. What I am beginning to perceive is that
investors tend to follow trends and fashion rather than taking
the trouble to look for value. This must offer opportunity for
the professional investment manager, as a result of the short
term mispricing of securities.

During his early days at Yorkshire Peter wrote and passed the
Chartered Financial Analyst Association exams as part of one of the
first groups to qualify. The work involved elicited another important
comment.

I think that intelligent forecasting (company revenues, earnings,

etc.) should not seek to predict what will in fact happen in the
future. Its purpose ought to be to illuminate the road, to point
out obstacles and potential pitfalls and so assist management
to tailor events and to bend them in a desired direction. Fore-
casting should be used as a device to put both problems and
opportunities into perspective. It is a management tool, but it

8
 can never be a substitute for strategy, nor should it ever be used
as the primary basis for portfolio investment decisions.

One can see that, almost by default, Peter was even then veering
toward a value approach and in fact his first major equity investment
exhibits most of the characteristics that are associated with a value-
based purchase. Peter was already looking out for solid companies in
unfashionable industries whose shares had fallen sharply and Beth-
lehem Copper came to his attention. In the absence of negative cor-
porate news justifying the price decline, he suspected that the shares
might be cheap. Quite how cheap they were did not become clear until
he had subjected the company to his own brand of exhaustive analy-
sis, which made it apparent that the shares were trading at the price of
the cash on the company’s balance sheet, on top of which it had no
debt and owned a profitable producing mine with solid long-term con-
tracts for the purchase of its copper production. Peter quietly built up
a significant position in Bethlehem for clients of the Yorkshire at an
average cost of around $4.50 per share.
Both Bethlehem and mining stocks in general were totally out of
favour with the investing public at the time. However in Peter’s de-
veloping judgement this was not just an irrelevance but a positive
bonus. He had inadvertently stumbled upon a classic net-net: a com-
pany whose share price was trading below its working capital, net all
its liabilities. It was the first such discovery of his career and had the
additional merit of proving the efficacy of value theory almost imme-
diately, had he been able to recognize it as such. Within four months
Bethlehem had doubled and in six months he was able to start sell-
ing some of the position at $13.00. The overall impact on portfolio
performance had been dramatic.
In later years Peter became well known as an inveterate traveller
who would routinely clock up well over a hundred thousand miles a

9
year in the quest for bargains in international markets and especially
for his habit of making a special effort to visit whichever country had
had the worst performing stock market in the previous eleven months.
His professional curiosity was boundless, but it was far from being
confined only to strictly professional matters. Peter’s approach had
much in common with that of the old style merchant banker, who be-
lieved it was as important to sniff the air and gauge the commercial
temperature as it was to examine the numbers. He always felt that
an understanding of local politics and the culture and character of the
people was an important factor in inspiring enough confidence to
make investments in unfashionable and even positively outlandish
locations and, even when the numbers might appear compelling, if he
became uncomfortable with the “feel” of a place, he would pass on an
investment.
Peter made his first visit to Japan in March 1969 and his immedi-
ate impressions are worth quoting in full, not just because Japan was
to become such an important factor in his investment success but for
the insight they offer into the entirely open-minded way in which he
habitually engaged with whatever new territory he might be explor-
ing. The visit had been organized by his friend Yuge-san, an executive
with Nippon Steel who had become a good friend in Vancouver over
many late evenings and much sake and gin.

My first impression of Tokyo was of a busy, bustling, construc-

tion crazy city, glazed and diffused through an orange sky.
Snow is still very much in evidence with the temperature in
the mid 40s. The Otari hotel has over 1000 rooms and a sushi
restaurant. Yuge-san took me for drinks and dinner in the
Chinese restaurant in the basement – absolutely first class –
and then downtown for a steam bath; relaxing even when the
masseuse was walking on me. As Yuge-san observed it was

10
 a pure steam bath, like a Turkish bath, not what he called
an “obscene” one. He suggested that we might have an
“obscene” one later in the week! I was struck by the contrast
between the frenetic movement all around me and the stillness
of the people’s quiet courtesy – also by the Western influence
evident everywhere, which I had not quite expected. I am in
no doubt this is a major economic power!

The visit included a formal tea in the oldest part of Tokyo with
Yuge-san’s mother and sister, exquisitely dressed in beautiful kimonos,
and dinner at home with his wife and two small children, as well as
a formal meeting with the Nippon finance team. In the course of the
week Peter had felt able to ask a number of the sort of questions that
would be considered completely inappropriate in Western society.
He established that Yuge-san earned 300 yen per month; far from a
fortune despite being quite senior. Once the rent on the Nippon apart-
ment and the lease on the car had been paid there was not a great deal
left over for anything else. The family’s entertainment, as well as any
of the very brief holidays that there might be, were Nippon organized
and sponsored as a kind of family corporate activity. Peter drew some
interesting conclusions from the information.

This is clearly still a paternalistic society which, despite war

and industrialization on a vast scale, retains many quite
feudal characteristics.
The conditions of employment actually go a long way
towards explaining how it is possible for Japanese industry
to be so price competitive. It enables the cost of labour to be
strictly controlled and kept at minimum levels, while at the
same time corporate loyalty is very carefully nurtured by foster-
ing the idea that the corporation itself, with all of its employees,

11
 their wives and their children, represents a kind of extended
family, or clan, with all of the old fashioned obligations that
this implies in both directions. I get no feeling that there is the
slightest undercurrent of discontent lurking, so it seems possible
to imagine that this personnel culture still has plenty of life left
in it, despite the abundant evidence of western influence in
Japanese consumer culture.
This trip [which had included Hong Kong and Thailand] has
given me a whole new set of perspectives. I now see Canada as
really tiny, although affluent. If these mainland Asian countries,
and especially China, were ever to get their act together eco-
nomically like Japan they could rival the whole of North Amer-
ica and the rest of the developed world without even blinking.
There have to be investment opportunities both in Japan and
in mainland China – perhaps through Hong Kong.

The next significant step that Peter took with portfolio investment
was to buy into a most unusual equity that, as it were, fell into his lap.
In 1970 Maurice Strong had left Power Corporation to work for the
Canadian Government and corporate enthusiasm for their investment
in the Yorkshire Trust had departed with him. Placing the Power Cor-
poration’s shares did not prove to be difficult. One of the Yorkshire’s
new shareholders turned out to be a curious sort of hybrid known as
Credit Foncier Franco Canadien. In his habitually thorough fashion
Peter took the trouble to scrutinize the Credit Foncier annual report
in considerable detail. What he discovered was intensely exciting. The
company was, as he described it, “a treasure trove of wonderful assets.”
It had been founded towards the end of the nineteenth century by
the powerful French banking group Compagnie Financière de Paris et
des Pays Bas, colloquially known as Paribas, with the idea of entering

12
the mortgage lending market in Quebec and the Maritimes and had
been encouraged to make loans with a more entrepreneurial, risk-tak-
ing approach than the Canadian Chartered Banks. As a result it had
become a key player in the Prairie provinces just at the time that those
vast areas, hitherto the untamed domain of the buffalo herds and the
Plains Indians, were gradually being converted into one of the world’s
greatest grain-producing expanses. Credit Foncier had been substan-
tially involved in financing pioneer farmers and had done extremely
well out of the enterprise: the profits had enabled it to acquire a sig-
nificant commercial real estate portfolio in the fast growing cities of
eastern Canada.
When the depression struck at the end of the 1920s, Credit Foncier
foreclosed on many of the farmers, who had been unable to keep up
with their mortgage payments, but in doing so it followed an unusu-
ally enlightened policy, allowing the farmers to remain as tenants on
very favourable rental terms rather than insisting on an eviction fol-
lowed by a fire-sale. Many had opted for this tenancy deal and Credit
Foncier had thereby become the owner of swathes of farmland, in-
cluding the underlying mineral rights, and whenever the land had been
sold, they had kept those rights. By the early 1970s, as commodity
prices, including oil, began to rise, the company, somewhat unex-
pectedly, found itself sitting on a very considerable portfolio of highly
prospective mineral wealth. As well, as Peter immediately saw, their
accounting policies had remained ultra conservative, with the entire
real estate portfolio carried on the balance sheet at book cost with
no attempt to put a realistic value on the mineral rights.
Credit Foncier’s corporate structure was also most unusual. Al-
though Paribas was the controlling shareholder, the shares of the
Canadian entity were listed in Montreal and Paris and there was a
float of about 30%, the majority of which was held by institutions in

13
Paris, especially by some of the more exclusive private banks. There
were two boards, a Canadian board of directors, which ran the Cana-
dian operation, and a French board, whose members had the unusual
entitlement of benefitting as individuals from 20% of the profits gen-
erated in Canada.
Naturally enough there was a good deal of competition at senior
management level within Paribas to secure a seat on the Credit
Foncier board and this privilege had come to be regarded as a special
reward for particularly valuable service and sometimes as a retirement
perk. But times were changing and the Canadian board members
were becoming restive over this arcane and unconventional structure,
which did not sit entirely comfortably with prevailing Canadian
corporate practice. To Peter it seemed like a license to loot the candy
store: neither the cash nor the real value of the assets was even re-
motely adequately reflected in the share price and, given the tension
that was beginning to emerge between the two boards, it was not
hard to envisage that in the foreseeable future there might be a clash
that could act as a catalyst to draw public attention to the underlying
value or perhaps eventually precipitate an outright disposal by Paribas,
which would immediately unlock shareholder value. The more that
he looked, the more perfect the opportunity revealed itself to be:
Credit Foncier ticked all the boxes, having been consistently pro-
fitable and paying dividends for many years.
A reasonable estimate of liquidation value appeared to be in excess
of $150 per share. Within days Peter began quietly to accumulate a
position at around $43 per share. For Canada the discount was
undoubtedly extreme, although, as Peter was to discover when some
years later he began buying shares in Europe, luckily it was not quite
so uncommon in those markets. Peter found the Credit Foncier ex-
perience totally engrossing and from that point onward was com-

14
pletely captivated by the thrill of making an investment discovery. He
confided in his journal:

I believe that there is probably one opportunity in every man’s

life which demands his knowledge, his guts, his self-esteem, and
his judgement. If he seizes it with both hands and it is success-
ful, he joins the first rank, if not he remains a mortal with feet
of clay. Credit Foncier may well be my test.

Shortly after writing this Peter went to a dinner at the Vancouver

Club attended by Yorkshire Trust clients and some of the City’s most
substantial investors; he outlined the Credit Foncier story and added
a thumbnail sketch of his view of corporate conditions in France:

I told them that the French corporate world had been shaken
to its core eighteen months ago by the first hostile takeover bid
in its history and that this was an indication that self-serving
management and contempt for shareholders were in their death
throes in the Gallic world, which could well be good news for
cffc. I don’t think anyone was listening.

Peter was in fact mistaken in that supposition. The group had not
forgotten that he had identified the unnoticed opportunity in Beth-
lehem Copper. It was becoming apparent that Peter was not just some
run of the mill broker punting an unusual, but probably poorly
researched, idea in order to differentiate himself from the pack. So
the story began to percolate and within two months the share price
of Credit Foncier had risen almost imperceptibly by 25%.
As far as Peter was concerned this was merely the beginning of
what he foresaw as a wonderful ride and he was never an investor

15
who was easily tempted to sell before the underlying value of a secu-
rity had been unlocked, merely to realize a quick flip. Within a few
months Peter’s informal syndicate controlled over 2% of the Credit
Foncier equity capital, making it the Canadian company’s second
largest shareholder. The list of the investors who made up the group
was impressive: Canadian Forest Products, another of the Yorkshire
shareholders; Greenshields and Wood Gundy; Cemp, the investment
vehicle of the Bronfman family; and American General Funds. By then
the shares had risen to $65 and the group was continuing to buy.

16
 3
Launching a Mutual Fund
on Value Principles

by the beginning of the 1970s Peter’s relationship with Frank

Trebell had deteriorated to the point where he felt his position at
Yorkshire had become untenable. He suspected that as a director he
was not being kept fully informed and he was increasingly doubt-
ful about Trebell’s effectiveness as chief executive. In his view the
opportunity to build on the Yorkshire’s solid reputation and turn a
sleepy but sound institution into the premier financial services group
in western Canada had been squandered in a series of ill-conceived
expansionary moves, which had been inadequately planned and
resourced and poorly executed. His unease and frustration emerge
very clearly in his journal:

I hate people who are imprecise and even more those who are
opaque or quite deliberately evasive; they just create mayhem
and disaster in the world around them. I do believe in change
and that an element of risk-taking is a necessary adjunct of
growing any successful business, but it has to be measured and
controlled and its extent clearly understood. I do not advocate
complacency, but I am conservative by nature. I am not a real
estate developer and I am not prepared to take those sorts of
 risks. I am afraid that the Trust Company will suffer if this con-
tinues. It will be starved of capital and exposed to bad decisions
made in the Yorkshire Finance Corp., with the consequent loss
of credibility, which is the corner-stone of what we have to sell.

Peter severed the cord with Trebell. In September 1971 his friend
Warren Goldring persuaded him to open a representative office for
agf Management Limited in Vancouver as an investment counsellor.
His decision was well timed, since a few months later Trebell was
reported to the bc Securities Commission in connection with some
irregularities in a real estate transaction and simultaneously to the
Ontario Securities Commission over back pricing in a group of mutual
funds that was managed and operated out of Toronto. He was even-
tually arrested, tried, and sent to prison.
Peter was asked to assist in both investigations and did so without
rancour but with complete candour, and eventually had to testify for
the prosecution at the trial. As he recorded, it was an awful task:

It is awesome how a single character flaw, in this case an over-

whelming capacity to obliterate inconvenient facts, has led to
complete self-destruction. Frank has so many admirable quali-
ties but that flaw in combination with a certain degree of slop-
piness and imperfect integrity have simply eaten away at an
otherwise fine man. As a result of all this I have become even
more acutely aware of the vital importance of good housekeep-
ing, attention to detail, and the dangers of self delusion.

Notwithstanding this difficult experience, Peter had not been

deflected from his quest for the “holy grail” of consistency, risk
control, and predictability in portfolio investment. On the basis of his
investment selection of Bethlehem Copper and Credit Foncier it might

18
have been perfectly fair to conclude that he was just a “natural” value
investor, but this would be to oversimplify and to ignore the fact that
Peter was and is an investment theoretician and philosopher. Those
two first outstanding selections were indeed classic value plays. How-
ever, Peter had not based his decisions on discernable and repeatable
principles; as yet he had no solid theoretical grounding that could pro-
vide a consistent methodology, or analytical tool, for the construction
of a complete and uniformly conceived investment portfolio.
Not that he had neglected to explore all kinds of investment
theories. In fact, in his search he had come to two important con-
clusions: that the majority of models used by investment research
departments were essentially worthless and that attempting to make
general market calls was a “mug’s game.” Most of the analytical
tools tended to be heavily reliant on extrapolating history and mar-
ket calls involved far too many variables, as well as being conditioned
by the herd instinct, which, more often than not, was triggered by
some completely unpredictable event. He also concluded that pure
chartists were simple fantasists, in approximately the same category
as those gambling punters who believe that they can predict the next
fall of a roulette ball on the basis of previous history. Despite all his
efforts, although he had recorded some useful thoughts that seemed
to be leading him in the right kind of direction, up to the moment
when he read Super Money on the airplane a satisfactory, compre-
hensive answer had eluded him. As his summary at this time shows,
he had not really made great progress, except perhaps through the
elimination of many of the “dead ends”:

• Management’s ability to predict earnings is universally poor.

• It is the strategic modelling behind a portfolio that matters
most.
• One needs to develop a sense of spaced maturities in a

19
 common stock portfolio in a way that is comparable to
a bond portfolio.
• In a macro sense it may be more useful to spend time
analysing industries instead of national or international
economies.
• It must be essential to develop and specify a precise
investment policy that investors can understand and rely
on the portfolio manager to implement.

When Peter had first joined agf, Allan Manford, the chair, had
given him a book called Institutional Investing by Charles Ellis, in
which the author suggested that any money manager worth his salt
ought to be able to achieve a 35% compound annual rate of return.
Quite obviously this was not something that was happening at agf,
or indeed being achieved by any other money manager with whom
Peter was familiar, but he was hypnotized by the statement. It was
clear to him that both Bethlehem and Credit Foncier had individually
more than achieved this benchmark and he began to try to determine
some of the common characteristics that had led to this success and
might make it possible to duplicate these choices.
He started his investigation by subjecting the two securities to a
form of regression analysis that he had devised for the purpose, the
idea being to arrive at a “predicted judgement of likely price appre-
ciation.” The departure point was to define what he considered to be
the most important variables and give each of them a weighting that
he could adjust later in light of the outcome. This approach was valid
because he already knew what the actual price appreciation had been
over any given period, once the first investment had been made. The
categories of variable that he chose were book value, dividend
growth, growth in earnings per share, frequency of senior manage-
ment changes/philosophy, favourable/unfavourable industry envi-

20
ronment, degree of recognition by the investment public, general
economic environment, available float, flow of funds, general level of
interest rates, equivalent money instruments, time horizon, and the
feel of the company.
The equation was Appa = Jppa - (V1+V2+V3…) where Appa is the
actual percentage price appreciation, Jppa the anticipated percentage
price appreciation, and V is the weighted variable. Of course it was far
too complicated to work satisfactorily. It needed the combined wis-
dom of Ben Graham and Warren Buffett for Peter to make his break-
through and the moment could not have been more opportune.
One positive aspect of the “fall out” from the Yorkshire affair was
that the All Canadian group of funds that had been a victim of the
“back pricing” activity came up for sale. As the news had spread and
the scale of the misdemeanours had been publicized and amplified in
the financial press, the level of redemptions in these funds had grown
from a trickle to a tidal wave, with the result that the management con-
tracts for the individual funds were up for sale at knock down prices.
As luck would have it, Peter was already familiar with one of the
funds: the All Canadian Venture Fund. This fund had been issued to
the public in early 1967 at which time it had had assets of $14 million
with a unit price of $4.30. During the bull market of 1967–69 the
assets had risen to $50 million and the unit price to $6.00. The fund’s
original investment policy had been to invest in the high growth
sectors of the economy with particular emphasis on developing
technology. The market break in 1970 had hit funds of this kind
especially hard because bear markets have a tendency to penalize con-
cept investments in favour of established businesses with earnings.
Redemptions, on top of the decline in the value of the portfolio, had
reduced the fund to its original asset levels and the unit price had
slumped. The manager’s response was to change investment tack in
favour of the latest fad in the natural resource and energy sector. Once

21
more all went well at the outset, but the market turned sour again and
by the end of 1974 the unit price had slumped for the second time
to just over $2.00 and assets in the fund, in the wake of the scandal,
stood at just over $7 million.
By this time redemptions had slowed to a trickle again; the remain-
ing investors, either shell-shocked or punch drunk, had presumably
pushed their certificates to the back of a drawer and were binning
the quarterly reports. For Peter this was the opportunity and in some
respects it was similar to a value investment. He had finally managed
to sell his shares in the Yorkshire for $100,000. This was a far cry
from the $400,000 valuation of the year before, but it was sufficient
for Peter, with Gowan Guest, a Vancouver lawyer whom he had met
through Tory party politics, as his partner, to buy the management
contract of the All Canadian Venture Fund.
The months preceding the acquisition had been far from idle in
terms of the development of Peter’s investment thinking. He had
devoured Graham and Dodd’s Security Analysis, especially chapter
41 entitled “The Asset-Value Factor in Common-Stock Valuation,”
which in his copy is heavily underlined and liberally annotated. He
wasted no time in writing to the long-suffering All Canadian unit-
holders signalling yet another change of policy and he made a com-
pelling case. It was quite a letter:

It seems to me that a new strategy has to be found. Investment

in emerging companies whose activities are orientated towards
new technologies is better suited to corporations who them-
selves specialize in that area. In addition it is my view that it
may take twenty or thirty years, a new set of analysts, and a
new generation of market players before stock markets react
to these types of security as they did in the mid to late 60s.

22
 I would like to suggest a new concept that will offer share-
holders an opportunity to realize significant and steady capital
appreciation. It is not a new idea in that it is essentially a
“return to value” philosophy pioneered by the dean of analysts,
Professor Benjamin Graham, and his successor Warren Buffett.
For a twenty-year period up to 1955, Graham, through his
Graham-Newman fund, averaged more than 20% growth per
annum using the techniques that I shall outline below. Warren
Buffett managed to achieve a 30% growth rate for his share-
holders, turning $100,000 into $100 million between 1956 and
1969 when he returned the money to his stockholders because
he could find no more bargains in the market. He returned to
the investment market in November 1974.
The essential concept is to buy under-valued, unrecognized,
neglected, out of fashion, or misunderstood situations where
inherent value, a margin of safety, and the possibility of sharply
changing conditions created new and favourable investment
opportunities. Although a large number of holdings might be
held, performance was invariably established by concentrating
in a few holdings. In essence, the fund invested in companies
that, as a result of detailed fundamental analysis, were trading
below their “intrinsic value.” The intrinsic value was defined
as the price that a private investor would be prepared to pay
for the security if it were not listed on a public stock exchange.
The analysis was based as much on the balance sheet as it
was on the statement of profit and loss.
Based on my studies and experience, investments for the
Venture Fund should only be made if most of the following
criteria are met:
• The share price must be less than book value. Preferably

23
 it will be less than net working capital less long term debt.
• The price must be less than one half of the former high
and preferably at or near its all time low.
• The price earning multiple must be less than ten or the
inverse of the long term corporate bond rate, whichever
is the less.
• The company must be profitable. Preferably it will have
increased its earnings for the past five years and there will
have been no deficits over that period.
• The company must be paying dividends. Preferably the
dividend will have been increasing and have been paid for
some time.
• Long term debt and bank debt (including off-balance sheet
financing) must be judiciously employed. There must be
room to expand the debt position if required.

In addition, studies should be made of past and expected future

rates of profitability, the ability of the management, and the
various underlying factors and hypotheses that govern sales
volume, costs, and profit after taxes. Of course, one should
never become an absolute slave to the above criteria, but they
have proved to my satisfaction to be a vital starting point.
My own exposure to this type of investment procedure
has been as follows: On January 1st 1973, we started with
$600,000 and, utilizing these techniques, the unit value
appreciated by 35.2%. During the same period the All Cana-
dian Venture Fund was down by 49%, the tse industrials
by 20%, and the Dow Jones Industrial Index by 26%.
To the best of my knowledge, this investment philosophy
would have outperformed every mutual fund in Canada over
this period. This fund never owned more than ten stocks and

24
 50% of its assets were at one time concentrated in just two
stocks (Bethlehem Copper and Credit Foncier).

Privately he confided some of his other investment principles to the

journal and they too make fascinating reading:

I will never use inside information or seek it out. I do implicitly

believe in Sir Sigmund Warburg’s adage, “All you get from
inside information is a whiff of bad breath.” In fact it is worse
than that because it can actually paralyse reasoning powers; im-
perilling the cold detached judgement required so that the hard
facts can shape decisions. Intuition, whether positive or nega-
tive, is quite another matter. It is a vital component of my art.
Stock manipulations only have a limited and temporary
effect on markets. In the end it is always the economic facts and
the values which are the determining factors. Actually value in
an investment is similar to character in an individual – it stands
up better in adversity which it overcomes more readily.
Once the analysis is complete and you have reached the firm
conviction that an investment is right you should not try to be
too clever about the purchase price. If you have to take a loss
do it decisively – don’t dither. Learn the lessons and then forget
about it.
In every analysis you need to isolate what the real assets are
and you must not forget to examine the franchise to do busi-
ness, to review the character and competence of the manage-
ment and to estimate the outcome if the whole business had
to be turned into cash.

Some of these thoughts, which relate to the overriding Benjamin

Graham principle of the margin of safety, were the fruit of a ripen-

25
ing relationship with Irving Kahn, one of the doyens of value invest-
ment, who in some ways became the mentor to Peter that Trebell had
failed in the end to be. In a very real sense spending time with Irving
and becoming immersed in his investment thinking was tantamount
to sitting at the feet of Ben Graham – the master himself – since Irving’s
own apprenticeship had been as Graham’s teaching assistant at the
Columbia Business School. Irving was also a founder member of the
New York Society of Securities Analysts and one of the first to become
a chartered financial analyst. Today, at the age of a hundred and five,
he continues to work, often on week-ends as well, remarking recently
that one of the beauties of his profession is that there is no mandatory
retirement age and at this stage in his life he can still get pleasure
out of finding a cheap stock. Irving and his son Alan, who followed in
his footsteps, have been and remain some of Peter’s most steadfast
friends and supporters.
There was another principle, not directly related to investment, that
had also begun to take shape in Peter’s mind. Exercise and fitness had
long been a fixed feature of his routines, though they had never taken
on the dimensions of an endurance test or an outright challenge.
Through his extracurricular reading Peter had been absorbing some
of the athletic ideals of ancient Greece, which broadly propound the
theory that athletic stamina and mental resilience go hand in hand.
The legendary feat of Pheidippides’ 240 kilometre run from Athens
to Sparta and back, or the alternative version of his run to Athens,
straight from the battlefield at Marathon, to deliver the news of the
Greek victory over the Persians, had sparked Peter’s imagination and
the idea of running a marathon began to intrigue him and he decided
to attempt it. Fortunately he was already extremely fit because he left
himself a bare six weeks to prepare for the Buffalo to Niagara Falls
Marathon in the fall of 1976. Peter was just about to turn thirty-eight
and had never run more than five miles before he began his training,
but he had built up to a distance of twenty miles just before the event.

26
 A week after his final training run, on a cold cloudy morning, he
found himself driving from Toronto to Buffalo dressed in his running
shorts. He found the first twenty-one miles relatively easy, running
along the river towards the Falls, although they never seemed to get
any closer. From miles fifteen to twenty-one he was running with fluid
confidence, as though in a trance, passing lots of other runners and
wondering somewhat complacently what all the fuss was about. But
then he hit the fabled wall and found that his legs suddenly had no
punch and were not responding, so that it was will-power alone that
kept him going through the last five miles. Even then he only just made
it to the finishing line, collapsing into a friend’s arms, eyes glazed, sugar
depleted, dehydrated, and suffering from loss of balance. He now un-
derstood intuitively what it was that would have killed Pheidippides;
twenty-six miles on a cool, wettish morning was hard enough, but
running across the burning plain of Marathon in early September,
almost certainly without any water, would undoubtedly have been
fatal. Peter’s time was a very respectable 3.13 and he could simply
have notched up the achievement and left it at that, but the psychol-
ogy of the race had gripped him, as had the mental tenacity that he
had needed to call upon to complete it, and he was hooked for good,
running another twenty-two races over the years.

As Peter had perhaps anticipated, there was no reaction whatsoever

from the All Canadian Venture Fund shareholders to his letter setting
out the proposed changes in the fund’s investment policy. However, all
that was required to proceed with it was board approval. Peter had
already decided that the new value approach would be better served
and more smoothly implemented with a new board of directors,
which was to be made up of people with whom he had a strong rap-
port, who had had first-hand experience of his stock picking abilities,
and who understood the principles of value investment.

27
 In addition to his partner Gowan Guest, who became chair, he
chose Peter Webster, a member of the wealthy Quebec family that had
owned the Toronto Globe and Mail and a friend as well as a Yorkshire
Trust investment client; his oldest friend Michael Meighen, later to
become a senator; John McLernon, a friend from McGill days who
had become a very young and dynamic president of Macaulay Nicolls
Maitland; and Hugh Snyder, the president of Western Mining, a con-
vinced admirer of Peter’s investment skills, particularly since the suc-
cess of the investment in Bethlehem Copper. As part of the new broom
approach Peter also changed the name from the All Canadian Venture
Fund to the Cundill Value Fund and enshrined his own take on the
Benjamin Graham investment criteria in the minutes of the first meet-
ing of the new board.
As soon as all the administrative details were properly in place,
Peter wasted no time. His research notebooks were already crammed
with investigative security analysis, amongst which some outstanding
investment opportunities were lurking. However, the share that was
to have the most significant, immediate effect on the new Value Fund
was, at first glance, a most unlikely contender. For this reason it is a
perfect illustration of the versatility with which value principles can
be applied to any security, anywhere, in any industry.
By the beginning of 1976 the world-wide recession had bitten hard
and, as is usually the case when economic conditions are causing
general corporate stress, the advertising industry had been hurt more
than most, with very sharply falling revenues, much publicized re-
dundancies, and gloomy predictions that the market would never fully
recover and margins would consequently continue to be squeezed for
years to come. As a result J. Walter Thompson (jwt), a household
name in the industry, had no stock market friends at all. It had gone
public in 1972 at over $20.00 per share and was now trading at $4.00.
Both institutional and retail investors were completely disillusioned

28
and there was the added negative that H.R. Haldeman, President
Nixon’s ex-chief of staff, who had previously been the head of jwt’s
large Los Angeles office, had recently been imprisoned for his part in
the Watergate conspiracy.
However, as the shares at $4.00 were trading at less than 20% of
their previous high, the company had caught Peter’s attention and he
had ordered the annual report and the 10k. What he discovered sent
prickles up his spine: the company had a hard book value of $18.00
per share, not including its freehold buildings in Paris and Tokyo, and
it had a long-term lease in Berkeley Square at the heart of London’s
Mayfair. This was not all – it was still profitable and was paying a
dividend. Peter began buying at once and carried steadily on up to his
limit of 10% of the assets of the fund. The average cost was just over
$8.00 per share.
During the course of his buying program Peter visited the com-
pany several times and on one visit was asked if he would step
aside to have a word with the president, Don Johnston. Johnston
came straight to the point, “What do you know that we don’t?
We’re selling stock from the pension fund and you’re buying?!
Who’s behind this?”
Peter’s reply was nothing if not frank, “I’m buying your stock be-
cause it’s cheap and for no other reason. But you may not be aware
that if there were an acquirer and he got control at anywhere near this
price ($11.00), he would be able to liquidate your company at a very
substantial profit and I’m placing no value on the name, although that
must also be worth something.”
Johnston merely looked confused and wished Peter well. He was an
advertising man and a good one, but financially naïve. However, some
months later Sam Belzberg’s First City Financial filed a 13d, a statu-
tory public document required by the Securities and Exchange Com-
mission as soon as any single shareholder’s interest exceeds 5% of a

29
company’s equity capital, effectively putting jwt into play as a take-
over candidate. How Belzberg got to hear of it remains something of
a mystery, but Peter sold his stock a year later for well over $20.00 per
share.
The results of Peter’s stewardship of his own fund were nothing
short of spectacular and are set out in the 1977 annual report as
follows:

Cundill Value Fund djii tseii

1975 +32% +39% +10%
1976 +32% +17% +6%
1977 +21% -21% +6%

However, this success had generated its own problem, which is re-
ferred to in the annual report of the fund:

Although during the last three years our investments have

increased in value by approximately $1.5 million per annum,
we have been suffering annual redemptions of about the
same amount.

This is, of course, a typical knee-jerk reaction: many of the tired

old investors are only too delighted to clamber out at the first signs
of a recovery and a second wave of selling frequently occurs as soon
as issue price or historic purchase price are attained once more. In
this limbo situation the rest of the world has either not yet noticed the
performance numbers or doubts their sustainability. For Peter this
was intensely frustrating, especially as his fledgling fund had very
limited resources to devote to any kind of marketing program and
his own efforts, single-handed, were simply not enough to generate a
wave of new interest. Serendipity was, however, about to come to the

30
rescue, aided by Peter’s personal credentials in coming from solid
Yorkshire stock.
The founding shareholders of the Yorkshire Trust Company were
a wealthy Huddersfield family by the name of Norton. In addition to
their 25% interest in that company, they also owned a private hold-
ing company that had assets of about $10 million, consisting of a
portfolio of marketable securities and the freehold of an office build-
ing in Vancouver. The original purpose of this vehicle had been to try
to minimize the incidence of British taxation on individual family
shareholders and it had worked well for three generations. However,
with the advent of a fourth generation, the number of shareholders
had proliferated and the fact that there was no selling mechanism,
and therefore no liquidity, was becoming increasingly irksome. Simply
liquidating the company would immediately have triggered a very
substantial capital gains tax liability for all the shareholders, whether
or not they were willing sellers. Consequently the family was looking
for a tax-efficient way of resolving the problem.
Peter had impressed George Norton, the head of the family, when
they had first met in Vancouver after he had joined the Yorkshire Trust,
and he had also taken the trouble to visit Norton on his home ground
in Huddersfield. The upshot was that a deal was struck whereby Peter
issued units in the Cundill Value Fund to the various members of the
Norton family in exchange for their shares in the private company.
Peter then sold the building and the portfolio and more than doubled
the assets of the Value Fund, at the same time solving the family’s tax
problem and acquiring a solid group of long-term investors.

31
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 4
Value Investment in Action

the recovery of the global economy after the recession and

the stock market collapse of 1973/4 was followed by a golden decade
for value investment. The severity of the downturn meant that the
choice of securities that qualified for investment under Peter’s broad
criteria was bewilderingly large, and in this respect there are some sim-
ilarities with today. But the stricter standards he had chosen to apply
in the balance sheet analysis of the “intrinsic value” test, which he had
described as “mostly Graham, a little Buffett and a bit of Cundill,” im-
posed their own discipline and assisted him enormously in narrowing
the field of choice to manageable proportions. The result was a num-
ber of startlingly successful value discoveries that rapidly propelled the
Value Fund into the premier performance league in North America.
The complete neglect in which some of the fallen darlings of the
market now languished meant that it was possible to construct sub-
stantial positions without greatly disturbing the share price and this
was precisely what Peter set about doing.
J. Walter Thompson was the first of the companies where Peter
came to control 4.9% of the entire equity, but it was quickly followed
by the American Investment Company. Founded in 1931, aic had
grown into one of the largest personal loan companies in the United
States. As was to be expected in the rather unsettled economic climate,
consumer finance generally was under a cloud and shares of aic
were trading at $3.00, down from a high of over $30.00. However,
there was a hard book value of over $12.00, some valuable old real
estate assets that were carried at cost, and some useful tax loss carry
forwards.
By then the retail loan market had recovered sufficiently for aic
to have returned to profitability and there was even some talk of a
resumption of the dividend. Peter could find no flaws and immediately
bought 200,000 shares at $3.00. Six months later he had accumulated
over 5% and had filed a 13d with the sec declaring his position. At
the time he confided to the journal:

As I proceed with this specialization into buying cheap

securities I have reached two conclusions. Firstly, very few
people really do their homework properly, so now I always
check for myself. Secondly, if you have confidence in your own
work, you have to take the initiative without waiting around
for someone else to take the first plunge. I haven’t yet found a
solution for determining timing on the sell tack. People say it
ought to be largely dependent on one’s perception of the trend
in the overall stock market, but I am suspicious of this. I think
that the financial community devotes far too much time and
mental resource to its constant efforts to predict the economic
future and consequent stock market behaviour using a
disparate, and almost certainly incomplete, set of statistical
variables. It makes me wonder what might be accomplished
if all this time, energy, and money were to be applied to
endeavours with a better chance of proving reliable and
practically useful. The timing difficulty in selling does not

34
 lie in not knowing when the trading discount to intrinsic value
has been eliminated, but in judging by how much it is likely
to be surpassed.

Shortly after filing the 13d on the aic position Peter received a
call inviting him to join the board of the company. He deliberated
carefully over whether to accept, concerned that the board seat
would position him as an insider and restrict his freedom of action.
He discussed the question with Stuart Shapiro, a bright New York
attorney and subsequently a great friend, who had a reputation for
getting straight to the point. Stuart’s response was typically blunt;
“Well, my friend, if you wanna be a real player, you gotta actually
start playing.”
Peter did join the board and as a result he clocked up many thou-
sands of miles over the years making the awkward journey to the aic
headquarters in St Louis, but it was a prestigious role that brought
with it some valuable associations, good merger and acquisition ex-
perience, and, probably most important of all, his meeting with Tony
Novelly, the self-made owner of Apex Oil, who became one of his
closest friends, a great supporter and “confidant,” and a client as well.
aic was very quickly put into play and this resulted in bids from
Household Finance and Gulf and Western. Although both of these
offers ran into regulatory problems and eventually fell through, aic
was taken over in the end by Leucadia at $13.00 per share, two years
after Peter took his initial position. It was a perfect example of the
way in which a value buyer can act effectively as a catalyst, but it had
demanded a great deal of Peter’s time, attention, and energy and, above
all else, the exercise of patience.
The question of timing on the sell side was brought into particu-
lar focus by Peter’s investment in Tiffany and Co., the iconic Fifth

35
Avenue jeweller and silversmith. His analysis had revealed that the
stock was trading below both book and liquidation value. It had
produced positive earnings since 1961 and paid dividends (occasion-
ally out of reserves) since 1868. Notwithstanding all this, where short-
term stock market performance is concerned, perception is everything
and the pundits were negative about Tiffany on two counts. First, it
had lost money for several years in the 1930s, when luxury goods
had been neither fashionable nor generally affordable and there was
a consensus that the 1970s were likely to see a repeat of this so luxury
brands were definitely out of favour. Second, Tiffany’s equity was con-
trolled by Walter Hoving, its chief executive, who, although recog-
nized as a talented and energetic manager with real creative flair, had
roundly declared in public that he would never ever sell.
In fact Tiffany’s profits grew steadily right through the recession of
the early 70s, with revenues climbing from $23 million in 1970 to $35
million in 1974 and net income rising above the $1 million mark for
the first time ever in that same year. However, in the light of subse-
quent events, the meaning of Hoving’s use of “never” was to require
some qualification.
For Peter, of course, the clincher in making an investment decision
would always be the value of the net assets and in Tiffany’s case there
were plenty to choose from. The most obvious and high profile was
the famous Tiffany Diamond, a massive 128.5 carat canary-coloured
brilliant – the largest in the world – that was carried on the books
for $1.00 although it was public knowledge that the company had
recently turned down an offer of $2 million for it. Nevertheless, this
was not the real jewel in the crown: the freehold of the Tiffany build-
ing on Fifth Avenue had sat on the books valued at $1 million since
1940. Prime Manhattan real estate had risen dramatically since that
date and, recession or no recession, it was indisputably continuing to
do so.

36
 There was no goodwill in the books, so the brand was effectively
valued at zero. It was obvious to Peter that if Cartier in Paris and
Asprey in London were considered to be valuable as brands, the
Tiffany name was unlikely to be the exception. On top of this there
was a factory of 120,000 square feet in Newark and a very conser-
vative valuation placed on the inventory of retail stock. The shares
were trading below the book value of $10.50 and in Peter’s judgement
well below the company’s realistic liquidation value, so he quietly
accumulated 3% of Tiffany at an average of $8.00 per share and then
went to visit Walter Hoving.
Peter was not the first predator to cross Hoving’s threshold – over
a decade earlier Hoving had successfully seen off a raid by Bulova, the
prestige watch company. Thus, although he greeted Peter with perfect
old world courtesy, Hoving wasted no time in delivering his trade-
mark message to unsought callers with dubious intentions: “I have no
need to sell and I will never, ever, do so.”
Peter’s reply was characteristic and was also to become standard. He
explained politely his reasons for buying Tiffany stock and even more
politely that Hoving’s intentions were of marginal consequence to him.
He was quite content to be patient and await the inevitable recognition
of the fact that Tiffany shares were fundamentally undervalued. Hov-
ing immediately thawed and in due course they became good friends.
Peter’s assessment turned out to be entirely accurate and within a
year he was able to sell his entire position at $19.00 and rub his hands
contentedly. But six months later there was a “sting” when Avon
Products made an all share offer for Tiffany worth $50.00 per share
and Hoving unhesitatingly accepted it. Peter’s comment was that he
ought to have asked Hoving, “Never, ever – at any price?” This out-
come prompted considerable discussion among the Cundill Value
Fund board members over the question of how to deal with the prob-
lem of when to sell. Peter himself could come up with no absolutely

37
satisfactory proposal for a formula. In the end the solution turned out
to be something of a compromise: the fund would automatically sell
half of any given position when it had doubled, in effect thereby writ-
ing down the cost of the remainder to zero with the fund manager
then left with full discretion as to when to sell the balance. Peter
expressed his collected thoughts in the journal, based on the first five
years of his accumulated experience as a value investor.

The ultimate skill in this business is in knowing when to make

the judgement call to let profits run. While it is true that 99%
of investment effort is routine, unspectacular enquiry, checking
and double checking, laboriously building up a web of informa-
tion with single threads until it constitutes a complete tableau,
just occasionally a flash of inspiration may be necessary. Once
we have begun to build a position it has to be recognized that
our intentions may change in the course of its construction. An
influential, or even controlling, position quite often results from
a situation where a cheap security does little or nothing price-
wise for such a long time that we are able to buy a significant
percentage of the equity. Whether our intentions remain passive
under these circumstances depends on an assessment of the out-
look for the company and the capability of its management, but
I don’t think that we ought to be pro-active merely for the sake
of it. My task is principally the identification of opportunity
and the decision to press the buy button. This may sometimes
turn out to be a catalyst in itself, but normally we should rely
on others to do the promotional work or to put the company
directly into play. Otherwise it will turn into a constant and
time-consuming distraction from our prime objective of finding
cheap securities to buy.

38
 The perfect illustration of this axiom turned out to be right at the
heart of Wall Street. In 1978, at prices of around $6.00 a share, Peter
had started to accumulate a position in Bache, a large and venera-
ble brokerage house founded back in the 1870s. Bache had a book
value of $15.50 and Peter had calculated that, in a liquidation, if the
bond portfolio were wound up and the debt paid off, the stock would
be worth $9.00, and this was without attributing any value to the
fixed assets.
Bache’s boss, Harry Jacobs, had recently fought off a run taken
at his company by Gerry Tsai, a successful New York fund manager
to whom Jacobs had declared, even more roundly than Walter Hoving
had done when he met Peter, “I’m going to fight you to the death.”
And he had done so, buying Tsai’s position at a premium to the
market price, a practice known as “greenmailing,” which today
would attract the immediate attention of the sec. Although it was
not then illegal, Jacob’s defence tactic had seriously annoyed his
shareholders, who considered it highhanded and out of touch with
the prevailing standards of good corporate practice. The operation
had consequently left Bache in a position that was considerably more
vulnerable to a predator.
Peter’s reputation was now such that his investment activity was
being carefully monitored by an increasing number of professional
investors, especially on the buy side. This was particularly the case
in Vancouver and so it came as no surprise to him to learn that
First City Financial, Sam Belzberg’s family holding company, was a
significant buyer of Bache stock. Peter already knew Sam personally
and Sam was a close associate of Maurice Strong, with whom he
had co-invested in American Water Development Inc. The news did,
however, come as a nasty surprise to Harry Jacobs, who considered
the Belzbergs to be even less suitable purchasers than Jerry Tsai and,

39
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introduce hypotheses to render our materials more convenient for
our purposes; and all the time there is one sort of complex-
equipotential system in the body of every living being, which only
needs to be mentioned in order to be understood as such, and which
indeed requires no kind of preliminary discussion. The system of the
propagation cells, in other words the sexual organ, is the clearest
type of a complex-equipotential system which exists. Take the ovary
of our sea-urchin for instance, and there you have a morphogenetic
system every element of which is equally capable of performing the
same complex morphogenetic course—the production of the whole
individual.
Further on we shall deal exclusively with this variety of our systems,
and in doing so we shall be brought back to our problem of heredity.
But it had its uses to place our concept of the complex-equipotential
system upon such a broad basis: we at once gave a large range of
validity to all that is to follow—which, indeed, does not apply to
inheritance alone, though its significance in a theory of heredity may
be called its most important consequence.

The Second Proof of Life-Autonomy. Entelechy at the Bottom of

Inheritance

After we had established the concept of the harmonious-

equipotential system in a former chapter, we went on to study the
phenomena of the differentiation of it, and in particular the problem
of the localisation of all differentiations. Our new concept of the
complex-equipotential system is to lead us to an analysis of a
different kind: we shall pay special attention to the origin, to the
genesis of our complex systems that show equipotentiality.
If we review the process of ontogenesis, we are able to trace back
every complex system to a very small group of cells, and this small
group of cells again to one single cell. So in plants the cambium may
be shown to have originated in a sort of tissue-rudiment, established
at a very early period, and the ovary may be demonstrated to be the
outcome of a group of but a few cells, constituting the first visible
“Anlage” of the reproductive organs. At the end then, or from
another point of view at the beginning, a single cellular element
represents the very primordial egg-cell.
The whole cambium, there can be no doubt, must be regarded as
the result of a consecutive number of cell-divisions of the one cell
from which it originates. So must it be with the ovary. The primordial
egg-cell has undergone a long line of consecutive divisions; the
single eggs are the last result of them.
We now proceed to some considerations which have a certain logical
similarity to those which inaugurated our analysis of the
differentiation of the harmonious-equipotential systems, though the
facts in question are very different.
Viewed by itself without any kind of prepossessions, as it might be
by any one who faces a new problem with the single postulate of
introducing new natural entities—to use the scholastic phrase—as
little as possible, the development of the single egg might be
regarded as proceeding on the foundation of a very complicated sort
of machine, exhibiting a different kind of construction in the three
chief dimensions of space, as does also the organism which is to be
its result.
But could such a theory—irrespective of all the experimental facts
which contradict it—could such a theory stand before the one fact,
that there occurs a genesis of that complex-equipotential system, of
which our one single egg forms a part? Can you imagine a very
complicated machine, differing in the three dimensions of space, to
be divided hundreds and hundreds of times and in spite of that to
remain always the same whole? You may reply that during the
period of cell-divisions there is still no machine, that the machine is
established only after all the divisions are complete. Good; but what
then constructs this machine in the definitive cells of our systems,
say in the eggs? Another sort of machine perhaps? That could hardly
be said to be of much use. Or that entelechy of which we have
spoken? Then you would recur to our first proof of vitalism and
would burden entelechy with a specific performance, that is with the
construction of the hypothetic machine which you are postulating in
every single egg. But of course you would break the bounds of
physics and chemistry even then.
It seems to me that it is more simple, and so to say more natural,
not to recur to our first proof of life-autonomy in order to keep to
the “machine theory” in this new branch of inquiry, but to consider
facts as they offer themselves to analysis.
But then indeed we are entitled to draw an independent second
proof of the autonomy of life from our analysis of the genesis of
systems of the complex-equipotential type. We say it is a mere
absurdity to assume that a complicated machine, typically different
in the three dimensions of space, could be divided many many
times, and in spite of that always be the whole: therefore there
cannot exist any sort of machine as the starting-point and basis of
development.
Let us again apply the name entelechy to that which lies at the very
beginning of all individual morphogenesis.
Entelechy thus proves to be also that which may be said to lie at the
very root of inheritance, 128 or at least of the outcome of inheritance;
the individual formation of the next generation is shown not to be
performed by a machine but by a natural agent per se.

The Significance of the Material Continuity in Inheritance

But what about the material continuity appearing in inheritance,

which we have said to be almost self-evident, as life is only known to
exist on material bodies? Is there not, in fact, a serious contradiction
in admitting at the same time entelechy on the one side and a sort
of material condition on the other as the basis of all that leads to
and from inheritance? Next summer the relation between matter and
our autonomous agent of life will be studied more fully; at present it
must be enough to state in a more simple and realistic way, what we
hold this relation to be. There is no contradiction at all in stating that
material continuity is the basis of inheritance on the one side, and
entelechy on the other. It would be very inconvenient for us if there
were any: for the material continuity is a mere fact and our
entelechy we hope we have proved to exist also; if now there were
any sort of contradiction in assuming the existence of both of them,
of course it would be fatal to our proof.
Let us try to comprehend what is meant by the statement that
entelechy and something material are at work in inheritance at the
same time. Entelechy has ruled the individual morphogenesis of the
generation which is regarded as being the starting-point for
inheritance, and will rule also the morphogenesis of the generation
which is to follow; entelechy determines the egg to be what it is,
and the morphogenesis starting from this egg to be what it is also.
Entelechy, at present, is not much more for us than a mere word, to
signify the autonomous, the irreducible of all that happens in
morphogenesis with respect to order, in the one generation and in
the next. But may not the material continuity which exists in
inheritance account perhaps for the material elements which are to
be ordered? In such a way, indeed, I hope we shall be able to
reconcile entelechy and the material basis of heredity. May it not be
that there exist some “means” for morphogenesis, which are handed
down from generation to generation, always controlled by entelechy,
and which constitute the real significance of the continuity of matter
during inheritance?

The Experimental Facts about Inheritance

Discoveries of the last few years do seem to show that such means
of a material character, though not the foundation of that order of
processes which is inherited, are nevertheless among the most
necessary conditions for the accomplishment of inheritance in
general. It is scarcely necessary to remind you that for very many
years all concrete research on heredity proper—that is, the actual
comparison of the various specific characters in the generations of
the grandfather, the father, and the child—was due to Galton. You
may also be aware that in spite of Galton’s inestimable services it
was not till 1900 that one of the active principles concerned in
inheritance was found independently by de Vries, Correns, and
Tschermak, and that this principle happened to be one that had
been discovered already, stated with the utmost clearness and
precision by the Augustinian monk, Gregor Mendel, 129 as early as
1865, though it had been completely forgotten ever since.
The so-called “rule of Mendel” is based upon experiments with
hybrids, that is, with the offspring of parents belonging to different
species, or, at least, varieties, but it relates not to the characters of
the generation resulting immediately from hybridisation, the “first”
generation of hybrids, as we shall call it, but to the characters of
that generation which is the result of crossing the hybrids with each
other, provided that this leads to any offspring at all. There are many
cases indeed, both amongst animals and plants, where the offspring
of the hybrids, or in other terms the “second” generation, is found to
consist of individuals of three different types—the mixed 130 type of
the hybrids themselves, and the two pure types of the grandparents.
Whenever the individuals of the “second” generation are separated
into these three different types, hybrids are said to “split.” It is the
fact of this splitting on the one hand, and on the other hand a
certain statement about the numbers of individuals in the three
different types of the “second” generation, that gives its real
importance to Mendel’s rule.
Before discussing what may follow from Mendel’s discovery for the
theory of heredity, we must lay stress on the fact that there are
many exceptions to his rule. In quite a number of cases the hybrids
are of one or more types, which remain constant: there is no
splitting at all in the second generation. But that does not affect the
rule of Mendel in those cases where it is true. Where there is a
“splitting” in the second generation, there also are the numerical
proportions stated by Mendel; there never are other relations among
the numbers of individuals of the mixed and of the two pure types
than those given by his rule. I regard it as very important that this
real meaning of Mendel’s principle should be most clearly
understood.
From the fact of the splitting of hybrids in the second generation
most important consequences may be drawn for the theory of
inheritance; the split individuals, if crossed with each other, always
give an offspring which remains pure; there is no further splitting
and no other change whatever. The germ-cells produced by the split
individuals of the second generation may therefore be said to be
“pure,” as pure as were those of the grandparents. But that is as
much as to say that the pureness of the germ-cells has been
preserved in spite of their passing through the “impure” generation
of the hybrids, and from this fact it follows again that the union of
characters in the hybrids must have been such as to permit pure
separation: in fact, the germ-cells produced by Mendelian hybrids
may hypothetically be regarded as being pure themselves. 131
We have not yet considered one feature of all experiments in
hybridisation, which indeed seems to be the most important of all for
the theory of inheritance, if taken together with the fact of the
pureness of the germs. The rule of Mendel always relates to one
single character of the species or varieties concerned in
hybridisation, and if it deals with more than one character, it regards
every one of them separately; indeed, the rule holds for every one of
them irrespective of the others. We cannot study here how this most
important fact of the independence of the single characters of a
species with regard to inheritance leads to the production of new
races, by an abnormal mixture of those characters. We only take
advantage of the fact theoretically, and in doing so, I believe, we can
hardly escape the conclusion that the independence of the single
characters in inheritance, taken together with the pureness of the
germ-cells in the most simple form of hybrids, proves that there
occurs in inheritance a sort of handing over of single and separate
morphogenetic agents which relate to the single morphogenetic
characters of the adult. We may use Bateson’s word “allelomorphs”
for these agents, or units, as they may be called, thereby giving
expression to the fact that the single and separate units, which are
handed over in inheritance, correspond to each other in nearly
related species without being the same.
And so we have at least an inkling of what the material continuity of
inheritance is to mean, though, of course, our “single and separate
morphogenetic agents,” or “units” or “allelomorphs” are in
themselves not much more than unknown somethings described by
a word; but even then they are “somethings.”
Besides the researches relating to the rule of Mendel and its
exceptions, founded, that is, upon a study of the “second”
generation of hybrids, there is another important line of research
lately inaugurated by Herbst, which investigates the first generation
in hybridisation. The hybrids themselves are studied with the special
purpose of finding out whether the type of the single hybrid may
change according to the conditions of its development, both outer
and inner. The discoveries thus made may lead some day to a better
understanding of the intimate nature of the “units” concerned in
heredity, and perhaps to some knowledge of the arranging and
ruling factor in morphogenesis also.
Starting from the discovery of Vernon, that the hybrids of sea-
urchins are of different types according to the season, Herbst 132 was
able to show that differences among the hybrids with regard to their
being more of the paternal or more of the maternal type, are in part
certainly due to differences in temperature. But there proved to be
still another factor at work, and Herbst has succeeded in discovering
this factor by changing the internal conditions of morphogenesis.
Whenever he forced the eggs of Sphaerechinus to enter into the
first 133 phase of artificial parthenogenesis and then fertilised them
with the sperm of Echinus, he was able to approximate the offspring
almost completely to the maternal type, whilst under ordinary
conditions the hybrids in question follow the paternal far more than
the maternal organisation.
What is shown, in the first place, by these discoveries is the
importance of an arranging and ruling factor in spite of all units. The
organism is always one whole whether the paternal properties
prevail or the more complicated maternal ones; in other words, all
so-called properties that consist in the spatial relations of parts have
nothing to do with “units” or “allelomorphs,” which indeed cannot be
more than necessary means or materials, requiring to be ordered. As
to the character of the morphogenetic single and separate units
themselves Herbst is inclined to regard them as specific chemical
substances which unite correspondingly during nuclear conjugation,
forming a sort of loose chemical compound. It would depend on the
constitution of this compound whether germ-cells of hybrids could
become pure or not.

The Rôle of the Nucleus in Inheritance

At the end of our studies on heredity we hardly can avoid saying a

few words about the problem of the localisation of the
morphogenetic units in the germ-cells themselves. Is it in the
protoplasm or in the nucleus that they are placed? You all know that
this question was for a long time regarded as more important than
any other, and perhaps you have already blamed me for not raising
it until now. But in my opinion results gained by the purely analytical
method and carefully established, are always superior to those which
are of a merely descriptive nature and doubtful besides. The famous
problem of the part played by the nucleus in inheritance is both
descriptive and doubtful: it is only, so to say, of factual, not of
analytical importance, and quite insoluble at present.
As for our second proof of vitalism, stating that no kind of machine
inside the germ-cells can possibly be the foundation of their
morphogenesis, it is clear that the protoplasm and the nucleus may
both come into account here on equal terms. If you prefer to say so,
it is to the nucleus and to its division in particular that the second
proof of autonomy relates, while the first, though not over-looking
the presence of nuclei, 134 deals “especially” with the protoplasmic
nature of its “systems.”
What then can we say, on the basis of actual facts, about the part
taken by the protoplasm and by the nucleus in inheritance, now that
we have learnt from our analytical discussion that both of them
cannot be any kind of morphogenetic machine, but can only be
means of morphogenesis? Let us state our question in the following
way: whereabouts in the germ-cells are those “means” of
morphogenesis localised, the existence of which we infer from the
material continuity in the course of generations in general and from
the facts discovered about hybridisation in particular?
The first of the facts generally said to support the view that the
nucleus of the germ-cells exerts a specified influence upon the
processes of development and inheritance, relates to the proportion
between protoplasm and nuclear material in the egg and in the
spermiae. This proportion is very different in the two sexual
products, as we know, there being an enormous preponderance of
the protoplasm in the egg, of the nucleus in the spermatozoon. This
seems to indicate that the proportion between protoplasm and
nucleus is fairly indifferent for inheritance, as all the facts go to show
that inheritance from the father is as common as inheritance from
the mother. It is in the nucleus, and in the nucleus alone, that any
similarity of organisation exists between the two sexual products, so
very different in all other respects: therefore the nucleus should be
the organ of inheritance. The phenomena of nuclear division, of
karyokinesis, which are quite equal in both sexual cells, are certainly
well fitted to support this hypothesis.
There seems indeed to be some truth in this reasoning, but
nevertheless it must remain hypothetical; and it must never be
forgotten that there may be very probably some sort of
morphogenetic importance in protoplasm also. Rauber and
afterwards Boveri 135 have tried to prove experimentally that it is on
the nuclear chromatic substance only that inheritance depends, but
the first of these authors failed to get any results at all, and the
latter obtained only ambiguous ones. Godlewski, on the contrary,
has fertilised purely protoplasmic egg-fragments of the sea-urchin
with the sperm of quite another group of Echinoderms, and obtained
in spite of that a few stages of development of the pure maternal
type. This experiment seems to place the morphogenetic importance
of protoplasm beyond all doubt.
I should prefer not to make any definite statement about our
problem at present. Our actual knowledge of the organisation and
metabolism of both nucleus and protoplasm is so extremely small
and may relate to such very insignificant topics, that any definite
decision is impossible. I myself believe that the nucleus plays an
important part in heredity, perhaps even a greater one than
protoplasm, but this is only my belief. 136
The discovery of Gruber and others, that Protozoa are only capable
of restitution if they contain at least a fragment of the nucleus, has
also been used occasionally as a proof of the morphogenetic
importance of the nucleus. But might not this absence of restitution
where nuclear material is lacking be understood equally well on the
hypothesis of Loeb and R. S. Lillie that the nucleus is a centre of
oxidation in the cell? Remove the heart from a vertebrate and the
animal will not digest any more; but in spite of that the heart is not
the organ of digestion.
And so we lay stress once more upon this point: that the
experimental results of hybridisation and the analytical results
obtained by the discussion of the complex-equipotential systems are
of greater value to the theory of heredity than all speculation about
the importance or unimportance of special constituents of the cell, of
whose organisation, chemistry, and physics, scarcely anything is
known at present. 137

Variation and Mutation

Heredity, it has been said, may be understood as resting upon the
fact that each organism forms its own initial stage again, and that
this initial stage always encounters conditions of the same kind.
If this statement were quite correct, all the individuals of a given
species would be absolutely alike everywhere and for ever. But they
are not alike; and that they are not alike everywhere and for ever is
not merely the only real foundation of the so-called theory of
descent we possess, but also forces us to change a little our
definition of heredity, which now proves to have been only a sort of
approximation to the truth, convenient for analytical discussion.
In the first place, the conditions which surround the initial stages of
morphogenesis are not quite equal in every respect: and indeed the
offspring of a given pair of parents, or better, to exclude all
complications resulting from sexual reproduction, or amphimixis, as
Weismann called it—the offspring of one given parthenogenetic
female are not all equal among themselves. The individuals of each
generation are well known to vary, and it is especially in this country
that the so-called individual or fluctuating variation has been most
carefully studied by statistical methods, Galton and Weldon being
the well-known pioneers in this field. 138 In fact, if we are allowed to
assume that this sort of variation is the outcome of a variation of
conditions—in the most general meaning of the word—we only
follow the opinion which has almost universally been adopted by the
biologists 139 that are working at this branch of the subject. Variation
proper is now generally allowed to be the consequence of variations
in nutrition; the contingencies of the latter result in contingencies of
the former, and the law of contingencies is the same for both, being
the most general law of probability. Of course under such an aspect
fluctuating variation could hardly be called an exception, but rather
an addition to inheritance.
But there are other restrictions of our definition of heredity. The
initial stage which is formed again by an organism is not always
quite identical in itself with the initial stage of its own parent:
Bateson and de Vries were the first to study in a systematic way
these real exceptions 140 to true inheritance. As you know, de Vries
has given them the name of “mutations.” What is actually known on
this subject is not much at present, but nevertheless is of great
theoretical value, being the only real foundation of all theories of
descent, as we shall see in the next lectures. “Mutations” are known
to exist at present only among some domesticated animals and
plants. Nothing of a more general character can be said about their
law or meaning. 141

Conclusions from the First Main Part of these

Lectures
In finishing our chapter on inheritance, we at the same time have
finished the first main part of our lectures; that part of them which
has been devoted exclusively to the study of the morphogenesis of
the individual, including the functioning of the adult individual form.
We now turn to our second part, which is to deal with the problems
of the diversities of individual forms, with morphological systematics.
The end of our chapter on inheritance has already led us to the
threshold of this branch of biological science.
The chief result of the first main part of our lectures has been to
prove that an autonomy of life phenomena exists at least in some
departments of individual morphogenesis, and probably in all of
them; the real starting-point of all morphogenesis cannot be
regarded as a machine, nor can the real process of differentiation, in
all cases where it is based upon systems of the harmonious
equipotential type. There cannot be any sort of machine in the cell
from which the individual originates, because this cell, including both
its protoplasm and its nucleus, has undergone a long series of
divisions, all resulting in equal products, and because a machine
cannot be divided and in spite of that remain what it was. There
cannot be, on the other hand, any sort of machine as the real
foundation of the whole of an harmonious system, including many
cells and many nuclei, because the development of this system goes
on normally, even if its parts are rearranged or partly removed, and
because a machine would never remain what it had been in such
cases.
If our analytical discussions have thus led us to establish a typical
kind of vitalism, it follows that we can by no means agree with
Wilhelm Roux in his denomination of the analytical science of the
individual form and form-production as “Entwickelungsmechanik,”
“developmental mechanics,” a title, which, of course, might easily be
transformed into that of “morphogenetic mechanics,” to embrace not
only normal development, but restitution and adaptation too. We
feel unable to speak of “mechanics” where just the contrary of
mechanics, in the proper meaning of the word, has been proved to
exist.
Names of course are of comparatively small importance, but they
should never be allowed to be directly misleading, as indeed the
term “Entwickelungsmechanik” has already proved to be. Let us
rather say, therefore, that we have finished with this lecture that
part of our studies in biology which has had to deal with
morphogenetic physiology or physiological morphogenesis.
Once more we repeat, at this resting-point in our discussions, that
both of our proofs of life-autonomy have been based upon a careful
analysis of certain facts about the distribution of morphogenetic
potencies in two classes of morphogenetic systems, and upon
nothing else. To recall only one point, we have not said that
regeneration, merely because it is a kind of restitution of the
disturbed whole, compels us to admit that biological events happen
in a specific and elemental manner, but, indeed, regeneration does
prove vitalism, because it is founded upon the existence of certain
complex-equipotential systems, the analysis of the genesis of which
leads to the understanding of life-autonomy. This distinction, in fact,
is of the greatest logical importance.
PART II
 SYSTEMATICS AND HISTORY
A. THE PRINCIPLES OF SYSTEMATICS

Rational Systematics

All systematics which deserves the predicate “rational” is founded

upon a concept or upon a proposition, by the aid of which a totality
of specific diversities may be understood. That is to say: every
system claiming to be rational gives us a clue by which we are able
to apprehend either that there cannot exist more than a certain
number of diversities of a certain nature, or that there can be an
indefinite number of them which follow a certain law with regard to
the character of their differences.
Solid geometry, which states that only five regular bodies are
possible, and points out the geometrical nature of these bodies, is a
model of what a rational system should be. The theory of conic
sections is another. Take the general equation of the second degree
with two unknowns, and study all the possible forms it can assume
by a variation of its constants, and you will understand that only four
different types of conic sections are possible—the circle, the ellipse,
the hyperbola, and the parabola.
In physics and chemistry no perfect rational systems have been
established hitherto, but there are many systems approaching the
ideal type in different departments of these sciences. The chemical
type of the monohydric saturated alcohols, for instance, is given by
the formula CnH2n+1OH, and in this formula we not only have an
expression of the law of composition which all possible alcohols are
to follow,—but, since we know empirically the law of quantitative
relation between n and various physical properties, we also possess
in our formula a general statement with respect to the totality of the
properties of any primary alcohol that may be discovered or
prepared in the future. But chemistry has still higher aims with
regard to its systematics: all of you know that the so-called “periodic
law of the elements” was the first step towards a principle that may
some day give account of the relation of all the physical and
chemical properties of any so-called element with its most important
constant, the atomic weight, and it seems to be reserved for the
present time to form a real fundamental system of the “elements” on
the basis of the periodic law by the aid of the theory of electrons.
Such a fundamental system of the elements would teach us that
there can only be so many elements and no more, and only of such
a kind. In crystallography a similar end has been reached already by
means of certain hypothetic assumptions, and systematics has here
accounted for the limited number and fixed character of the possible
forms of crystalline symmetry.
It is not difficult to understand the general logical type of all rational
systems, and logic indeed can discover it without appealing to
concrete sciences or to geometry. Rational systematics is always
possible whenever there exists any fundamental concept or
proposition which carries with it a principle of division; or to express
it somewhat differently, which would lead to contradictions, if
division were to be tried in any but one particular manner. The so-
called “genus,” as will easily be perceived, then embraces all its
“species” in such a manner that all peculiarities of the species are
represented already in properties of the genus, only in a more
general form, in a form which is still unspecified. The genus is both
richer in content and richer in extent than are the species, though it
must be added that its richness in content is, as it were, only latent:
but it may come into actuality by itself and without any help from
without.
We are dealing here with some of the most remarkable properties of
the so-called synthetic judgments a priori in the sense of Kant, and,
indeed, it seems that rational systematics will only be possible where
some concept of the categorical class or some proposition based
upon such concept lies at the root of the matter or at least is
connected with it in some way. In fact, all rational systems with
regard to the relations of symmetry in natural bodies deal ultimately
with space; or better, all systems in such fields are able to become
rational only if they happen to turn into questions of spatial
symmetry.
All other genera and species, whether of natural bodies or of facts,
can be related only on the basis of empirical abstraction, i.e. can
never attain rationality: here, indeed, the genus is richer in extent
and poorer in content than are the species. The genus is
transformed into the species, not by any inherent development of
latent properties, but by a mere process of addition of characteristic
points. It is impossible to deduce the number or law or specifications
of the species from the genus. Mere “classification,” if we may
reserve the honorable name of systematics for the rational type, is
possible here, a mere statement in the form of a catalogue, useful
for orientation but for nothing more. We may classify all varieties of
hats or of tables in the same way.

Biological Systematics

At this point we return from our logical excursion to our proper

subject of biology; for I am sorry to say biological systematics is at
present of our second type of systematics throughout: it is
classification pure and simple. We have a catalogue in our hands,
but nothing more.
Such a statement of fact conveys not a particle of censure, casts not
the least reflection on the gifted men who created the classification
of animals or plants. It is absolutely necessary to have such a
catalogue, and indeed the catalogue of the organisms can be said to
have been improved enormously during the advance of empirical
and descriptive biological science. Any classification improves as it
becomes more “natural,” as the different possible schemes of
arrangement, the different reasons of division, agree better and
better in their results; and, in fact, there has been a great advance
of organic classification in this direction. The “natural” system has
reached such perfection, that what is related from one point of view
seems nearly related also from almost all points of view which are
applicable, at least from those which touch the most important
characteristics. There has been a real weighing of all the possible
reasons of division, and that has led to a result which seems to be to
some extent final.
But, nevertheless, we do not understand the raison d’être of the
system of organisms; we are not at all able to say that there must
be these classes or orders or families and no others, and that they
must be such as they are.
Shall we ever be able to understand that? Or will organic systematics
always remain empirical classification? We cannot answer this
question. If we could, indeed, we should have what we desire! As
simple relations of space are certainly not the central point of any
problematic rational organic systematics even of the future, the
question arises, whether there could be found any principle of
another type in the realm of synthetic a priori judgments which
could allow an inherent sort of evolution of latent diversities, as do
all judgments about spatial symmetry. At the end of the second
course of these lectures, which is to be delivered next summer, we
shall be able to say a few more words about this important point.
The concept of what is called “a type,” due almost wholly to Cuvier
and Goethe, is the most important of all that classification has given
to us. Hardly second in importance is the discovery of the
“correlation of parts,” as a sort of connection which has the
character of necessity without being immediately based upon
causality. Rádl seems to be the only modern author who has laid
some stress on this topic. The harmony which we have discovered in
development is also part of this correlation. When, later on, we
come to discuss analytically our well established entelechy as the
ultimate basis of individual organisation, we shall be able to gain
more satisfactory ideas with respect to the meaning of the non-
causal but necessary connection, embraced in the concepts of type
and of correlation of parts.
The type is a sort of irreducible arrangement of different parts; the
correlation deals with the degree and the quality of what may be
called the actual make of the parts, in relation to one another: all
ruminants, for instance, are cloven-footed, the so-called dental
formulae are characteristic of whole groups of mammals. Of course
all such statements are empirical and have their limits: but it is
important that they are possible. 142
It has been the chief result of comparative embryology to show that
the type as such is more clearly expressed in developmental stages
than it is in the adults, and that therefore the embryological stages
of different groups may be very much more similar to each other
than are the adults: that is the truth contained in the so-called
“biogenetisches Grundgesetz.” But the specific differences of the
species are not wanting in any case of ontogeny, in spite of such
similarities in different groups during development.
We have applied the name “systematics” or, if rationality is excluded,
“classification” to all that part of a science which deals with
diversities instead of generalities: in such a wide meaning
systematics, of course, is not to be confused with that which is
commonly called so in biology, and which describes only the exterior
differences of form. Our systematics is one of the two chief parts of
biology; what are called comparative anatomy and comparative
embryology are its methods. For it must be well understood that
these branches of research are only methods and are not sciences
by themselves.
 B. THE THEORY OF DESCENT

1. Generalities

It is most generally conceded at the present time that the actually

existing state of all organisms whatsoever is the result of their
history. What does that mean? What are the foundations upon which
the assumption rests? What is the relation of systematics to history?
In raising such questions and considerations we are treading the
ground sacred to the theory of descent.
I well know that you prefer the name “theory of evolution” for what
I am speaking of: but it may be misleading in various respects. We
already know that quite a determinate meaning has been given to
the word “evolutio” as applied to individual morphogenesis,
“evolutio” being here opposed to “epigenesis.” Now there would be
nothing against the use of the word evolution in a wider sense—
indeed it is often applied nowadays to denote the fact that a
something is actually “evolved” in embryology—if only our entelechy
had taken the place of the machine of the mechanists. But that is
the very point: there must be a real “evolving” of a something, in
order that the word evolution may be justified verbally: and that is
not the case in so-called phylogeny. At least we know nothing of an
evolutionary character in the problematic pedigree of the organisms,
as we shall see more fully hereafter. The term “theory of descent” is
therefore less open to objection than is the usual English term. The
word transformism, as used by the French, would also be a very
good title.
The theory of descent is the hypothetic statement that the
organisms are really allied by blood among each other, in spite of
their diversities. 143 The question about their so-called monophyletic
or polyphyletic origin is of secondary importance compared with the
statement of relationship in general.
There are two different groups of facts which have suggested the
idea of transformism: none of these facts can be said to be
conclusive, but there certainly is a great amount of probability in the
whole if taken together.
The first group of evidences which lead to the hypothesis of the real
relationship of organisms consists of facts relating to the
geographical distribution of animals and plants and to palæontology.
As to geography, it seems to me that the results of the floral and
faunal study of groups of islands are to be mentioned in the first
place. If, indeed, on each of the different islands, A B C and D,
forming a group, the species of a certain genus of animals or plants
are different in a certain respect, and show differences also
compared with the species living on the neighbouring continent, of
which there is geological evidence that the islands once formed a
part, whilst there is no change in the species on the continent itself
for very wide areas, then, no doubt, the hypothesis that all these
differing species once had a common origin, the hypothesis that
there is a certain community among them all, will serve to elucidate
in some way what would seem to be very abstruse without it. And
the same is true of the facts of palaeontology. In the geological
strata, forming a continuous series, you find a set of animals, always
typical and specific for every single stratigraphical horizon, but
forming a series just as do those horizons. Would not the whole
aspect of these facts lose very much of its peculiarity if you were to
introduce the hypothesis that the animals changed with the strata?
The continuity of life, at least, would be guaranteed by such an
assumption.
The geographical and geological evidences in favour of the theory of
descent are facts taken from sciences which are not biology proper;
they are not facts of the living but only facts about the living. That is
not quite without logical importance, for it shows that not biology
alone has led to the transformism hypothesis. Were it otherwise,
transformism might be said to be a mere hypothesis ad hoc; but
now this proves to be not the case, though we are far from
pretending that transformism might be regarded as resting upon a
real causa vera.
But let us study the second group of facts which support the theory
of descent. It is a group of evidences supplied by biology itself that
we meet here, there being indeed some features in biology which
can be said to gain some light, some sort of elucidation, if the theory
of descent is accepted. Of course, these facts can only be such as
relate to specific diversities, and indeed are facts of systematics; in
other words, there exists something in the very nature of the system
of organisms that renders transformism probable. The system of
animals and plants is based upon a principle which might be called
the principle of similarities and diversities by gradation; its categories
are not uniform but different in degree and importance, and there
are different kinds of such differences. No doubt, some light would
be shed upon this character of the system, if we were allowed to
assume that the relation between similarities and diversities, which
is gradual, corresponded to a blood-relationship, which is gradual
also.

the covert presumption of all theories of descent

We have used very neutral and somewhat figurative words, in order

to show what might be called the logical value of the theory of
descent, in order to signify its value with respect to so-called
“explanation.” We have spoken of the “light” or the “elucidation”
which it brings, of the “peculiarity of aspect” which is destroyed by
it. We have used this terminology intentionally, for it is very
important to understand that a specific though hidden addition is
made almost unconsciously to the mere statement of the hypothesis
of descent as such, whenever this hypothesis is advocated in order
to bring light or elucidation into any field of systematic facts. And
this additional hypothesis indeed must be made from the very
beginning, quite irrespective of the more detailed problems of the
law of transformism, in order that any sort of so-called explanation
by means of the theory of descent may be possible at all. Whenever
the theory that, in spite of their diversities, the organisms are related
by blood, is to be really useful for explanation, it must necessarily be
assumed in every case that the steps of change, which have led the
specific form A to become the specific form B, have been such as
only to change in part that original form A. That is to say: the
similarities between A and B must never have become
overshadowed by their diversities.
Only on this assumption, which indeed is a newly formed additional
subsidiary hypothesis, joined to the original hypothesis of descent in
general—a hypothesis regarding the very nature of transformism—
only on this almost hidden assumption is it possible to speak of any
sort of “explanation” which might be offered by the theory of
transformism to the facts of geography, geology, and biological
systematics. Later on we shall study more deeply the logical nature
of this “explanation”; at present it must be enough to understand
this term in its quasi-popular meaning.
What is explained by the hypothesis of descent—including the
additional hypothesis, that there always is a prevalence of the
similarities during transformism—is the fact that in palaeontology, in
the groups of island and continent faunae and florae taken as a
whole, as well as in the single categories of the system, the
similarities exceed the diversities. The similarities now are
“explained”; that is to say, they are understood as resting on but one
principle: the similarities are understood as being due to
inheritance; 144 and now we have but one problem instead of an
indefinite number. For this reason Wigand granted that the theory of
descent affords what he calls a numerical reduction of problems.
Understanding then what is explained by the theory of descent with
its necessary appendix, we also understand at once what is not
elucidated by it: the diversities of the organism remain as
unintelligible as they always were, even if we know that inheritance
is responsible for what is similar or equal. Now there can be no
doubt that the diversities are the more important point in
systematics; if there were only similarities there would be no
problem of systematics, for there would be no system. Let us be
glad that there are similarities in the diversities, and that these
similarities have been explained in some way; but let us never forget
what is still awaiting its explanation. Unfortunately it has been
forgotten far too often.

the small value of pure phylogeny

And so we are led to the negative side of the theory of

transformism, after having discussed its positive half. The theory of
descent as such, without a real knowledge of the factors which are
concerned in transformism, or of the law of transformism, in other
terms, leaves the problem of systematics practically where it was,
and adds really nothing to its solution. That may seem very
deplorable, but it is true.
Imagine so-called historical geology, without any knowledge of the
physical and chemical factors which are concerned in it: what would
you have except a series of facts absolutely unintelligible to you? Or
suppose that some one stated the cosmogenetic theory of Kant and
Laplace without there being any science of mechanics: what would
the theory mean to you? Or suppose that the whole history of
mankind was revealed to you, but that you had absolutely no
knowledge of psychology: what would you have but facts and facts
and facts again, with not a morsel of real explanation?
But such is the condition in which so-called phylogeny stands. If it is
based only on the pure theory of transformism, there is nothing
explained at all. It was for this reason that the philosopher Liebmann
complained of phylogeny that it furnishes nothing but a “gallery of
ancestors.” And this gallery of ancestors set up in phylogeny is not
even certain; on the contrary, it is absolutely uncertain, and very far
from being a fact. For there is no sound and rational principle
underlying phylogeny; there is mere fantastic speculation. How could
it be otherwise where all is based upon suppositions which
themselves have no leading principle at present? I should not like to
be misunderstood in my polemics against phylogeny. I fully grant
you that it may be possible in a few cases to find out the
phylogenetic history of smaller groups with some probability, if there
is some palaeontological evidence in support of pure comparative
anatomy; and I also do not hesitate to allow that such a statement
would be of a certain value with regard to a future discovery of the
“laws” of descent, especially if taken together with the few facts
known about mutations. But it is quite another thing with phylogeny
on the larger scale. Far more eloquent than any amount of polemics
is the fact that vertebrates, for instance, have already been “proved”
to be descended from, firstly, the amphioxus; secondly, the annelids;
thirdly, the Sagitta type of worms; fourthly, from spiders; fifthly, from
Limulus, a group of crayfishes; and sixthly, from echinoderm larvae.
That is the extent of my acquaintance with the literature, with which
I do not pretend to be specially familiar. Emil du Bois-Reymond said
once that phylogeny of this sort is of about as much scientific value
as are the pedigrees of the heroes of Homer, and I think we may
fully endorse his opinion on this point.

history and systematics

A few words should be devoted to the relations between history and

systematics in biology. Is there no contradiction between historical
development and a true and rational system which, we conceded,
might exist some day in biological sciences, even though it does not
at present? By no means. A totality of diversities is regarded from
quite different points of view if taken as the material of a system,
and if considered as realised in time. We have said that chemistry
has come very near to proper rational systematics, at least in some
of its special fields; but the compounds it deals with at the same
time may be said to have originated historically also, though not, of
course, by a process of propagation. It is evident at once that the
geological conditions of very early times prohibited the existence of
certain chemical compounds, both organic and inorganic, which are
known at present. None the less these compounds occupy their
proper place in the system. And there may be many substances
theoretically known to chemical systematics which have never yet
been produced, on account of the impossibility of arranging for their
proper conditions of appearance, and nevertheless they must be said
to “exist.” “Existence,” as understood in systematics, is independent
of special space and of special time, as is the existence of the laws
of nature: we may speak of a Platonic kind of existence here. Of
course it does not contradict this sort of ideal existence if reality
proper is added to it.
Thus the problem of systematics remains, no matter whether the
theory of descent be right or wrong. There always remains the
question about the totality of diversities in life: whether it may be
understood by a general principle, and of what kind that principle
would be. As, in fact, it is most probably by history, by descent, that
organic systematics is brought about, it of course most probably will
happen some day that the analysis of the causal factors concerned
in the history will serve to discover the principle of systematics also.
Let us now glance at the different kinds of hypotheses which have
been established in order to explain how the descent of the
organisms might have been possible. We have seen that the theory
of transformism alone is not worth very much as a whole, unless at
least a hypothetical picture can be formed of the nature of the
transforming factors: it is by some such reasoning that almost every
author who has defended the theory of descent in its universality
tries to account for the manner in which organisms have acquired
their present diversities.
 2. The Principles of Darwinism

There is no need in our times and particularly in this country, to

explain in a full manner the theory known under the name of
Darwinism. All of you know this theory, at least in its outlines, and so
we may enter at once upon its analytic discussion. A few words only
I beg you to allow me as to the name of “Darwinism” itself. Strange
to say, Darwinism, and the opinion of Charles Darwin about the
descent of organisms, are two different things. Darwin, the very type
of a man devoted to science alone and not to personal interests,—
Darwin was anything but dogmatic, and yet Darwinism is dogmatism
in one of its purest forms. Darwin, for instance, gave the greatest
latitude to the nature of the variations which form the battleground
of the struggle for existence and natural selection; and he made
great allowances for other causal combinations also, which may
come into account besides the indirect factors of transformism. He
was Lamarckian to a very far-reaching extent. And he had no
definite opinion about the origin and the most intimate nature of life
in general. These may seem to be defects but really are advantages
of his theory. He left open the question which he could not answer,
and, in fact, he may be said to be a good illustration of what Lessing
says, that it is not the possession of truth but the searching after it,
that gives happiness to man. It was but an outcome of this mental
condition that Darwin’s polemics never left the path of true scientific
discussions, that he never in all his life abused any one who found
reason to combat his hypotheses, and that he never turned a logical
problem into a question of morality.
How different is this from what many of Darwin’s followers have
made out of his doctrines, especially in Germany; how far is
“Darwinism” removed from Darwin’s own teaching and character!
It is to Darwinism of the dogmatic kind, however, that our next
discussions are to relate, for, thanks to its dogmatism, it has the
advantage of allowing the very sharp formulation of a few causal
factors, which a priori might be thought to be concerned in organic
transformism, though we are bound to say that a really searching
analysis of these factors ought to have led to their rejection from the
very beginning.
The logical structure of dogmatic Darwinism reveals two different
parts, which have nothing at all to do with one another.

natural selection

We shall first study that part of it which is known under the title of
natural selection, irrespective of the nature of the causes of primary
differences, or, in other words, the nature of variability. This part
may be said to belong to Darwin’s personal teachings and not only
to “Darwinism.” The offspring of a certain number of adults show
differences compared with each other; there are more individuals in
the offspring than can grow up under the given conditions, therefore
there will be a struggle for existence amongst them, which only the
fittest will survive; these survivors may be said to have been
“selected” by natural means.
It must be certain from the very beginning of analysis that natural
selection, as defined here, can only eliminate what cannot survive,
what cannot stand the environment in the broadest sense, but that
natural selection never is able to create diversities. It always acts
negatively only, never positively. And therefore it can “explain”—if
you will allow me to make use of this ambiguous word—it can
“explain” only why certain types of organic specifications, imaginable
a priori, do not actually exist, but it never explains at all the
existence of the specifications of animal and vegetable forms that
are actually found. In speaking of an “explanation” of the origin of
the living specific forms by natural selection one therefore confuses
the sufficient reason for the non-existence of what there is not, with
the sufficient reason for the existence of what there is. To say that a
man has explained some organic character by natural selection is, in
the words of Nägeli, the same as if some one who is asked the
question, “Why is this tree covered with these leaves,” were to
answer “Because the gardener did not cut them away.” Of course
that would explain why there are no more leaves than those actually
there, but it never would account for the existence and nature of the
existing leaves as such. Or do we understand in the least why there
are white bears in the Polar Regions if we are told that bears of
other colours could not survive?
In denying any real explanatory value to the concept of natural
selection I am far from denying the action of natural selection. On
the contrary, natural selection, to some degree, is self-evident; at
least as far as it simply states that what is incompatible with
permanent existence cannot exist permanently, it being granted that
the originating of organic individuals is not in itself a guarantee of
permanency. Chemical compounds, indeed, which decompose very
rapidly under the conditions existing at the time when they
originated may also be said to have been eliminated by “natural
selection.” It is another question, of course, whether in fact all
eliminations among organic diversities are exclusively due to the
action of natural selection in the proper Darwinian sense. It has
been pointed out already by several critics of Darwinism and most
clearly by Gustav Wolff, that there are many cases in which an
advantage with regard to situation will greatly outweigh any
advantage in organisation or physiology. In a railway accident, for
instance, the passengers that survive are not those who have the
strongest bones, but those who occupied the best seats; and the
eliminating effect of epidemics is determined at least as much by
localities, e.g. special houses or special streets, as by the degree of
immunity. But, certainly, natural selection is a causa vera in many
other cases.
We now may sum up our discussion of the first half of Darwinism.
Natural selection is a negative, an eliminating factor in transformism;
its action is self-evident to a very large degree, for it simply states
that things do not exist if their continuance under the given
conditions is impossible. To consider natural selection as a positive
factor in descent would be to confound the sufficient reason for the
non-existence of what is not, with the sufficient reason of what is.
Natural selection has a certain important logical bearing on
systematics, as a science of the future, which has scarcely ever been
alluded to. Systematics of course has to deal with the totality of the
possible, not only of the actual diversities; it therefore must
remember that more forms may be possible than are actual, the
word “possible” having reference in this connection to originating,
not to surviving. Moreover, systematics is concerned not only with
what has been eliminated by selection, but also with all that might
have originated from the eliminated types. By such reasoning natural
selection gains a very important aspect—but a logical aspect only.

fluctuating variation the alleged cause of organic diversity

The second doctrine of dogmatic Darwinism states that all the given
diversities among the organisms that natural selection has to work
upon are offered to natural selection by so-called fluctuating
variation; that is, by variation as studied by means of statistics. This
sort of variation, indeed, is maintained to be indefinite in direction
and amount, at least by the most conservative Darwinians; it has
occasionally been called a real differential; in any case it is looked
upon as being throughout contingent with regard to some unity or
totality; which, of course, is not to mean that it has not had a
sufficient reason for occurring.
It could hardly be said to be beyond the realm of possibility that
such differences among organic species as only relate to degree or
quantity and perhaps to numerical conditions also, might have been
“selected” out of given contingent variations, if but one postulate
could be regarded as fulfilled. This postulate may appropriately be
stated as the fixation of new averages of variation by inheritance.
Let the average value of a variation, with regard to a given property
of a given species be n and let the value n + m—m being variable—
which is represented in fewer individuals of course than is n, be such
as to offer advantages in the struggle for existence; then the
individuals marked by n + m will have the greater chance of
surviving. Our postulate now states that, in order that a permanent
increase of the average value of the variation in question may be
reached, n + m in any of its variable forms must be able to become
the average value of the second generation, as n was the average
value of the first. Out of the second generation again it would be the
few individuals marked by n + m + o, which would be selected; n +
m + o would be the new average; afterwards n + m + o + p would
be selected, would become the new average, and so on. A black
variety for instance might be selected by such a series of processes
out of a grey-coloured one without difficulty.
But our postulate is not beyond all doubt: certain experiments, at
least, which have been carried out about the summation of
variations of the true fluctuating type by any kind of selection seem
to show that there may be a real progress for a few generations, but
that this progress is always followed by a reversion. Of course our
experience is by no means complete on this subject, and, indeed, it
may be shown in the future that positive transforming effects of
fluctuating variability, in connection with selective principles, are
possible in the case of new quantitative differences (in the widest
sense), but we are not entitled to say so at present.
And this is the only condition on which we can give credit to the
second doctrine of dogmatic Darwinism. Its second principle, indeed,
proves to be absolutely inadequate to explain the origin of any other
kind of specific properties whatever.
I cannot enter here into the whole subject of Darwinian criticism. 145
Our aims are of a positive character, they desiderate construction
and only use destruction where it is not to be avoided. So I shall
only mention that dogmatic Darwinism has been found to be unable
to explain every kind of mutual adaptations, e.g. those existing
between plants and insects; that it can never account for the origin
of those properties that are indifferent to the life of their bearer,
being mere features of organisation as an arrangement of parts; that
it fails in the face of all portions of organisation which are composed
of many different parts—like the eye—and nevertheless are
functional units in any passive or active way; and that, last not least,
it has been found to be quite inadequate to explain the first origin of
all newly formed constituents of organisation even if they are not
indifferent: for how could any rudiment of an organ, which is not
functioning at all, not only be useful to its bearer, but be useful in
such a degree as to decide about life or death?
It is only for one special feature that I should like to show, by a
more full analysis, that dogmatic Darwinism does not satisfy the
requirements of the case. The special strength of Darwinism is said
to lie in its explaining everything that is useful in and for organisms;
the competitive factor it introduces does indeed seem to secure at
least a relative sort of adaptedness between the organism and its
needs. But in spite of that, we shall now see that Darwinism fails
absolutely to explain those most intimate organic phenomena which
may be said to be the most useful of all.
Darwinism in its dogmatic form is not able to explain the origin of
any sort of organic restitution; it is altogether impossible to account
for the restitutive power of organisms by the simple means of
fluctuating variation and natural selection in the struggle for
existence. Here we have the logical experimentum crucis of
Darwinism.
Let us try to study in the Darwinian style the origin of the
regenerative faculty, as shown in the restitution of the leg of a newt.
All individuals of a given species of the newt, say Triton taeniatus,
are endowed with this faculty; all of them therefore must have
originated from ancestors which acquired it at some time or other.
But this necessary supposition implies that all of these ancestors
must have lost their legs in some way, and not only one, but all four
of them, as they could not have acquired the restitutive faculty
otherwise. We are thus met at the very beginning of our argument
by what must be called a real absurdity, which is hardly lessened by
the assumption that regeneration was acquired not by all four legs
together, but by one after the other. But it is absolutely inevitable to
assume that all the ancestors of our Triton must have lost one leg,
or more correctly, that only those of them survived which had lost
one! Otherwise not all newts at the present day could possess the
faculty of regeneration! But a second absurdity follows the first one;
out of the ancestors of our newt, which survived the others by
reason of having lost one of their legs, there were selected only
those which showed at least a very small amount of healing of their
wound. It must be granted that such a step in the process of
selection, taken by itself, would not at all seem to be impossible;
since healing of wounds protects the animals against infection. But
the process continues. In every succeeding stage of it there must
have survived only those individuals which formed just a little more
of granulative tissue than did the rest: though neither they
themselves nor the rest could use the leg, which indeed was not
present! That is the second absurdity we meet in our attempt at a
Darwinian explanation of the faculty of regeneration; but I believe
the first one alone was sufficient.
If we were to study the “selection” of the faculty of one of the
isolated blastomeres of the egg of the sea-urchin to form a whole
larva only of smaller size, the absurdities would increase. At the very
beginning we should encounter the absurdity, that of all the
individuals there survived only those which were not whole but half;
for all sea-urchins are capable of the ontogenetical restitution in
question, all of their ancestors therefore must have acquired it, and
they could do that only if they became halved at first by some
accident during early embryology. But we shall not insist any further
on this instance, for it would not be fair to turn into ridicule a theory
which bears the name of a man who is not at all responsible for its
dogmatic form. Indeed, we are speaking against Darwinism of the
most dogmatic form only, not against Darwin himself. He never
analysed the phenomena of regeneration or of embryonic restitution
—they lay in a field very unfamiliar to him and to his time. I venture
to say that if he had taken them into consideration, he would have
agreed with us in stating that his theory was not at all able to cover
them; for he was prepared to make great concessions, to
Lamarckism for instance, in other branches of biology, and he did
not pretend, to know what life itself is.
Darwin was not a decided materialist, though materialism has made
great capital out of his doctrines, especially in Germany. His book, as
is well known, is entitled “The Origin of Species,” that is of organic
diversities, and he himself possibly might have regarded all
restitution as belonging to the original properties of life, anterior to
the originating of diversities. Personally he might possibly be called
even a vitalist. Thus dogmatic “Darwinism” in fact is driven into all
the absurdities mentioned above, whilst the “doctrine of Darwin” can
only be said to be wrong on account of its failing to explain mutual
adaptation, the origin of new organs, and some other features in
organic diversities; the original properties of life were left
unexplained by it intentionally.

darwinism fails all along the line

The result of our discussion then must be this: selection has proved
to be a negative factor only, and fluctuating variation as the only
way in which new properties of the organisms might have arisen has
proved to fail in the most marked manner, except perhaps for a few
merely quantitative instances. Such a result betokens the complete
collapse of dogmatic Darwinism as a general theory of descent: the
most typical features of all organisms remain as unexplained as ever.
What then shall we put in the place of pure Darwinism? Let us first
try a method of explanation which was also adopted occasionally by
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