Legendary value investor Seth Klarman sums of the twelve most important lessons that he learned from Warren Buffett

Seth Klarman just put together a list of the twelve most important lessons that he’s learned from watching Warren Buffett over the years for the Financial Times, and considering how rarely he writes anything for the public you really owe it to yourself to read through the entire article, but we’ll pull out two highlights that really cut to the core of what value investing is about.

Seth Klarman On 12 Lessons Learned From Warren Buffett

‘Buy bargains’: Seth Klarman

“Value investing works. Buy bargains,” writes Klarman.

That sounds obvious, but it really is amazing how many people will argue that you only beat the market by being lucky. Value investors are by no means monolithic, even Buffett and his mentor Benjamin Graham approached investing differently throughout their career. The common feature is a belief that prices change more often and more drastically than value, and the attentive, patient investor will eventually find bargains.

Having a value-oriented point of view does mean dropping a lot of the ideas that mainstream finance takes for granted: volatility isn’t a measure of risk (it can’t be, since price isn’t a measure of value tick-by-tick), diversification doesn’t reduce your risk, and the key to getting ahead is steady compounding not beating the market this year.

Klarman not afraid to hold cash

Seth Klarman also reiterates one of the more striking, and difficult, parts of his investment philosophy, telling us that “Holding cash in the absence of opportunity makes sense.”

That’s difficult for most funds and investment managers because they have to justify their fees, and clients will start withdrawing money as soon as performance falls behind their benchmark. Klarman has held as much as half of his portfolio in cash when he doesn’t see anything he wants to invest in, which is a big part of why Baupost does better during downturns than most investment funds. In those cases, clients are paying for the sound judgment that it’s better to protect their principal than reach for yield.

It also means that when markets bottom out, Klarman is able to take his pick of cheap securities while everyone else is trying to meet obligations.

If you’re looking for more detail on how Seth Klarman built a $30 billion fund with just under 20% annualized returns since 1982 you can look for his book Margin of Safety, but it’s been out of print for ages and used copies usually go for more than a grand online. You can also check out ValueWalk’s ten-part series for a detailed look at this master value investor.

See the full article from the FT here