The Collected Wisdom Of Seth Klarman by Steven N. Friedman, CFA, Santangel’s Review

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Seth Klarman On Value Investing

“We define value investing as buying dollars for 50 cents.”

“There is nothing esoteric about value investing. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance that engulfs most market participants.”

“Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment. Price, of course, is determined in the financial markets, varying with the vicissitudes of supply and demand for a given security.”

“I’ve actually never seen people be successful over a long period of time without being value investors. To me, it’s sort of like the E = MC2 of money and investing.”

“Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.”

“When we look at value, we tend to look at it on a very conservative basis—not making optimistic forecasts many years into the future, not assuming growth, not assuming favorable cost savings, not assuming anything like that. Rather looking at what is there right now, looking backwards and saying, is that the kind of thing the company has been able to do repeatedly? Or is this a uniquely good year, and is it unlikely to be repeated? We tend to look at hard assets as much as possible.”

“Unlike speculators, who think of securities as pieces of paper that you trade, value investors evaluate securities as fractional ownership of, or debt claims on, real businesses.”

“Value investing requires deep reservoirs of patience and discipline.”

“ As the father of value investing, Benjamin Graham, advised in 1934, smart investors look to the market not as a guide for what to do, but as a creator of opportunity.”

“ Value investing is, in effect, predicated on the proposition that the efficient-market hypothesis is frequently wrong.”

“As value investors, our business is to buy bargains that financial market theory says do not exist.”

“ Buying such bargains confers on the investor a margin of safety, room for imprecision, error, bad luck, or the vicissitudes of economic and business forces.”

“To value investors, the concept of indexing is at best silly and at worst quite hazardous.”

“ Price is the ultimate thing that matters, [although we] worry about risks before focusing on returns.”

“ Every security or asset is a ‘buy’ at one price, a ‘hold’ at a higher price and a ‘sell’ at some still higher price.”

“ Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands.”

“You have to be able to stand things going bad before they go good.”


 

Seth Klarman On Long-Term Orientation

“Beyond [an] investor’s speculative impulses, technological innovation over the years has compressed investor time horizons. Technology enables a money manager’s performance to be measured not only annually, quarterly, or monthly—but of course daily, hourly and constantly.”

“The performance pressures most investors feel drives them into an absurdly short-term orientation.”

“ We don’t try to be anyone’s best performing manager in a given year because such an attempt would almost certainly fail. It would distract us from our focus on risk-aversion and the pursuit of excellent long-term results, while shifting our attention toward quick gains, short-term trades and market momentum.”

“With the exception of an arbitrage or a necessarily short-term investment, we enter every trade with the idea that we are going to hold to maturity in the case of a bond and for a really long time, potentially forever, in the case of a stock.”

“Value investing is a long-term orientated investment approach—never to be confused with short-term speculation—that requires considered patience, discipline and rigor.”

“We have no interest in running companies. We think that we do one thing well, and that’s enough. We’re basically long-term investment artists.”

“We are always long-term oriented. We never attempt to gauge near-term market movements; we have no edge there. We strive to make long-term investments that have truly compelling risk-reward characteristics. We are never afraid to stand apart from the crowd. We stick to our game plan, and focus on areas where we are skilled and experienced. We are resolute in resisting the short-term performance pressures and herd behaviors that plague the investment business.”

“We’ve maintained a commonsensical, albeit increasingly unconventional, approach to investing in that we strive to maintain a long-term perspective in a world of short-term actors, and we patiently hold cash in the absence of compelling opportunity, refusing to pull the trigger until the target is clear and compelling.”

The Collected Wisdom Of Seth Klarman
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