Seth Klarman interviewed by Charlie Rose at the Facing History and Ourselves New York Benefit Dinner. This event was at Chelsea Piers in New York City on November 1, 2011.

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let me turn to why is it that margin of safety
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you can't get it for example 2012 eBay I mean I've never I knew that was a fact
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but I didn't I still don't understand why you can get a charlie is also a new
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one
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well I know I know what I mean is it is it true so margin of safety
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the idea for margin of safety came with a business school classmate called me up
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and said he said Virginia Smith here working at Harper Collins Harper and row
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at the time anything and you know they've asked me to talk flying into
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aspiring authors and would you like to write a book on investing and I said you
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think about that people have said that you know they like my letters to clients
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maybe you should do it so I took the chips and wrote the book they didn't do
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a very good job advertised it
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editors kept getting fired because of me and by the third editor we we finished
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the book and then it sold about 5,000 copies and died out so in my I did
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nothing for a while it was dead with richard's prediction was right
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temporarily and it died and then it started to get a cult following and I
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thought well maybe I'll bring it back someday raise money for charity and
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that's the truth about the cell wall street edition for $500 thousand bucks
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and and raise a million or two for charity and not the time or energy to
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actually do that so I think we could delegate this rather quickly
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I'll have to get on that what was it about margin of safety because in a
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sense it's a term that you believe in and you know it according to what I read
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a book that's on line but thats desk
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you both are great when you were disciples but you're great
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followers of the teachings of Ben Graham think it's probably on warrants bookshop
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under a pile of papers I don't think were next to read it anymore
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no I don't I don't really know I tried to write it to be accessible to the lay
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person or or the the professional entering the field and so I tried to use
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layman's layman's language and just make it accessible and it's certainly the
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terms borrowed from security analysis and it it's meant to be in some ways it
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intellectual successor to Intelligent Investor which was the more accessible
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of gramm's book so I think it's the other book in in that tradition but when
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you had called on media people can't get something they want to be very well
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maybe a lot of that I think they call that supply and demand suppose you wrote
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recently the preface to the new edition of security analysis at the right time
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suggested else what is it you want to say and why has it remain a furloughed
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star and secondly sort of this remarkable but I had you everybody knows
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I've probably done more conversational more about that than anybody alive and
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and there we talk about all the time and how you know his own been RAM experience
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in coming to Columbia and what it meant to him understand why this has been such
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a profound series of principles that have made you and investments who you
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are today first of all I wish I'd met Ben Graham I never was was fortunate to
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do that the I think warren ketchup captured the idea himself in his 1964
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article the super investors are Graham and Dodd still in it he talks about
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value investing is like an inoculation you either get it right away or you
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never get it and I think it's just true I actually think there's a gene for this
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stuff whether it's a convincing Jeter contrarian gene I think that everybody
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appreciates a bargain but when the market's going down and most people
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overreact and skit scared by stock is going down what am I gonna do so if
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you're buying a sweater and it goes on sale for $2 250 you get excited when you
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get to the store but if you have a stock worried about the sweater 400 maybe not
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so happy so I think it's for me it's natural but for a lot of people it's
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fighting human nature but it is true what it's what warren buffett said when
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you find out about it it's like being lit on this little secret and so if you
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can remember that stocks are pieces of paper that I read all the time that
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stocks are fractional interests of businesses it all makes sense if it's
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almost like it to slow the game down like to talk about baseball speeding up
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on you need to slow it down I can buy this thing for a huge fraction of what
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it's worth what am I worried about if it goes down a little bit what's the gift
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yet knowing what it's worth I think that the the analysis is actually the easy
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part of what I want to speak to business school students I tell them investing at
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the intersection of economics and psychology the economics the valuation
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of business is not that hard but psychology how much do you buy at this
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price to wait for a lower price what do you do when when it looks like the world
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might end
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those things are harder and knowing whether you stand there by more or
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something legitimate has gone wrong any to sell those are harder things and that
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he learned over with experience you learn by having the right make
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psychological makeup in the first place
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what's the right psychological makeup that you have patients would be one
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another that investors have to be patient discipline but what I what I
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really think is not to be greedy if you if your greeting you leverage you blow
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up almost every financial blow up his cause of leverage and then you need to
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balance arrogance in humility and I'll explain what I mean when you buy
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anything it's a very good you're saying the markets are gyrating and somebody
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wants to sell this to me and I know more than everybody else I'm gonna stand here
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and buy anything more than the next guy wants to pay and bio that's a very good
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and you do the humility to say but I might be wrong and you have to do that
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on everything but one are you different than wine in terms of how long has
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evolved and how you have involved you know I mean obviously I think Charlie
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Munger had some influence on warning in understanding 22 not just to look for
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the classic example the cigarette but you know what to look at things that
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were reasonable price with a belief that they could be that there still was a
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margin of safety first of all lot of my Charlie Munger's are out here in the
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audience while the people here that I bounce ideas off of and we should we
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share thoughts and have you involved in what we are an evolved from a different
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one above for three stages he went from buying cigar butts and getting less
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scrupulous 432 buying great businesses that really cheap prices to buying and
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holding Greek businesses at so so prices and maybe even this new area of buying
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securities from crappy businesses at better than market prices like 430
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I'm still in phase one we're still buying we're still buying cigar but
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there's a good business there and buying them and it's a lot of fun which you're
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proud of you know I feel like
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I feel like I have stunted growth Charlie you know you know what I think
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that it's how I think before the better investor than me because he has a better
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eye toward ports what makes a great business and when I find a great
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business i'm happy to buy it and hold it
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most businesses don't look so great to me but he also doesn't mean he's not
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really focused on the gyrations of the stock everyday me neither I don't have a
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Bloomberg Government US I don't hear you don't have a Bloomberg on your desk
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because you might make some tough but what's on your desk phone giant piles of
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paper that are at risk of falling on me at any moment and I have a computer
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yeah so so tell us about your desktop water bottle to me but you but you sit
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at a trading this when you're not meeting either clients or are people
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that gonna give you information that might be relevant to what you decisions
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you have to make you sitting at a training thinking big bucks
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what are you really are you it's not so much because you were reacting to the
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volatility of every market that you invested in because if you are valujet
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best of my assumption would that that you know looking to trade for a moment
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we're not traders that there's a wonderful story first broke out at
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twenty brown tells the story of how they were interviewing somebody to come and
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go to come during their firm and after the interview he's walking the fellow to
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the elevator and the fellow says you know it's amazing here twenty brown most
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firms you can tell from the atmosphere in the place where the market's up for
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the market's down a Tweedy Browne capital markets open
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I think it's like that our firm we're making medium to long-term investments
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here are three to five years or longer and so we're not really that into the
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only reason we care about the gyrations is so we can buy something even cheaper
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do you like bad times then
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you know we benefit from volatility and distressed debt and everything else we
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provide liquidity when people want to sell things in a hurry presumably you
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know what's a transaction between consulting consenting adults when
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somebody owns a bomb that was triple-a in there was trouble see they want to
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sell they want liquidity
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where we sort of our our our rhythm is opposite most of the markets where them
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by things when the market's down we sell things when the markets do I root for
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bedtimes course not I love our country that we bad time but it is it
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frustrating when the market goes straight up and up and opposition from
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from 82 days 87
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it was frustrating and I worry because just at those times it's one of the
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little guy gets sucked in the little guy trying to resist double when the
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market's going higher and higher a little guy gets pulled in by stories
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from their neighbor stories for the cocktail party and they hear about how
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much money people are making the market church early
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you probably know this that the return from all mutual funds in the nineteen
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nineties was 600 basis points higher than the average return from investors
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in those funds during the same period and that's because they get into the run
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coming out of the wrong time so that's painful to me to what is your lesson
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that's why I wrote the book to try to educate the average person but only like
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the few hundred of them
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I hope I'm gonna get a copy of this book can you talk to us about your philosophy
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of timing if there is there no philosophy of timing because you looking
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at value and they do understand value and and essentially the big decision for
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you is that by decision more than the cell decision finds it easier so it's
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hard for them to get out there's no timing element you can never tell how
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big a bargain you might get offered tomorrow somebody comes along once I saw
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your dollar 50 cents you can never know if there was a salty or $0.40 tomorrow
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we need to buy it and leave little room to buy more and maybe someday spend your
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last dollar and by the by the bargain and maybe it goes down before it goes up
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so you always are checking and rechecking your work
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the critical thing that the thing that would cause you to lose your confidence
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when you're doing that will be of you realize that dollar was an adulterer you
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thought it was worth a dollar but Greece failed or the euro fell or collapsed and
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all of a sudden $4.30 and I we thought was a bargain is overvalued so that's
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the dilemma
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it's not so much figuring out what it's worth today it's making sure it'll still
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be worth that same thing or possibly that same up tomorrow what's the biggest
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mistake you for me
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oh my god I prepared so hard you know I've been very fortunate if you talk
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about it work I've never really screwed up a lot we went through tumultuous
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times we stuck to our discipline we've made mistakes they often are where we
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underestimated the leverage in the situation we didn't think it was that
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big a deal
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leverage more leverage can magnify your returns but also magnifies your losses
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getting better with that people we've had investments where these are
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interesting point getting in bed with bad people
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yeah how does that happen and how do you avoid that so a lot of stocks are cheap
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for a reason and often about you investor will figure out the reason
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because everybody else has gotten sick of a management raping and pillaging the
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company over paying themselves deploying capital poorly taking advantage of the
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shareholders with with free stock or options awards or hiring their
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brother-in-law so so there are stocks that have been perennially undervalued
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because the run by somebody who fits that profile another's value investor
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will come along and say wow that looks awfully cheap and grandma died didn't
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really likes the quality of management as high as they might of and so good
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management at value could manage was somewhat celebrities they can pull the
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buyback stock was undervalued they can use the stock as currency when it's
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overvalued bad management's will think only about themselves first and so those
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early lessons but profound lessons that I learned to learn them well