Value Investing

Seth Klarman – It Is Crucial To Have, And Maintain, A Sound Process

Here’s a great article at the The Outstanding Investor Digest that includes comments and answers from Seth Klarman at a symposium entitled “Celebrating 75 Years of Security Analysis”. During the symposium Klarman provided a number of valuable investing insights and honored the legacy of Graham and Dodd saying, “Graham and Dodd teach us not only about investing, but also thinking about investing”.

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Seth Klarman

Here’s an excerpt from that article:

Sometimes, being too early is the same as being wrong….

Seth Klarman: For years, when someone asked me what my biggest fear was as an investor in managing my portfolio, my answer was that it was buying too soon on the way down from often very overvalued levels. I knew a market collapse was possible. And sometimes, I imagined that I was back in 1930 after the market had peaked the year before, and then dropped 30%. Surely, there would’ve been some tempting bargains then. And just as surely, you’d have been crushed by the market’s subsequent plunge over the next three years — down to below 20% of 1929 levels.

A fall from 70 to 20, and from 100 to 20, would feel almost exactly the same by the time you hit 20. Sometimes being too early becomes indistinguishable from being wrong.

After a 30% drop, who knows how much further it might go?

Klarman: Of course, getting in too soon as the market falls involves great risk for all investors, including value investors. Certainly, when a few securities start to get cheap even as the bull market continues, a value-starved investor will step up and buy them. Soon enough, many of these prove to be no bargain at all, as the flaws that caused them to be rejected by the bulls become more glaringly apparent when the world gets worse. After a stock market has dropped 30%, there’s no way to tell how much further it might have to go. It’d be silly to expect every bear market to turn into the Great Depression.

But it would be equally wrong to expect that a fall from overvalued to more fairly valued couldn’t badly overshoot on the downside.

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You can find the original article by The Outstanding Investor Digest here.

Article by Johnny Hopkins, The Acquirer's Multiple