amount a future buyer might pay, then its purchase is speculation.” – Seth Klarman
“To a value investor, investments come in three varieties: undervalued at one price, fairly valued at another price, and overvalued at still some higher price. The goal is to buy the first, avoid the second, and sell the third.” – Seth Klarman[106]
“Value investors will not invest in businesses that they cannot readily understand or ones they find excessively risky. Hence few value investors will own the shares of technology companies. Many also shun commercial banks, which they consider to have unanalyzable assets, as well as property and casualty insurance companies, which have both unanalyzable assets and liabilities.” – Seth Klarman, Margin of Safety
“Interestingly, we have beaten the market quite handsomely over this time frame, although beating the market has never been our objective. Rather, we have consistently tried not to lose money and, in doing so, have not only protected on the downside but also outperformed on the upside.” – Seth Klarman
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” -Seth Klarman
“There is no timing element. You can never how big a bargain you will get offered tomorrow. Somebody comes along and wants to sell you a dollar for 50 cents, you can never know if they’ll want to sell it for 40 cents tomorrow. So you need to buy it and leave a little room to buy more, and maybe someday spend your last dollar to buy the bargain, and maybe it goes down before it goes up. So you are always checking and rechecking your work. The critical thing, the thing that would cause you to lose your confidence when you’re doing that, would be if you realized that a dollar wasn’t a dollar. You thought it was worth a dollar, but Greece failed, or the euro fell or collapsed, and all of sudden your dollar is only 30 cents and now what you thought was a bargain is overvalued. So that’s the dilemma. It’s not so much figuring out what it’s worth today, it’s making sure it will still be worth that same thing, or approximately that same amount, tomorrow.” – Seth Klarman[107]
“You need to balance arrogance and humility. When you buy anything, it’s an arrogant act. You’re saying, the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I’m going to stand here and buy it. I’m going to pay an eighth more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say, ‘But I might be wrong.’ And you have to do that on everything.” – Seth Klarman[108]
Seth Klarman[109]:
- “The best protection against risk is knowing what you are doing.”
- “Do not suffer interim losses, relish and appreciate them.”
- “Be indifferent if you lose your short term clients, remember they are your own worst enemy.”
- “Be focused on process and not outcome.”
- “One of the biggest challenges in investing is that the opportunity set available today is not the complete opportunity set that should be considered. Limiting your opportunity set to the one immediately at hand would be like limiting your spouse to the students you met in high school.”
- “Investors frequently benefit from making decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. The time other investors spend delving into the last unanswered detail may cost them the chance to buy into situations at prices so low they offer a margin of safety despite the incomplete information.”
- “Right at the core, the mainstream has it backwards. Warren Buffett often quips that the first rule of investing is to not lose money, and the second rule is to not forget the first rule. Yet few investors approach the world with such a strict standard of risk avoidance.”
- “Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”
- “The near absence of bargains works as a reverse indicator for us. When we find there is little worth buying, there is probably much worth selling.”
- “When you buy bargains and they become better bargains, it is easy to start to question yourself, which can impair your judgement. Real or imagined concerns about client redemptions, employee defections can greatly influence behavior away from rational.”
- “Pressure to produce over the short term – a gun to the head of everyone – encourages excessive risk taking which manifests itself in several ways – fully invested posture at all times, the use of leverage, and a market centric orientation that makes it difficult to stand apart from the crowd and take a long term perspective.”
- “It sounds crazy but in times of turmoil in the market, I’ve felt serenity in knowing that if I checked and rechecked my work, one plus one still equals two regardless of where the stock trades after I bought it.”
- “We are not so brazen as to believe that we can perfectly calibrate valuation; determining risk and return for any investment remains an art not an exact science.”
“Courage is a function of process.” – Seth Klarman[110]
“Depressions aren’t good but the depression mentality is good.” – Seth Klarman[111]
“We buy expecting to hold a bond to maturity and a stock forever.” – Seth Klarman[112]
“There’s no such thing as a value company. Price is all that matters. At some price, an asset is a buy, at another it’s a hold, and at another it’s a sell.” – Seth Klarman[113]
Seth Klarman from Margin of Safety
1. “The disciplined pursuit of bargains makes value investing very much a risk-averse approach. The greatest challenge for value investors is maintaining the required discipline. Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking. A value investor may experience poor, even horrendous, performance compared with that of other investors or the market as a whole during prolonged periods of market overvaluation. Yet over the long run the value approach works so successfully that few, if any, advocates of the philosophy ever abandon it.”
2. “To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don’t when they don’t.
Investors should pay attention not only to whether but also to why current holdings are undervalued. It is critical to know why you have made an investment and to sell when the reason for owning it no longer applies. Look for investments with catalysts that may assist directly in the realization of underlying value. Give reference to companies having good managements with a personal financial stake in the business. Finally, diversify your holdings and hedge when it is financially attractive to do so.”
(This perfectly sums up the theory of value traps. If something looks cheap but you can’t figure out why it’s cheap, odds are it’s you, not the market, that’s missing something.)
3. “The future is unpredictable. No one knows whether the economy will shrink or grow (or how fast), what the rate of inflation will be, and whether interest rates and share prices will rise or fall. Investors intent on avoiding loss consequently must position themselves to survey and even prosper under any circumstances. Bad luck can befall you; mistakes happen. The river may overflow its banks only once or twice in a century, but you still buy flood
