Seth Klarman Says This is the Single Biggest Investing Advantage You Can Have
Have you ever felt like you are at a steep disadvantage when investing in the stock market? Mutual funds and hedge funds have multi-million dollar research budgets, high frequency trading, and much better connections (I’m sure they never use their connections to gain an edge… right?). What is an individual investor to do? Seth Klarman has the answer.
Seth Klarman’s Wisdom
Seth Klarman is a self-made hedge fund billionaire. He runs the Baupost Group; the world’s 11th largest hedge fund by assets under management. Seth Klarman’s investing knowledge is highly sought-after. A new copy of his 1991 book, Margin of Safety sells for over $3,000. Potential investors not looking to spend thousands on a book (and that should be everyone), can find a free Word document of the book by being handy with google.
Has including ESG become a necessity for investors?
ESG (environmental, social, governance) has become a hot topic in recent years, especially lately with the debate over whether pension funds should be able to factor in ESG when choosing investments. At Morningstar's recent conference, the firm argued that ESG has become a requirement for long-term investors. Q2 2020 hedge fund letters, conferences and more Read More
Seth Klarman looks for poorly understood or mispriced investments which he can buy for a fraction of their intrinsic value. Klarman has used his conservative style of value investing to average returns of around 20% a year; long-term numbers similar to investing greats Warren Buffett and Shelby Davis.
Klarman on Gaining an Investing Edge
Seth Klarman has earned his place among investing greats. He is very clear about how investors can gain an edge over Wall Street’s minute-to-minute obsession with stock prices:
“The single greatest edge an investor can have is a long-term orientation”
This is perhaps the most useful quote for individual investors. A long-term orientation frees you from the worries of day-to-day market fluctuations. I find Seth Klarman’s extremely important. In fact, it is the first quote used inThe 8 Rules of Dividend Investing (see rule 1).
With high frequency trading, brokerage fees, and slippage investors are wise to trade as little as possible. The lower your portfolio’s turnover, the lower your frictional investing costs will be. Morningstar found that the single best predictor of mutual fund success is a low expense ratio. The lower yourpersonal expense ratio, the better your odds of success. Reducing portfolio turnover has the biggest impact on individual investor expenses; the lower your turnover, the better off your investment account.
Warren Buffett on Long-Term Holding
Seth Klarman has been referred to as ‘his generation’s Warren Buffett’. The actual Warren Buffett has many excellent quotes about investing for the long run as well. Three of Warren Buffett’s quotes on long-term investing are below:
“Only buy something you’d be perfectly happy to hold if the market shut down for 10 years”
“Our favorite holding period is forever”
“If you aren’t willing to won a stock for 10 years, don’t even think about owning it for 10 minutes”
Both Seth Klarman and Warren Buffett are very clear that investors should invest in stocks for long periods of time. When two of the most well-respected and successful investors of the past several decades emphasize an investment idea so clearly and consistently, it is wise to take notice.
Why Long-Term Thinking Works
Markets are made up of institutional investors; the ‘big fish’, and individual investors; the ‘little fish’. Institutional investors are judged on quarterly performance. As a result, they are biased toward thinking about short-term investment opportunities.
Trying to beat institutional investors with far more resources and connections at their own game is foolish. Instead, change the game. For individual investors, performance should be gauged over years, not quarters. The lack of an institutional imperative driving individual investors towards short-term investments is the individual investor’s greatest advantage.
- 17 of Warren Buffett’s Best Quotes Analyzed on Sure Dividend
- Seth Klarman’s Portfolio on StockPickr
- Top 9 Dividend Aristocrats of 1989 on Sure Dividend
- Seth Klarman’s Margin of Safety: The Most Legendary Book In Personal Finance on The Conservative Income Investor