Seth Klarman – Value Investing Is Like The E=mc2 Of Money And Investing

One of the best resources for investors are the Santangel Investor Forum and The Santangel Roundtable. These invitation-only events offer unique investment ideas from some of the world’s top investors. Events were created by The Santangel Review which also provides some great commentary on leading investors.

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My favorite commentary is called, The Collected Wisdom of Seth Klarman, which provides a compilation of quotes from The Baupost Group founder. Included in the piece are Klarman’s 17 quotes related to the attractiveness of being a value investor and why few investors have the discipline or patience to be successful value investors.

Seth Klarman

Here’s an excerpt from that article:

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

2. “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.”

3. “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.”

4. “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.”

5. “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.”

6. “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.”

7. “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.”

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

9. “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.”

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

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

12. “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.”

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

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

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

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

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




About the Author

The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”