Margin of Safety – Seth Klarman – Chapter 5 Summary discusses all you need to know about stock market investing. The rule is not to lose money but more about that in the coming chapters discussing the actual margin of safety when it comes to investing.
Margin Of Safety – Seth Klarman – Chapter 5 Summary – Value Investing
Good day fellow investors. We continue with the summary of the margin of safety by Seth Klarman which is by far one of the best books on value investing out there. However it was written 40 years ago so I'm trying to eliminate the things that are not so relevant now and focus on the eternal knowledge investing knowledge that is in there. Let's start with Chapter 5. Chapter 5 discusses how you have to start with your investment goals. Warren Buffett's investment goals are pretty simple. Don't lose money. Don't lose money. And that's the core of value investing because you're investing with the margin of safety. Let's see what Seth Klarman has to say about value investing first and then in the next chapter about how to find business value what these margin of safety. So please subscribe.
Klarman explains about the rules. That doesn't mean that you shouldn't incur risk just that your portfolio shouldn't be exposed to a appreciable loss of principle over several years. It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest hot initial public offering Uber Lyft ring about yet the avoidance of loss is the surest way to ensure a profitable outcome.
Value investing and Klarman
So value investors avoid loss. They don't invest in stocks like Nijo and things because there is a potential for loss and we'll see later how that why that is so important. And then the actual risk of a particular investment can be determined from historical data. It depends on the price paid. That's the key.
If enough investors believe the argument that equities will offer the best long term returns they may pour money into stocks bidding prices up to levels at which they no longer offer superior returns. S&P 500 close to all time highs. Returns expect that from stocks 5 percent which is highly risky as were discussed in the stock market news on Friday. Clairemont continues by showing the beauty of compounding and he emphasizes how it all quickly evaporates. If there is a sizable loss which if you don't think about risk always happens. Therefore one must focus on avoiding losses at all costs 6% for 30 years 1000 becomes 5000 at 15 16 percent 1000 becomes 85000.
Seth Klarman's Margin of Safety PDF summary
However very nice comparison an investor who earns 16 percent annual returns over a decade for example will perhaps surprisingly end up with more money than invest or who earns 20 percent a year for nine years and then loses 15 percent the 10th year. This is crazy to think and everybody thinks the S&P 500 is such a great investment now. But nobody focuses on risk and therefore this is so important because just one loss of 15 percent even if it did very very good of 40 percent in the future will erase earnings. For those who don't think about risk as with Klarman say the second investor will outperform the former.
Nine years out of 10 gaining considerable Physick income from that these are apparently superior performance and all you need to know when it comes to investing from Klarman is the following. In the long run however stock prices are also that third I'll buy more loosely than bonds do the performance of the underlying business.
If the prevailing stock price is not warranted by underlaying underlying value it will eventually fall. Those who bought in at the price itself reflect that overly optimistic assumptions will incur losses. Tesla. Tesla. Most investment approaches do not focus on loss avoidance or on an assessment of the real risk of an investment compared with its return. Only one that I know does value investing. We continue with value investing with the following chapter number six in the following video on Klarman. Thank you for watching. Looking forward to your comments and please subscribe. I think these are the most important videos because they give you everything you need to know for your investing lifetime avoiding risk value investing. Margin of Safety. It is boring. Nobody does it. That's why it works that well.