Seth Klarman interviewed by Charlie Rose at the Facing History and Ourselves New York Benefit Dinner. This event was at Chelsea Piers in New York City on November 1, 2011.
[klarman]0:00
let me turn to why is it that margin of safety
0:03
you can’t get it for example 2012 eBay I mean I’ve never I knew that was a fact
0:10
but I didn’t I still don’t understand why you can get a charlie is also a new
0:16
one
0:17
well I know I know what I mean is it is it true so margin of safety
0:22
the idea for margin of safety came with a business school classmate called me up
0:27
and said he said Virginia Smith here working at Harper Collins Harper and row
0:32
at the time anything and you know they’ve asked me to talk flying into
0:37
aspiring authors and would you like to write a book on investing and I said you
0:41
think about that people have said that you know they like my letters to clients
0:45
maybe you should do it so I took the chips and wrote the book they didn’t do
0:50
a very good job advertised it
0:52
editors kept getting fired because of me and by the third editor we we finished
0:58
the book and then it sold about 5,000 copies and died out so in my I did
1:05
nothing for a while it was dead with richard’s prediction was right
1:09
temporarily and it died and then it started to get a cult following and I
1:15
thought well maybe I’ll bring it back someday raise money for charity and
1:19
that’s the truth about the cell wall street edition for $500 thousand bucks
1:23
and and raise a million or two for charity and not the time or energy to
1:30
actually do that so I think we could delegate this rather quickly
1:34
I’ll have to get on that what was it about margin of safety because in a
1:39
sense it’s a term that you believe in and you know it according to what I read
1:43
a book that’s on line but thats desk
1:48
you both are great when you were disciples but you’re great
1:53
followers of the teachings of Ben Graham think it’s probably on warrants bookshop
1:59
under a pile of papers I don’t think were next to read it anymore
2:02
no I don’t I don’t really know I tried to write it to be accessible to the lay
2:12
person or or the the professional entering the field and so I tried to use
2:18
layman’s layman’s language and just make it accessible and it’s certainly the
2:23
terms borrowed from security analysis and it it’s meant to be in some ways it
2:27
intellectual successor to Intelligent Investor which was the more accessible
2:32
of gramm’s book so I think it’s the other book in in that tradition but when
2:38
you had called on media people can’t get something they want to be very well
2:41
maybe a lot of that I think they call that supply and demand suppose you wrote
2:48
recently the preface to the new edition of security analysis at the right time
2:52
suggested else what is it you want to say and why has it remain a furloughed
2:58
star and secondly sort of this remarkable but I had you everybody knows
3:03
I’ve probably done more conversational more about that than anybody alive and
3:08
and there we talk about all the time and how you know his own been RAM experience
3:14
in coming to Columbia and what it meant to him understand why this has been such
3:20
a profound series of principles that have made you and investments who you
3:28
are today first of all I wish I’d met Ben Graham I never was was fortunate to
3:33
do that the I think warren ketchup captured the idea himself in his 1964
3:41
article the super investors are Graham and Dodd still in it he talks about
3:46
value investing is like an inoculation you either get it right away or you
3:51
never get it and I think it’s just true I actually think there’s a gene for this
3:55
stuff whether it’s a convincing Jeter contrarian gene I think that everybody
4:00
appreciates a bargain but when the market’s going down and most people
4:05
overreact and skit scared by stock is going down what am I gonna do so if
4:11
you’re buying a sweater and it goes on sale for $2 250 you get excited when you
4:16
get to the store but if you have a stock worried about the sweater 400 maybe not
4:20
so happy so I think it’s for me it’s natural but for a lot of people it’s
4:24
fighting human nature but it is true what it’s what warren buffett said when
4:29
you find out about it it’s like being lit on this little secret and so if you
4:33
can remember that stocks are pieces of paper that I read all the time that
4:37
stocks are fractional interests of businesses it all makes sense if it’s
4:42
almost like it to slow the game down like to talk about baseball speeding up
4:45
on you need to slow it down I can buy this thing for a huge fraction of what
4:50
it’s worth what am I worried about if it goes down a little bit what’s the gift
4:54
yet knowing what it’s worth I think that the the analysis is actually the easy
4:59
part of what I want to speak to business school students I tell them investing at
5:03
the intersection of economics and psychology the economics the valuation
5:07
of business is not that hard but psychology how much do you buy at this
5:12
price to wait for a lower price what do you do when when it looks like the world
5:16
might end
5:17
those things are harder and knowing whether you stand there by more or
5:23
something legitimate has gone wrong any to sell those are harder things and that
5:27
he learned over with experience you learn by having the right make
5:31
psychological makeup in the first place
5:33
what’s the right psychological makeup that you have patients would be one
5:43
another that investors have to be patient discipline but what I what I
5:50
really think is not to be greedy if you if your greeting you leverage you blow
5:55
up almost every financial blow up his cause of leverage and then you need to
6:00
balance arrogance in humility and I’ll explain what I mean when you buy
6:05
anything it’s a very good you’re saying the markets are gyrating and somebody
6:10
wants to sell this to me and I know more than everybody else I’m gonna stand here
6:13
and buy anything more than the next guy wants to pay and bio that’s a very good
6:18
and you do the humility to say but I might be wrong and you have to do that
6:23
on everything but one are you different than wine in terms of how long has
6:29
evolved and how you have involved you know I mean obviously I think Charlie
6:34
Munger had some influence on warning in understanding 22 not just to look for
6:38
the classic example the cigarette but you know what to look at things that
6:42
were reasonable price with a belief that they could be that there still was a
6:47
margin of safety first of all lot of my Charlie Munger’s are out here in the
6:51
audience while the people here that I bounce ideas off of and we should we
6:55
share thoughts and have you involved in what we are an evolved from a different
6:59
one above for three stages he went from buying cigar butts and getting less
7:03
scrupulous 432 buying great businesses that really cheap prices to buying and
7:07
holding Greek businesses at so so prices and maybe even this new area of buying
7:12
securities from crappy businesses at better than market prices like 430
7:19
I’m still in phase one we’re still buying we’re still buying cigar but
7:23
there’s a good business there and buying them and it’s a lot of fun which you’re
7:27
proud of you know I feel like
7:32
I feel like I have stunted growth Charlie you know you know what I think
7:38
that it’s how I think before the better investor than me because he has a better
7:42
eye toward ports what makes a great business and when I find a great
7:45
business i’m happy to buy it and hold it
7:47
most businesses don’t look so great to me but he also doesn’t mean he’s not
7:51
really focused on the gyrations of the stock everyday me neither I don’t have a
7:56
Bloomberg Government US I don’t hear you don’t have a Bloomberg on your desk
8:01
because you might make some tough but what’s on your desk phone giant piles of
8:09
paper that are at risk of falling on me at any moment and I have a computer
8:14
yeah so so tell us about your desktop water bottle to me but you but you sit
8:19
at a trading this when you’re not meeting either clients or are people
8:24
that gonna give you information that might be relevant to what you decisions
8:28
you have to make you sitting at a training thinking big bucks
8:33
what are you really are you it’s not so much because you were reacting to the
8:37
volatility of every market that you invested in because if you are valujet
8:41
best of my assumption would that that you know looking to trade for a moment
8:46
we’re not traders that there’s a wonderful story first broke out at
8:50
twenty brown tells the story of how they were interviewing somebody to come and
8:54
go to come during their firm and after the interview he’s walking the fellow to
9:00
the elevator and the fellow says you know it’s amazing here twenty brown most
9:04
firms you can tell from the atmosphere in the place where the market’s up for
9:08
the market’s down a Tweedy Browne capital markets open
9:13
I think it’s like that our firm we’re making medium to long-term investments
9:18
here are three to five years or longer and so we’re not really that into the
9:22
only reason we care about the gyrations is so we can buy something even cheaper
9:26
do you like bad times then
9:31
you know we benefit from volatility and distressed debt and everything else we
9:40
provide liquidity when people want to sell things in a hurry presumably you
9:44
know what’s a transaction between consulting consenting adults when
9:47
somebody owns a bomb that was triple-a in there was trouble see they want to
9:53
sell they want liquidity
9:55
where we sort of our our our rhythm is opposite most of the markets where them
10:01
by things when the market’s down we sell things when the markets do I root for
10:05
bedtimes course not I love our country that we bad time but it is it
10:12
frustrating when the market goes straight up and up and opposition from
10:16
from 82 days 87
10:19
it was frustrating and I worry because just at those times it’s one of the
10:24
little guy gets sucked in the little guy trying to resist double when the
10:30
market’s going higher and higher a little guy gets pulled in by stories
10:33
from their neighbor stories for the cocktail party and they hear about how
10:37
much money people are making the market church early
10:39
you probably know this that the return from all mutual funds in the nineteen
10:44
nineties was 600 basis points higher than the average return from investors
10:49
in those funds during the same period and that’s because they get into the run
10:53
coming out of the wrong time so that’s painful to me to what is your lesson
10:57
that’s why I wrote the book to try to educate the average person but only like
11:01
the few hundred of them
11:04
I hope I’m gonna get a copy of this book can you talk to us about your philosophy
11:12
of timing if there is there no philosophy of timing because you looking
11:16
at value and they do understand value and and essentially the big decision for
11:22
you is that by decision more than the cell decision finds it easier so it’s
11:28
hard for them to get out there’s no timing element you can never tell how
11:34
big a bargain you might get offered tomorrow somebody comes along once I saw
11:38
your dollar 50 cents you can never know if there was a salty or $0.40 tomorrow
11:43
we need to buy it and leave little room to buy more and maybe someday spend your
11:48
last dollar and by the by the bargain and maybe it goes down before it goes up
11:51
so you always are checking and rechecking your work
11:55
the critical thing that the thing that would cause you to lose your confidence
11:58
when you’re doing that will be of you realize that dollar was an adulterer you
12:02
thought it was worth a dollar but Greece failed or the euro fell or collapsed and
12:09
all of a sudden $4.30 and I we thought was a bargain is overvalued so that’s
12:14
the dilemma
12:15
it’s not so much figuring out what it’s worth today it’s making sure it’ll still
12:19
be worth that same thing or possibly that same up tomorrow what’s the biggest
12:23
mistake you for me
12:28
oh my god I prepared so hard you know I’ve been very fortunate if you talk
12:37
about it work I’ve never really screwed up a lot we went through tumultuous
12:42
times we stuck to our discipline we’ve made mistakes they often are where we
12:49
underestimated the leverage in the situation we didn’t think it was that
12:52
big a deal
12:53
leverage more leverage can magnify your returns but also magnifies your losses
12:57
getting better with that people we’ve had investments where these are
13:01
interesting point getting in bed with bad people
13:03
yeah how does that happen and how do you avoid that so a lot of stocks are cheap
13:09
for a reason and often about you investor will figure out the reason
13:13
because everybody else has gotten sick of a management raping and pillaging the
13:17
company over paying themselves deploying capital poorly taking advantage of the
13:23
shareholders with with free stock or options awards or hiring their
13:28
brother-in-law so so there are stocks that have been perennially undervalued
13:33
because the run by somebody who fits that profile another’s value investor
13:38
will come along and say wow that looks awfully cheap and grandma died didn’t
13:41
really likes the quality of management as high as they might of and so good
13:48
management at value could manage was somewhat celebrities they can pull the
13:51
buyback stock was undervalued they can use the stock as currency when it’s
13:56
overvalued bad management’s will think only about themselves first and so those
14:01
early lessons but profound lessons that I learned to learn them well
