On February 15, 1999, Barron’s magazine published an opinion piece entitled, Why Value Investors Are Different. The article looked at one of the most important periods of Warren Buffett’s career and was written by none other than Seth A. Klarman.
As usual, Seth Klarman’s insights are invaluable. So, here are some key takeaways from the article.
Seth Klarman: Why value investors are different
Seth Klarman begins his piece on Warren Buffett with the following statement:
“The most dramatic and valuable lesson from the fabulous (and still counting) 50-plus-year investment career of Warren Buffett is the legendary account of his steadfast conviction amidst the 1973-75 bear market. He had correctly identified by 1973 that the shares of companies such as the Washington Post were selling for but a fraction of underlying business value represented by those shares.”
[A side note: The discounted value of the Washington Post’s shares was discussed in Warren Buffett’s famous essay, ‘The Superinvestors of Graham-and-Doddsville’.During 1973, The Washington Post Company had a market capitalization of $80 million. However, the figures showed that the company’s assets were worth $400 million, probably appreciably more according to Buffett.]
The stock price of the Washington Post continued to decline over the next two years, through 1975. But Warren Buffett kept buying. Roger Lowenstein later wrote in his biography of Warren Buffett:
“[the] impression of Buffett sweeping down the aisles of a giant store [buying stock]…As the market fell, he raced down the aisles all the faster.”
Seth Klarman notes that studying Warren Buffett’s behavior during this period is extremely important for investors. He writes:
“…it powerfully evokes the memory of what happens in bear markets: Good bargains become even better bargains. It is also important testimony to the wisdom of staying power: Had Buffett worried about the interim losses in 1974 or 1975 from his earlier and more expensive purchase of Washington Post shares, he might have…panicked or been forced out…”
Here, Seth Klarman goes on to write about something that’s not usually mentioned when talking about Buffett nowadays; his human nature.
It’s easy to forget that Buffett is indeed human, not an invincible super investor that can do no wrong — even though this is the image that he gives off. What must Buffett have been thinking during the bear market of the early 70s when most of his stocks were falling? Seth Klarman writes:
“…the well-founded conviction a value investor is able to have, confidence in the margin of safety that a bargain purchase is able to confer…he [Buffett] simply decided that the market was wrong. His view was that the sellers were not thinking clearly…Their disagreement, if there was one, concerned the level of appropriate discount between share price and business value, a gap that Buffett saw as widening.”
“He didn’t worry about whether the stock was about to split or pay or omit a dividend. He most certainly did not evaluate the stock’s beta or use the capital-asset pricing…he simply valued the business and bought a piece of it at a sizeable discount.”
Seth Klarman then goes on to talk about the perception of risk. Was Buffett worried about risk? Of course, but as Klarman notes, Warren Buffett’s perception of risk is not the same as the short-term fund manager, who is worried about short-term underperformance. Instead, Buffett’s description of risk is the permanent loss of capital. And with that being the case, the best way to reduce risk is to try and buy a dollar for only $0.50.
This article was originally published on ValueWalk.com. Part two can be found here.