Seth Klarman is one of the best value investors of all time. He founded his Boston based hedge fund Baupost in 1983 and since inception, the fund has produced returns of around 20% per annum for investors despite the fact that its cash weighting frequently exceeds 30%.
Klarman’s book on value investing, Margin of Saftey has been out of print for many years, but demand from investors seeking to learn from his advice has pushed the price of second-hand copies as high as $1,000.
How to be a value investor by Seth Klarman
Here are a couple of quotes from the text that might help you refine and improve your investing process:
“Unsuccessful investors are dominated by emotion. Rather than responding coolly and rationally to market fluctuations, they respond emotionally with greed and fear. We all know people who act responsibly and deliberately most of the time but go beserk when investing money. It may take them many months, even years, of hard work and disciplined saving to accumulate the money but only a few minutes to invest it. The same people would read several consumer publications and visit numerous stores before purchasing a stereo or a camera yet spend little or no time investigating the stock the just heard about from a friend. Rationality that is applied to the purchase of electronic and photographic equipment is absent when it comes to investing.”
Investing is a marathon, not a sprint:
“Many unsuccessful investors regard the stock market as a way to make money without working rather than as a way to invest capital in order to earn a decent return. Anyone would enjoy a quick and easy profit, and the prospect of an effortless gain incites greed in investors. Greed leads many investors to seek shortcuts to investment success. Rather than allowing returns to compound over time, they attempt to turn quick profits by acting on hot tips. They do not stop to consider how the tipster could possibly be in possession of valuable information that is not illegally obtained or why, if it is so valuable, it is being made available to them. Greed also manifests itself as undue optimism or, more subtly, as complacency in the face of bad news. Finally, greed can cause investors to shift their focus away from the achievement of long-term investment goals in favor of short-term speculation.”
It’s never possible to know all the facts:
“It would be a serious mistake to think that all the facts that describe a particular investment are or could be known. Not only may questions remain unanswered; all the right questions may not even have been asked. Even if the present could somehow be perfectly understood, most investments are dependent on outcomes that cannot be accurately foreseen. Even if everything could be known about an investment, the complicating reality is that business values are not carved in stone. Investing would be much simpler if business values did remain constant while stock prices revolved predictably around them like the planets around the sun. If you cannot be certain of value, after all, then how can you be certain that are you buying at a discount? The truth is you cannot.”