Sunday, May 27, 2012

Thoughts from Seth Klarman, a Legendary Investor

In 1934 Benjamin Graham and David Dodd introduced the term “Margin of Safety” in their book "Security Analysis". Warren Buffet built an investment empire on these concepts and principles.

In 1991, Seth Klarman of Baupost Limited Partners wrote "Margin of Safety – Risk-Averse Value Investing Strategies for the Thoughtful Investor". The book became an investment classic and Mr. Klarman became an investment superstar.

The following excerpts from his book are worth considering during this period of economic uncertainty.
  • On Value Investing: “The most beneficial time to be a value investor is when the market is falling.” and ” Value investing is simple to understand but difficult to implement….The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.” 
  • On Inflation and Deflation: “ Value investing can work very well in an inflationary environment” but deflation is “a dagger to the heart of value investing”…”in a deflationary environment, if you cannot tell whether or when you will realize underlying value, you may not want to get involved at all.” 
  • On Diversification: “An investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings” and suggests that as few as ten to fifteen different holdings should be suffice for diversification.
  • On Buy and Hold Investing: “Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today” and “Given the geopolitical and macro-economic uncertainties we face in the early •1990s and are likely to continue to face in the future, why would abstaining from trading be better than periodically reviewing one's holdings?”
  • On Investment Fads: “All market fads come to an end” however “It is only fair to note that it is not easy to distinguish an investment fad from a real business trend” but “Investing is serious business, not entertainment”.  

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