Jason Zweig interviewed Seth Klarman at a conference back in 2010. I recently dug up the transcript and wanted to highlight a few parts. The entire interview is a worthy read because Klarman always has good insights to share.
The interview also offers a reminder of the prevailing groupthink just two years after the financial crisis. If you paid attention to the financial news at the time, you might remember the constant coverage of inflation worries, gold as the answer, a double-dip recession, and the EU breaking up.
None of it happened. Not yet, anyways. But history – even six-year-old history – can be a guide to better decisions in the future. Anyways, here’s Seth Klarman on speculating, the long run mentality, a value company, humility, cycles, and learning.
On investing versus speculating:
Investing is buying a fractional interest in a business and buying debt claims on a business.
The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation.
On the Stocks for the Long Run mentality:
A tremendous disservice is perpetrated by the idea that stocks are for the long run, because you have to make sure you are around for the long run, that when you have unexpected pain, as many people did in 2008, you don’t get out and you actually are a buyer. The prevailing view has been that the market will earn a high rate of return if the holding period is long enough, but entry point is what really matters.
We all know that the evidence shows that when you enter at a low price, you will have good returns, and when you enter at a high valuation, you will have poor returns.
Avoiding round trips and short-term devastation enables you to be around for the long term.
On the concept of a value company:
In our view, there is no such thing as a value company. Price is the essential determinant in every investment equation. At some price, every company is a buy; at some price, every company is a hold; and at a still higher price, every company is a sell. We do not really recognize the concept of a value company.
On humility, being wrong, and learning:
In investing, whenever you act, you are effectively saying, “I know more than the market. I am going to buy when everybody else is selling. I am going to sell when everybody else is buying.” That is arrogant, and we always need to temper it with the humility of knowing we coud be wrong – that things can change – and acknowledging that we have a lot of smart competitors. Thus, in worrying about all the things that can go wrong, you can prepare, you can hedge – and you must remember to sell fully priced securities so taht you underexposed when things go badly. All these things give us the courage to follow our convictions.
In an interview, we work hard to see whether people can admit mistakes. We hold our people accountable to that standard. Everybody is going to make mistakes, but we like to know that people will accept that they made them, figure out what they have learned, and move on.
On reading, history, and cycles:
Never stop reading. History doesn’t repeat, but it rhymes. Jim Grant has a wonderful expression: In science, progress is cumulative, and in finance, progress is cyclical. Fads will come and go, and people will think we are on to a new thing in finance or investing; but the reality is that it is probably not really new, and if we have seen the movie or read the book, maybe we know how it turns out.
Opportunities for Patient Investors – FAJ 2010