Anything written by Seth Klarman is hard to come by. His book, Margin of Safety, is out of print and can only be found used at a famously high asking price. His Baupost letters are highly protected. And the few articles can be traced back to the ’80s and ’90s.
But in the writing, it’s apparent that Klarman is a value investor deeply rooted in Ben Graham’s teaching. The recurring theme — protecting capital is goal number one.
Another theme is the combination of flexibility and turning human nature to his advantage. The human psyche has some general tendencies that work really well in most circumstances except when it comes to investing. Klarman bargain hunts with that in mind but it often leads to areas investors are rushing to avoid.
There are other themes too, which are best left in his own words.
Here’s Klarman:
All investors need to learn how to be at peace with their decisions. — Source
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The whole reason that our capitalist system works the way it does is because there are cycles, and the cycles self-correct. — Source
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I think investors always learn the lessons of the recent past. And that is the lesson. — Source
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People always want to believe that this time is different, that there’s something new under the sun, and that through their own ingenuity they can wish away risk. — Source
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The way to maximize outcome is to concentrate on process. — Source
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Human nature being what it is, small loopholes are likely to be exploited until they become big ones, and big ones until they turn into financial disasters. — Source
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When stocks are rising for no better reason than that they have risen, the greater fool is at work. — Source
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The way I would think about risk aversion is most people would not want to toss a coin for their entire net worth. — Source
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Short sellers are the market’s police officers. If short selling were to go away, the market would levitate even more than it currently does. — Source
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Higher risk investments often erode one’s capital and produce lower returns — the worst of all investment worlds. Higher-returns-for-higher-risks only applies on average and over time. — Source
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The true investment challenge is to perform well in difficult times. — Source
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The laws of probabilities tell us that almost anyone can achieve phenomenal success over any given measurement period. It is the task of those evaluating a money manager to ascertain how much of past success is due to luck and how much to skill. — Source
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Avoiding round trips and short-term devastation enables you to be around for the long term. — Source
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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. — Source
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When the markets are fairly ebullient, investors tend to hold the least objectionable securities rather than the truly significant bargains. — Source
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A cheap stock can stay cheap forever, but if you own a bankrupt bond, the process of emerging from bankruptcy and distributing new securities offers a practical catalyst to realize the value. — Source
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There is no salve for the hungry investor like the immediate positive reinforcement that comes from making money instantaneously. — Source
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It would be silly to expect every bear market to turn into the Great Depression. It would be equally wrong to expect that a fall from overvalued, to more fairly valued, couldn’t badly overshoot on the downside. — Source
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Your own psychology can be your worst enemy as an investor. — Source
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Market inefficiencies, like tax selling and window dressing, also create mindless selling, as can the deletion of a stock from an index. These causes of mispricing are deep-rooted in human behavior and market structure, unlikely to be extinguished anytime soon. — Source
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Risk is how much can you lose and what are the chances of losing it. — Source
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Investors need to pick their poison: Either make more money when times are good and have a really ugly year every so often, or protect on the downside and don’t be at the party so long when things are good. — Source
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Value investing is, at its core, the marriage of a contrarian streak and a calculator. — Source
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My experience is that when people want to give something away at a ridiculous price because they have to, not because they want to, that’s a good time to buy. — Source
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I think it would be an interesting change for integrity if managers of funds were required to have more of their own money in them. — Source
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New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. — Source
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It is crucial to have a strategy in place before problems hit, precisely because no one can accurately predict the future direction of the stock market or economy. — Source
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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. — Source
Last Call
- Sometimes the Market Is Wrong – Morningstar
- Common Plots of Economic History – M. Housel
- The Presumed End of the Value Premium (pdf) – StarCapital Research
- Why Value Investing Sucks – Institutional Investor
- Chuck Akre: Interest Compounding Machines (video) – WealthTrack
- A History of Factor Investing – OSAM
- The Economist Who Wants to Ditch Math – Marker
- Signaling: The Language Peacocks, Gazelles, and Humans All Speak – Farnam Street
- Electric Cars are Changing the Cost of Driving – Quartz
- The Accidental Invention of Play-Doh – Smithsonian
