• Home
  • About
  • Earnings Calendar
  • Economic Calendar
  • Subscribe
  • Contact

Explore The Value Investing Philosophy of Seth Klarman

Seth Klarman is a renowned value investor and the head of the hedge fund, The Baupost Group. His book, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, is considered an investment classic but not in the price range of most of us regular, everyday investors. Klarman’s book sells for – ready – $1,600 on Amazon! The laws of supply and demand still seem to work as Margin of Safety is out of print but investors’ hunger for it still lingers in the investment jungle. Knowledge is power, however, and that $1,600 book may be the best investment you could make if you allow Klarman to inculcate you with the tenets of value investing and risk management. If you are of less means, allow this article to be a quick synopsis of Klarman’s value investing philosophy.
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.”  
Seth Klarman
It turns out that value investing is not just a set of calculations to identify investments on sale at the moment but an enduring process that requires updating and a focus on long-term appreciation. Another famed value investor, Warren Buffett, has exploited the power of compounding and not inviting the “tax man” to the party. If you can identify a mispriced investment, particularly a stock, with an underlying company that possesses an economic moat and one that you could hold onto for ten or more years without a flinch – you may be entering the investment world of Klarman and Buffett.

Another tenet of value investing is margin of safety, appropriately contained in the title of Klarman’s book. Investments like stocks can always depreciate further in price after you buy them (it seems like they always do), but if you have done your homework, then this further depreciation is likely a continuation of the fleeting conditions you are exploiting. If you have a long-term orientation and are resolute about your research, then a further decline in the price of your investment should only cause you to get more excited about it and commit more capital to it as it has only become more attractive. That’s Mr. Market being even crankier than he was yesterday. If you’re employing margin of safety in your investment approach, then you have already bought your investment for less than it is worth. Margin of safety is paramount in limiting your risk and one of the most important tenets of value investing. Why would you ever pay full price for something if you don’t have to?

Being a value investor is not easy. You must have the wherewithal to conduct research but also go deeper than your peers in understanding the economics of the business you are investing in or the unique characteristics of the security that you are buying. You must have a back bone and trust in your research and valuation. There will always be people telling you that you are a fool or that you are catching falling knives. A long-term investment horizon can orient you to be undeterred by the shortsightedness of the greater investment world; a psychological make-up towards independence and perseverance, however, will be required to endure the intensity of temporary pressure brought on by market crashes, financial panics, and other events.

“Because everybody else is doing it” is rarely if ever a profitable investment strategy and usually leads to ruin. By the time you join the crowd, the crowd is getting ready to change its mind. You must be a crowd of one in investing. Group think is deleterious to investment results. You need only to look in the mirror when making a group decision. The crowd, usually in the form of the market, must be your servant rather than your guide. Allow it to offer you investment pitches rather than investment directives.  Profit from folly rather than engage in it. If you can heed to Seth Klarman’s principles of value investing and direct your thinking and doing, you should be able to not only navigate the volatility of the market but also profit from its mispricing and myopic nature.

- Andrew Sebastian

Get New Article Updates:

More from ADS Insights:

Recent Posts Widget