“Picking through the crumbs left by investment elephants can be rewarding.”
-Seth Klarman
Perhaps the greatest living investor is Seth Klarman of Baupost Group. Sporting a return for his hedge fund that has beaten all but four other investment funds since its inception in 1982, Klarman is a staunch practitioner of deep value investing. His book, Margin of Safety, which has been out of print for more than 20 years, but is so popular among investment managers that copies on Amazon.com are currently going for $1,795! Klarman has no plans to reissue the book – now how is that for creating value?
Between 2013 and 2014, Klarman made a bold move by returning much of the $30 billion he was managing for his investors explaining that he was having trouble finding anything at all to buy in this environment. He felt so strongly about not misallocating capital that instead of sitting on it and earning fees, he gave it back! So given the run in stocks over the last six years that has led many to deviate from investing fundamentals, we thought it only right to pay homage to Klarman and the merits of value investing.
Here are a few of our favorite quotes from Margin of Safety , along with our takeaways, that further prove that in the end staying the course will always get you to your goal:
“Once you adopt a value-investment strategy, any other investment behavior starts to seem like gambling.”
Managers that are able to value businesses correctly – and not buy stock in that company unless it is below that value – are key to driving long-term investment returns. It takes much of the guesswork out of the market and allows an investor to breathe easily. After all, as long as you pay below true value for an asset, you are likely to get your capital returned at some point even if the market goes down in the meantime.
“Picking through the crumbs left by investment elephants can be rewarding.”
Many value investors avoid “hot” stocks, or crowded trades because they believe the herd is usually wrong. This approach has proven to be correct most of the time. Instead, they preserve capital and often are able to buy that same hot stock later when the masses have bailed out and caused the stock price to become much lower than reasonable.
“How do value investors deal with the analytical necessity to predict the unpredictable? The only answer is conservatism.”
The “margin of safety” concept is widely adopted by value managers: Always invest at below what you believe is a discount to intrinsic value. This will allow your mistakes to have less impact, and gives you greater ability to withstand an outcome you didn’t predict.
“A pile of junk is still junk no matter how you stack it.”
Avoid the allure of a “good story” stock, and be cautious if you sense you’re being “sold” on a stock. Invest on merits and business metrics alone, and preferably those that can be replicated and predicted with relative ease.
Brad Sanders is a Tectonic Advisors, LLC. investment strategist and CWA Digital News Monthly Investments Editor.
