Seth Klarman

  • 02 May
    The Art Of Business Valuation – Three Valuable Valuation Methods

    The Art Of Business Valuation – Three Valuable Valuation Methods

    • Don’t expect precision from business valuation, but accuracy helps a lot.
    • Calculating net present values, liquidation values, and stock market values are the best methods to use according to Klarman.

    Introduction

    Today, we’re really digging into the essence of Seth Klarman’s book Margin of Safety.

    Some think the market, being efficient, will tell you the exact value of a business, but history has shown that in the short term it often happens that the market values businesses extremely irrationally, either on the upside or on the downside. Knowing how to properly value a business gives an investor the perfect investing edge as it allows them to disregard what the market thinks and turn that into their own advantage by exploiting market mispricings.

    Let’s see what Klarman has to say about business valuation by going through chapter 8 of his book. More →

  • 25 Apr
    Klarman’s View On Risk & Return

    Klarman’s View On Risk & Return

    • It’s essential to focus on risk, whether you are a trader, dividend investor, or value investor.
    • One of the biggest investment fallacies is that risk and return are positively correlated.
    • The market is inefficient because of extreme liquidity provided by central banks, passive investments, and share repurchases.
    • Volatility is low, but this doesn’t mean risks are low.
    • Klarman provides a simple and powerful definition of risk.
    • If you can’t tolerate price volatility, you shouldn’t invest in stocks. Own T-bills instead.
    • A declining stock price should increase your returns.

    Introduction

    Today I’ll continue summing up Klarman’s iconic investing book Margin of Safety.

    Every time I reread the book, I’m more astonished by the wisdom it contains. I hope to transfer as much value as possible to you as the book is extremely difficult to get (lowest price on Amazon is $1,000). Today’s topic is from Chapter 7, The Nature of Risk. More →

  • 17 Apr
    Forget About The Market & Focus On Absolute Performance

    Forget About The Market & Focus On Absolute Performance

    • Would you instantly sign up for a 15% yearly return for the next 10 years with inflation at 2%? The answer is probably yes.
    • Would you feel the same joy if the market could do 20% per year over the next ten years? Even if the answer is irrational, that is how we as humans are wired.
    • Chasing market performance is a self-reinforcing cycle that slowly builds up, but it takes less than two years for the house of cards to crash completely.

    Introduction

    Today I’ll continue with my analysis of the investing concepts discussed in Seth Klarman’s book Margin of Safety. Today’s topic is relative and absolute performance. More →

  • 10 Apr
    Are You A Top Down Or Bottom Up Investor?

    Are You A Top Down Or Bottom Up Investor?

    • It’s best to use a bottom up and not a top down approach to investing if you want to lower your risk and increase your returns.
    • A value investor doesn’t like risk and invests with a huge margin of safety, is patient, happy to stay in cash if there are no bargains, constantly looks at balance sheets, and buys the present. Positive future developments in a business are just a bonus.

    Introduction

    We’ve covered more than half of Seth Klarman’s book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. I’ve received amazing feedback on the series and hope you will be satisfied with the summary and comment on the second half of the book. You can read the previous articles on the topic here. More →

  • 13 Mar
    Value Investing: The Importance of a Margin of Safety

    Value Investing: The Importance of a Margin of Safety

    • A margin of safety and value investing aren’t so attractive in rising markets, but become essential in declining markets.
    • The lower the price, the higher the margin of safety, no matter what the market thinks. Klarman usually buys more in such occasions.
    • Algorithms and numbers don’t make great investors. Discipline, patience, and judgement do.

    Introduction

    We have finally arrived at the core of Seth Klarman’s book Margin of Safety, i.e. Value Investing and the Margin of Safety.

    “Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized.” Klarman

    The essence of value investing is finding a bargain, i.e. buying a dollar for much less than one hundred pennies. When a bargain is found—and they can be very difficult to find, especially in a market like the one we’re in now—the next step is to determine the margin of safety, or the discount the price offers in relation to the undiscovered value. The bigger the discount, the better. More →

  • 27 Feb
    A Value Investment Philosophy

    A Value Investment Philosophy

    • If you want to succeed in investing for the long term, your focus has to be on potential losses, only later should you look at potential gains.
    • Risk can’t be determined from historical data, it only depends on the price paid.
    • Risk avoidance is compatible with investing success when the correct approach is used.

    Introduction

    Given the great response, I’ll continue with breaking down Seth Klarman’s legendary book Margin of Safety.

    You can read my introduction to Klarman’s Margin of Safety here, my review of chapter one, Where Most Investors Stumblehere, my review of chapter two, The Nature of Wall Street Works Against Investorshere, and The Institutional Performance Derby: The Client Is the Loser chapter, here.

    Today, we’ll focus on the second part of the book, A Value Investment Philosophy.  More →

  • 15 Feb
    The Institutional Performance Derby: The Client Is the Loser

    The Institutional Performance Derby: The Client Is the Loser

    • It’s important to understand how investing institutions operate and think so you don’t get trapped.
    • Nobody at these institutions eats their own cooking and there is no incentive to do anything. It reminds me of communism.
    • Institutional investing is a self-reinforcing mechanism, which is great in a bull market but terrible in a bear market.

    Introduction

    Seth Klarman’s book Margin of Safety is an iconic investment book. As it’s extremely difficult to get, I’m synthesizing it for you while injecting my own up-to-date commentary.

    You can read my introduction to Klarman’s Margin of Safety here, my review of chapter one, Where Most Investors Stumble, here, and my review of chapter two, The Nature of Wall Street Works Against Investors, here. Today’s article will discuss his The Institutional Performance Derby: The Client Is the Loser chapter. More →

  • 07 Feb
    The Nature of Wall Street Works Against Investors

    The Nature of Wall Street Works Against Investors

    • Being detailed about your investments and knowing where the interest of your financial intermediary lies is essential for your financial well being.
    • Fees, underwriting commissions, investment fads, and Wall Street’s short term focus cost investors more than 1% a year.
    • On a $100,000 initial portfolio, a 2% yearly difference in returns after 30 years adds up to $738,675.

    Introduction

    The bold statement The Nature of Wall Street Works Against Investors is the title of the second chapter of Seth Klarman’s book Margin of Safety – Risk-Averse Value Investing Strategies for the Thoughtful Investor.

    As the book is an essential read for every investor but very difficult to come by and expensive to get, I am summarizing it for you alongside adding updated commentary in relation to the current market situation. More →

  • 01 Feb
    There’s Trouble Ahead For The S&P 500

    There’s Trouble Ahead For The S&P 500

    • Analyzing the S&P 500 through Klarman’s principles signals trouble ahead as the market is highly speculative, diverges from fundamentals, and is at a high level because yields are low.
    • Further, future earnings estimations that keep the market high are extremely optimistic.
    • An analysis of Klarman’s portfolio shows that it’s still possible to find value in the markets, and to lower risks and increase returns by having a margin of safety.

    Introduction

    Yesterday, we reviewed Chapter 1 of Seth Klarman’s book Margin of Safety – Risk-Averse Value Investing Strategies for the Thoughtful Investor.

    Today, we’re going to analyze the current market according to the investing principles described in yesterday’s article. More →

  • 31 Jan
    Where Most Investors Stumble

    Where Most Investors Stumble

    • Are you a speculator or an investor? Speculators usually don’t survive more than one economic cycle while investors reach decent returns.
    • It’s of extreme importance to distinguish whether an asset is an investment or a speculation.
    • We’ll list 11 characteristics of successful investors, and 13 characteristics of unsuccessful investors.

    Introduction

    Last week, we discussed Seth Klarman’s performance and approach to investing.

    Today, we’re going to dig into his book Margin of Safety – Risk-Averse Value Investing Strategies for the Thoughtful Investor. As it’s a very rare and expensive book full of extremely valuable insights, I believe our readers will find huge value in this series of articles. More →