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Seth Klarman: Framework for Investment Success
Posted by: Anh Hoang (IP Logged)
Date: August 23, 2011 01:14PM
In the excerpt for annual letter of Seth Klarman in 2010, he has mentioned to investors the framework investment success. I think that would be very useful to share the main ideas with others here
Seth Klarman discussed two vital elements for successful long-term investment. The first is to answer the question, “What’s your edge?”, and possibilities from the toolkit are truly long-term capital; a flexible approach to search for opportunities across broad array of markets, securities and asset classes; deep industry knowledge; strong sourcing relationships, and a solid grounding in value investing principles.
Second, the investor should consider the competitive landscape and the behavior of other market participants. Stay out of the hot market and focus on what people ignore. If other investors are rigidly committed to fast-growing technology stocks, you might not outperform. If the competitors are dumping Greeks equities or U.S. housing debt, these asset classes may be worth the attention, regardless of currently poor fundamentals that are driving others' decisions. Where to best apply the focus and skills depends partially on where others are applying theirs.
Focusing on the approach of competitors and their processes, not the short-term results, as short-term performance envy may cause many of the shortcomings that lock most investors into a perpetual cycle of underachievement. Watch the competitors not out of jealousy, but out of respect.
Most traditional investors are limited by a lot of constraints including narrow skill-sets, legal restrictions or psychological inhibitions. A drop in a stock's price gives investors enough reason to sell the stock, or when a bond is downgraded, or a company omits its dividends. Such behavior often creates supply-demand imbalances where bargains can be found.
Price is the single most important criterion in sound investment decision making. The investors in all asset classes are fond of simplicity, rosy outlooks. They prefer full buildings and trophy properties to fixer uppers that need to be filled, even though empty or unloved buildings may be a far more compelling, and even a safer, investment.
Further, a majority of investors feel compelled to be fully invested at all times. If investors invest full time, one important tool from investors’ toolkits is removed: the ability to wait patiently for compelling opportunities that may arise in the future. In addition, an investor who is too worried about missing out on the upside of potential investment may be exposing himself to substantial downsize risk precisely when valuation is extended.
There is much information but not everyone knows how to select information. Investors are often quite short-term. Everyone can ask questions, but not everyone can identify the right questions to ask. Everyone searches for opportunity, but most look only when the searching is straightforward, even if undeniably highly competitive.
The full excerpts of the annual letter to investors of Seth Klarman can be view in the following link:
Excerpts from Seth Klarman 2010 annual letter
Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks