As you might know, some of Seth Klarman (Trades, Portfolio)'s comments from the 2015 Letter to Investors have been disclosed. It is important to note that, since its inception 33 years ago, this is only the third year in which the fund has had a drawback. Overall, the result of its publicly traded positions was a loss of 6.7%, while the private investment portfolio raised 2.4%. Generally, Klarman is very blunt and straightforward in his comments, yet with a great deal of insight and wisdom embedded.
"Value investors must be strong and resilient, as well as independent-minded and sometimes contrary," he wrote. "You don't become a value investor for the group hugs. Indeed, one can go long stretches of time with no positive reinforcement whatsoever. Unlike some other fields of endeavor, in investing you can do the same thing as yesterday but achieve completely different reported results. In the long run, the research and analysis you perform should overcome market forces; the fundamentals ultimately matter. But in the short run, markets can trump effort and insight."
For me, this is the paragraph that provides a brief summary of the kind of temperament that one must have to succeed at investing. As Howard Marks (Trades, Portfolio) would say, to outperform the averages one must not only think differently but also be right in that different approach. To do so, we must step aside from the crowd and be able to trust our analysis, in spite of the lack of reinforcement as Klarman mentions. While it is warmer in the crowd, by waiting for the market to confirm our hypothesis, we diminish our potential returns.
"2015 was a year of dodging relentlessly falling knives; upon deeper inspection, one superficially tempting investment after another turned out to be worse than they initially appeared. We avoided the great majority of these and were nicked by only a handful," he wrote.
We could say that even value investors got lured into low valuations in certain sectors, and while no one would have predicted the degree of the fall in these sectors, it became clear upon a deeper inspection that some of these companies were more fragile than they appeared on the screeners. A great deal is generally very rare and hard to find, so it is our task to say "No" and discard many options to maximize the value of our investments. As Klarman mentions in the following quote, sometimes the market wins in the short run; however, fundamentals are always reflected in prices.
"In investing, however, there is no umpire calling balls and strikes, and in retrospect we could have been even more patient at the plate. What had, for many investors, been a growing pool of red ink during the year turned into a bloodbath by year end. To repurpose Warren Buffett (Trades, Portfolio)’s famous quote about managements and businesses, when a talented investment team confronts an exceptionally challenging market, sometimes the market wins (at least in the short run)."
