Sometimes, I like to go back and look at some comments made by the greatest investors of our time. Seth Klarman is one of the few people who speak rarely, but when they do offer great advice. The main reason I highly admire Klarman is his unrelenting patience, which is one of the main keys to being successful in investing. Klarman is held in extremely high regard by Warren Buffett. There is a rumor (it has not been confirmed), that Buffett has a copy of Margin of Safety
on his desk. This would not surprise me, as Buffett recently stated that Klarman is one of his three favorite investors.
In 2009, Seth Klarman gave a rare public appearance. In this appearance the values investor gave a list of items that he felt should have been learned by investors, but, in his opinion, was not. Klarman felt that the lessons “were either never learned or else were immediately forgotten by most market participants”, and thus he felt that he needed to address the topic personally.
These lessons circled around a number of themes. Klarman pointed out that the Great Depression was a great teacher, in that one's mentality needed to think in terms of limited risk taking and sustainable growth, rather than merely speculating on which stocks would do well. Klarman always keeps a large amount of his portfolio in cash, and is therefore less likely to underperform in a down market.
He noted that history came in cycles, and that to be aware of those cycles; after all, crises do not show up out of the blue, and it helps to be in a conservative position when that happens. In fact if one looks back at the past several decades there have been many crises which very few people predicted including; Russia’s default in 1998, the Asian crisis, The Mexican Peso Crisis, and the crash of 1987 just to name a few.
As part of that, investors should not seek to make every ounce of profit possible; you should always keep something back in case something unpredictable happens. Klarman happens to be one of the few investors who do not track his performance by comparing it to an index like the S&P 500. Klarman believes that an investor should focus on investing in stocks that provide a margin of safety while ignoring what the indices do. Over time you will do better using this approach.
Here is a quote from Klarman on the topic:
"To value investors the concept of indexing is at best silly and at worst quite hazardous. Warren Buffett has observed that "in any sort of a contest -- financial, mental or physical -- it's an enormous advantage to have opponents who have been taught that it's useless to even try." I believe that over time value investors will outperform the market and that choosing to match it is both lazy and shortsighted."
In essence, limiting strategies in a crisis is one of the worst thing that an investor can do, as it limits not only their response to a crisis but is akin to putting all of their eggs in one basket and hoping that all of them hatch; the investor has no room for error that a more liberal investing strategy would naturally allow for. New financial products should be viewed with special skepticism as they are created for optimal situations, and not the market as it actually runs, making their ability to allow for unforeseen issues almost non-existent. The recent financial crisis should have taught us this lesson, but we see Wall Street coming up with new and exotic products which many investors are blindly buying into.
Also, investors should be aware that risk models are entirely inaccurate; there sometimes variables that are ignored or are weighted wrong, and so they tend to give inaccurate evaluations, which can cause a stock to be under- or over-valued. Risk should be looked at in terms of investment, and not some static number; the investor should determine the risk, not some outside agency. Most of the theories of risk nowadays are based on the disproven efficient market theory. Terms like beta, alpha and other metrics used by firms are misleading at best. Nassim Taleb in both of his best sellers; The Black Swan
and Fooled by Randomness
, slams the common definition of risk which measures stocks based on metrics such as volatility, and past events while ignoring “black swans”, and the future. Again, it is not surprising that Seth Klarman has strongly recommended reading Taleb's books.
If a company states that its stock is going to well, that company is actually riskier than one that does not state how its stocks are doing, because people will make the mistake of believing that company and expectations will hinder how it will do.
In short, pay attention to what the market does, be aware that it will run in cycles, and be prepared for the cloudy times as well as the sunny. Too many investors looked solely at the sunny times, making the stock market a bad place to be when it disappeared, and causing the stock market to perform a lot worse than it.
http://www.valuewalk.com/
http://twitter.com/#!/valuewalk
on his desk. This would not surprise me, as Buffett recently stated that Klarman is one of his three favorite investors.In 2009, Seth Klarman gave a rare public appearance. In this appearance the values investor gave a list of items that he felt should have been learned by investors, but, in his opinion, was not. Klarman felt that the lessons “were either never learned or else were immediately forgotten by most market participants”, and thus he felt that he needed to address the topic personally.
These lessons circled around a number of themes. Klarman pointed out that the Great Depression was a great teacher, in that one's mentality needed to think in terms of limited risk taking and sustainable growth, rather than merely speculating on which stocks would do well. Klarman always keeps a large amount of his portfolio in cash, and is therefore less likely to underperform in a down market.
He noted that history came in cycles, and that to be aware of those cycles; after all, crises do not show up out of the blue, and it helps to be in a conservative position when that happens. In fact if one looks back at the past several decades there have been many crises which very few people predicted including; Russia’s default in 1998, the Asian crisis, The Mexican Peso Crisis, and the crash of 1987 just to name a few.
As part of that, investors should not seek to make every ounce of profit possible; you should always keep something back in case something unpredictable happens. Klarman happens to be one of the few investors who do not track his performance by comparing it to an index like the S&P 500. Klarman believes that an investor should focus on investing in stocks that provide a margin of safety while ignoring what the indices do. Over time you will do better using this approach.
Here is a quote from Klarman on the topic:
"To value investors the concept of indexing is at best silly and at worst quite hazardous. Warren Buffett has observed that "in any sort of a contest -- financial, mental or physical -- it's an enormous advantage to have opponents who have been taught that it's useless to even try." I believe that over time value investors will outperform the market and that choosing to match it is both lazy and shortsighted."
In essence, limiting strategies in a crisis is one of the worst thing that an investor can do, as it limits not only their response to a crisis but is akin to putting all of their eggs in one basket and hoping that all of them hatch; the investor has no room for error that a more liberal investing strategy would naturally allow for. New financial products should be viewed with special skepticism as they are created for optimal situations, and not the market as it actually runs, making their ability to allow for unforeseen issues almost non-existent. The recent financial crisis should have taught us this lesson, but we see Wall Street coming up with new and exotic products which many investors are blindly buying into.
Also, investors should be aware that risk models are entirely inaccurate; there sometimes variables that are ignored or are weighted wrong, and so they tend to give inaccurate evaluations, which can cause a stock to be under- or over-valued. Risk should be looked at in terms of investment, and not some static number; the investor should determine the risk, not some outside agency. Most of the theories of risk nowadays are based on the disproven efficient market theory. Terms like beta, alpha and other metrics used by firms are misleading at best. Nassim Taleb in both of his best sellers; The Black Swan
and Fooled by Randomness, slams the common definition of risk which measures stocks based on metrics such as volatility, and past events while ignoring “black swans”, and the future. Again, it is not surprising that Seth Klarman has strongly recommended reading Taleb's books.If a company states that its stock is going to well, that company is actually riskier than one that does not state how its stocks are doing, because people will make the mistake of believing that company and expectations will hinder how it will do.
In short, pay attention to what the market does, be aware that it will run in cycles, and be prepared for the cloudy times as well as the sunny. Too many investors looked solely at the sunny times, making the stock market a bad place to be when it disappeared, and causing the stock market to perform a lot worse than it.
http://www.valuewalk.com/
http://twitter.com/#!/valuewalk
