During 2009, The Outstanding Investor Digest interviewed Seth Klarman (Trades, Portfolio) on his views after the subprime bubble burst. Some of the comments made by Klarman remain as relevant today as in those days. Here are some of the best excerpts from the interview:
"So when individual stocks reach levels where they are truly undervalued, what are value investors supposed to do other than to buy them? Anything else is market timing."
"Investors today who are tempted to pull out of the market and wait for some kind of 'all clear' signal before recommitting would be well advised to remember the counsel of Graham and Dodd, who wrote in 1934: 'While we were writing, we had to combat a widespread conviction that financial debacle was to be the permanent order.' If they could say that then, I must restate it now."
"Value investors who are able to maintain their focus and resist the pressures inherent in the investment business to pursue short-term results have a multifaceted and adaptable tool kit that should allow them to prosper even in difficult times. First, by maintaining their discipline and by remaining patient in good times and bad, value investors own bargains. This doesn't mean those holdings can't or won't drop in price; it means that when they decline, they'll be even a better bargain to which you are likely to add."
"Value investing is at its core the marriage of a contrarian streak and a calculator. The strategy of buying what is in favor is a fool's errand, ensuring long-term underperformance. Only by standing against the prevailing winds can an investor prosper over time. But for awhile, a value investor typically underperforms."
There is little to add to Klarman's words; however, we can summarize the main ideas from his remarks.
Buy when you find a bargain. Market timing is hard. What value investors focus on is finding undervalued securities with a wide margin of safety. Purchase when available.
Great opportunities take courage. To seize great opportunities, it is necessary to be greedy when others are fearful. If we wait for the market to start confirming our thesis, then we are certain to miss the upside. However, this takes not only discipline, but a lot of courage to be brave and place our bets when the market is falling apart. Having the emotional strength to match our analytical rigor is critical to achieving outstanding results.
Ignore the short-term noise and have some cash around. Having enough cash around is very important, and that can only be achieved with discipline and patience. A lot of mediocre opportunities will be let go for those limited swings we get to make the big money.
Learn to be away from the crowd. Value investors are contrarian, generally apart from the crowd. As humans, we are wired to live in society, so this is harder said than done. Having the courage to defend our positions is critical after thorough analysis.
What do you think?
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