Can you build an investment strategy using quotes alone? No, but you can increase your knowledge of the investment world and build out your investing mental model.
The collection of quotes below are from Seth Klarman (Trades, Portfolio), and they are designed to give a unique insight into his investment process. They don't tell you how to invest. They give insight into how this highly regarded value investor thinks and invests his money.
Hopefully, you'll be able to improve your investment process to some degree with the quotes below.
Wisdom from Seth Klarman (Trades, Portfolio)
To be a successful investor, you need an edge:
“To succeed in today's overcrowded environment, investors need an edge, an advantage over the competition, to help them allocate their scarce time. Since most everyone has access to complete and accurate databases, powerful computers, and well-trained analytical talent, these resources provide less and less of a competitive edge; they are necessary but not sufficient. You cannot have an edge doing what everyone else is doing; to add value, you must stand apart from the crowd. And when you do, you benefit from watching the competition at work.”
You also need to be tolerant of losses and confident in your investment strategy:
“Here's how to know if you have the makeup to be an investor. How would you handle the following situation? Let's say you own a Procter & Gamble in your portfolio, and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you're an investor. If you don't, you're not an investor, you're a speculator, and you shouldn't be in the stock market in the first place.”
Don't try to outperform or match your performance against others. Concentrate on risk aversion and the pursuit of long-term results without getting caught up in the short-term performance darby.
"We don't try to be anyone's best performing manager in a given year because such an attempt would almost certainly fail. It would distract us from our focus on risk-aversion and the pursuit of excellent long-term results while shifting our attention toward quick gains, short-term trades and market momentum.”
Business valuations can be significantly impacted by the prevailing market environment:
“The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of 'private market value' as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.”
Focus on the long-term. It is here where the average investor has the most advantage:
“We are always long-term oriented. We never attempt to gauge near-term market movements; we have no edge there. We strive to make long-term investments that have truly compelling risk-reward characteristics. We are never afraid to stand apart from the crowd. We stick to our game plan and focus on areas where we are skilled and experienced. We are resolute in resisting the short-term performance pressures and herd behaviors that plague the investment business.”
Psychology is an integral part of investing that should not be overlooked:
“Understanding how our brains work-our limitations, endless mental shortcuts, and deeply ingrained biases—is one of the keys to successful investing. At Baupost, we believe that it is sometimes easier to predict how investors will behave in certain situations than it is to predict a company's bottom line. At times of market extremes, by avoiding emotional overreaction and remaining aware of our biases, it may be possible to know market participants better than they can know themselves.”
The best place to look for bargains is in the shreds left over by Wall Street:
"Institutional constraints and market inefficiencies are the primary reasons that bargains develop. Investors prefer businesses and securities that are simple over those that are complex. They fancy growth. They enjoy an exciting story. They avoid situations that involve the stigma of financial distress or the taint of litigation. They hate uncertain timing. They prefer liquidity to illiquidity. They prefer the illusion of perfect information that comes with large, successful companies to the limited information from companies embroiled in scandal, fraud, unexpected losses or management turmoil.”
Value investing is a multi-disciplinary style:
“Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment. Price, of course, is determined in the financial markets, varying with the vicissitudes of supply and demand for a given security.”
And once again, Klarman is a firm believer that to be a successful long-term investor; investors need to have the edge over the rest of the market:
"If you are investing and you don't have an edge you probably shouldn't be [investing]. And so we think about that a lot, that there are a lot of really formidable competitors, a lot of money that's flowed into the hands of very capable value investors, long-term oriented, smart people. There are obviously also people that know a huge amount about industries, industry specialists, corporate executive, former executives, and so it's very competitive out there most of the time. So much of the time we have drifted into less liquid or more obscure parts of the universe.”
Disclosure: The author owns no stock mentioned.
