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Seth Klarman: Is Investing an Art, a Science or a Craft?

It could be all 3

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Oct 24, 2019
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Is investing an art, a science or a craft? Is it a bit of everything? In a 2009 interview with the TIFF Education Foundation, value investor

Seth Klarman (Trades, Portfolio) answered this very question, explaining how investing falls into all three of these categories.

What is most important?

When we talk about the "science" of investing, what we mean is the technical, replicable elements of analysis. Understanding financial statements, achieving fluency in the language of accounting and building discounted cash flow models all fall into this category. They are all "skills" that you can learn and can implement by following a formula. Interestingly, Klarman believes this is actually the easiest part of investing, and least relevant to what it is really about:

“I would say art first and foremost, craft second, science third. To me, the science of valuing things and of identifying when things sell at a discount is as straightforward as could be. It’s almost a commodity these days; when you hire business school kids, they all know how to do that. There are nuances and places they might make mistakes, but I think that’s the easiest part, albeit for a layperson it might seem like the hardest part.”

What about craft?

It’s important to define what is meant by "craft" here. In the interview, craftsmanship is defined as “the ability and willingness to come to work every day and to do the same thing over and over again.” What I would add to this is everything that makes up the psychological aspects of investing: not getting swept along by the crowd, being contrarian and so on:

“I think that there is a big element of craft in showing up, especially for a value investor where part of the game is discipline. It’s like

Warren Buffett (Trades, Portfolio) says, you are in a game with no umpire and no called strikes so you can keep the bat on your shoulder for a long time. So the craft of showing up and saying, 'Nope, nothing interesting today. Nope, still nothing interesting,' is really important.”

The art of investing

For Klarman, the "art" of investing really comes down to having that special something that allows some people to quickly understand the ins and outs of a particular investment proposal and, crucially, to combine knowledge that they may have from other domains with the data presented to them:

“The ability to distill two or three major themes out of an investment and get right to the heart of the matter is truly an art. Some of our best analysts can get up to speed in a day or two on something they’ve never heard of before. This is a world where many people have chosen to specialize, to have silos, to have narrow areas of extreme expertise. That’s a legitimate choice, and many of the best long-short funds, for example, have their pharmaceutical analyst and their oil and gas analyst and their financial analyst. We respect that, but we think value is added by being generalists and seeing opportunities from a broader perspective. If you have silos, you’re going to own things only within those silos.”

There’s nothing wrong with have a narrow specialisation in one area - in fact, it may help you focus your energies on a single thing. But the universe of possibilities will always be more limited for a specialist than it is for a generalist. Klarman clearly prefers to be the latter.

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