Yesterday, I posted Cameron Wright’s excellent notes on Seth Klarman’s discussion with Jason Zweig of The Wall St. Journal at the CFA Institute Annual Conference on May 18, 2010. I reread the notes this morning and offer the following observations.
1. Seth Klarman is an exceptionally gifted investor and thinker. It is worth seeking out and studying everything he has written on investing. (In the future, I will put together a post on links to his writings – stay tuned.)
2. Klarman notes that the investing business is more competitive now than it was when Ben Graham operated. We should never lose site of the fact that whenever we buy an investment there is someone on the other side of the trade. We must assume that the person is both (very) intelligent and (very) well informed. To win at this game, we must limit our purchases to times when we know we have an edge. This could be through superior insight, for example, as a result of a good research and hard work, or because it is obvious that the reason the other party is selling has nothing to do with the underlying value of the asset, i.e. market panic, forced redemptions, etc.
3. Klarman is investing in asset classes that are well beyond traditional stocks and bonds. Many, if not most, of these alternative asset classes are difficult to buy, especially for individual investors. Don’t fret that there are ways to make money that are outside of your circle of competence. The answer is not to blindly follow investors like Klarman into areas you do not understand; this won’t work. Rather, focus on your own circle of competence and find an edge. As Munger says, you may not be able to become a world-class musician or tennis player, but you can, with patience and hard work, become the best plumber in Bemidji, MN.
4. Great investors do not beat the market every quarter or every year. Even the best have periods of underperformance. What value investing has on its side is logic. If you consistently purchase undervalued instruments at a margin of safety, the results will take care of themselves. This may play out in a lumpy fashion, but in the end will yield good results.
5. Klarman and his analysts spend their time looking for irrational sellers. Why? Because when someone is selling for an irrational reason you have an edge.
6. If you forget that securities are claims on a business, you will be much more susceptible to selling into a down market.
7. Great summary of the investment process: “1.) Find compelling bargains, not slight bargains. 2.) Test everything with sensitivity analyses. 3.) Prepare to be wrong.”
8. Klarman is more worried about the macro-economy that at any point in his career. My take on this is 1) to demand an even larger margin of safety in your investments, 2) go back over your research to confirm that your investment theses are sound, 3) don’t be averse to holding a material amount of cash in your portfolio as a simple hedge or if you cannot find compelling bargains, and 4) temper growth projections in all valuation models. In short, don’t reach. Consider the downside first and foremost.
9. Great quote: “Wall St. exists to make money, not to benefit Baupost. I know that Wall St. will always try to take our money, I go in with open eyes, you need to think “Caveat Emptor” when dealing with Wall St.
10. When Klarman buys a stock, he expects to hold it forever. Reminds me of Buffett who said, “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
11. Another great quote: “At some price, an asset is a buy, at another it’s a hold, and at another it’s a sell.”
12. Book recommendations: “The Intelligent Investor, Greenblatt’s You Can Be A Stock Market Genius, Whitman’s Aggressive Conservative Investor, Anything from Jim Grant, Roger Lowenstein has not written a bad book, anything from him. Also Michael Lewis, who also hasn’t written a bad book either, but specifically MoneyBall which will go down as a definitive book on investing. Also Too Big to Fail is good.”