Seth Klarman

Seth Klarman: Why Value Investors Are Different

Last week, I sent out what Buffett was saying in 1974 during the 73-75 bear market. His message was that it was a great time to buy.

Fast forward to 1999, Seth Klarman wrote about Buffett’s purchase of Washington Post and how value investors should think about investing.

Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?

 

Klarman On

Bitcoin

 the danger of Chinese leverage

Discipline while value investing in bubby times

Value investing is not dead

Radicalization of politics

Dangerous FAANG valuations

Seth Klarman

Let’s see what he had to say and whether value investors really are different.

Why Value Investors are Different

  • Klarman recounts how Buffett got into the Washington Post stock and continued to buy while the market around him was crashing. Buffett’s steadfast outlook on valuation was what allowed him to weather falling prices and buy more.
  • This event is important as it shows in bear markets, good bargains become even better bargains. Had Buffett panicked and sold out, he would have lost on what turned out to be a great investment.
  • Value investor’s well-founded conviction – being confident in the margin of safety that a bargain purchase is able to confer
  • How would you react if you continue to see losses on your purchases?
  • Profit from bargain purchases is not an immediate occurrence. Buffet was not making transactions for quick gains. His view was that sellers of Washington Post were not thinking clearly or not in the position to think clearly. The sellers of Washington Post and Buffett, mainly disagreed on the discount between share price and business value. Two different things.
  • Buffett did not think about the market cap, trading volume, corporate actions etc in his buying decision. Simply valued the business, that he liked, had a moat and knew a lot about. It fit his criteria and he  bought it at a sizable discount

Stock Buying and Selling Decision

  • Mutual fund managers, live on short term relative performance. Desperate to put cash to work, they don’t buy what is cheap but what is working. Since what is cheap by definition is not working.
  • When stocks are rising for no better reason than they have risen, the greater fool is at work.
  • When you buy based on value, buy more when the stock is undervalued. Sell when it becomes fully valued

Necessary Arrogance

  • Root of value investing = market is a voting machine, not a weighing machine.
  • Investors need a sense of “arrogrance” and be more confident in their own opinion. It’s your reasoning against the crowd. The combined weight of all other opinions does not mean it is correct. Balance arrogrance with caution.
  • Someone just as smart is on the other side of the table selling you the shares are bargain prices. Why?
  • Risks can be mitigated by extended fundamental analysis and knowing something is a bargain and why it is a bargain

Some things to think about.

Downloads

Click here to download the complete PDF version

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Article by Jae, Jun, Old School Value

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