Investors are too often lured by the prospect of the instant millions and fall prey to much of the fad on Wall Street. The myriad approaches they adopt offer little or no real prospect of long-term success and invariably carry the risk of significant economic losses - they resemble speculation or mere gambling rather than a coherent investment program.
However, Value Investing - a strategy for investing in securities with a significant discount from the base value - has a long history - has a long history of delivering excellent investment performance with limited downside risks. Taking its title from Benjamin Graham's often repeated admonition to always invest with a certain margin of safety, Klarman's "Safety Margin" explains the philosophy of investing in value, and perhaps more importantly, the logic behind it, showing why it works. while other approaches have failed. The plan that Klarman offers, if carefully followed, gives the investor a good chance of investment success
Seth Klarman is one of the biggest investors of the current generation, perhaps of all time, through his Baupost fund. This 1991 book is an investment classic, so much so that it retails for $ 780 in the secondary market. The most important conclusion for most value investors is that all investments must have an intrinsic safety margin. This means looking at the negative side before looking at the negative side. The concept of risk is asymmetric, not the standard deviation of returns as modern portfolio theory suggests. For example, the risk of a particular security in a modern portfolio is independent of the price; for a value investor, the risk is extremely price dependent.
Klarman focuses on absolute performance, not relative performance. In contrast to CNBC's bubble heads, it doesn't have to be constantly invested. He is rightly skeptical of Wall Street research and their investment bankers' exotic products.
The most important earnings metric for Klarman is rightfully his free cash flow. It is not earnings per share and it is not EBITDA. Depreciation is real, as are investments that are not included in the income statement.
The reader must remember that this book was written in 1991 against the backdrop of the 1987 crash, the crash of junk bonds and the bear market of 1990. It is critical of newly issued junk bonds (high yield in today's terminology). He didn't know that 27 years later, the high yield would dominate new issues. He is also critical of the index funds that dominate the stock market today. Index funds are very useful for the average investor.
Why? Put simply, the average investor doesn't have the talent or time to be a value investor like Klarman. It takes more than a few heads and a lot of hard work to be just another Seth Klarman.
"Safety margin" is written clearly and concisely. My two criticisms are that there are too few examples of value investing in action and it is obviously outdated. Yet the lessons to be learned from reading the book are timeless.
I am a former student of the Value Investing program at Columbia Business School and I heard about Seth Klarman in one of our classes, so I decided to get my hands on this book. After months of waiting, I was finally able to read this book in my local library in a special locked room as this book is # 1 in the theft list. All I can say is that it comes closest to the holy grail of investing. I have applied most of his principles to my investments and the results have been spectacular (if only in a short period of time). No wonder the author (who owns the rights) doesn't want to publish the book again. He wants to keep his methods secret from him. Just look at Klarman's track record on Baupost !!
CBS alumni such as Louis Bacon, Leon Cooperman, William Von Mueffling, and even Warren Buffett are said to have copies. This book is worth gold.
I would recommend this book to anyone interested in delving into the thoughts of one of the great value investment professionals.
This book is one of the hardest financial books to track down. It was released in 1991 and is now out of stock, sold for over $ 1000 on Amazon and Ebay. In fact, it's one of the most commonly stolen library books, making it very difficult to find a copy to read.
Seth Klarman, the portfolio manager of Baupost Group, is a very successful practitioner of the value investment strategy. In this book he wants to educate the reader on this concept and highlight the benefits of a risk-averse approach. In his introduction, Klarman notes that even though this book leads to a lower return on investment for itself as a side effect of educating more people on more refined investments, it is worth it for the public good. Although I really appreciate this mentality, the question naturally arises: why hasn't the book been republished? Clearly, given what I mentioned in the first paragraph, there is a significant need to read it. Anyway, for the book itself ...
"Safety margin" is divided into three sections. The first part discusses where most investors make mistakes and stumble: it covers investing against speculation, the nature of Wall Street, and how institutional investing leads to a short-term performance derby (of which the client is ultimately the loser) . It also summarizes the information presented in a well thought out way
