Latticework Investor

Value Investing

Investing Wisdom from Seth Klarman

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Noisefree investing has posted some letters to investors from Seth Klarman’s Baupost Group. The letters are dated from 1995 to 1998. Some (of the many) great quotes are below.

… we prefer investments, when we can find them at attractive prices, that involve a catalyst for the realization of underlying value

Our policy is to continue to protect ourselves from serious market declines through the purchase of out-of-the-money put options.

We firmly believe that one of Baupost’s biggest risks, and, needless to say, that of other investors, is that we will buy too soon on the way down. Sometimes cheap stocks become a whole lot cheaper; it simply hasnt happened lately. (And when that happens, expensive stocks will fare far worse.)

We will not stray from our rigid value investment discipline. We buy absolute bargains when they become available, and sell when they are no longer bargains. We hold cash when there is nothing better to do, and we hedge against the risk of a dramatic and sustained downturn in the market.

Risk is also mitigated by both our constant emphasis on investment fundamentals and on knowing why each investment we make is available at a seeming bargain price. We regard investing as an arrogant act; an investor who buys is effectively saying that he or she knows more than the seller and the same or more than other prospective buyers. We counter this necessary arrogance (for indeed, a good investor must pull confidently on the trigger) with an offsetting dose of humility, always asking whether we have an apparent advantage over other market participants in any potential investment. If the answer is negative, we do not invest.

Rather than own a little bit of everything, we have always tended to place our eggs in a few dozen baskets and watch them closely. These bargain-priced opportunities are selected one at a time, bottom up, which provides a margin of safety in case of error, bad luck or disappointing business results.

Cash provides protection in a storm and ammunition to take advantage of newly created opportunities, but holding cash involves the considerable opportunity cost of foregoing presently attractive investments.

It is only in a bear market that the value investing discipline becomes especially important because value investing, virtually alone among strategies, gives you exposure to the upside with limited downside risk.

In a stormy market, the value investing discipline becomes crucial, because it helps you find your bearings when reassuring landmarks are no longer visible.

But the value investing discipline tells you exactly what to analyze, price versus value, and then what to do, buy at a considerable discount and sell near full value. And, because you cannot tell what the market is going to do, a value investment discipline is important because it is the only approach that produces consistently good investment results over a complete market cycle.

If an undervalued stock drops after you buy it and you are confident in your analysis, you simply buy more.

The payoff to fundamental analysis rises proportionately with the difficulty of performing it. [talking about investing in emerging market or areas where information is less readily available]

In investing, nothing is certain. The best investments we have ever made, that in retrospect seem like free money, seemed not at all that way when we made them.

We continue to be willing to give up a portion of our upside to protect against serious downside exposure.


Written by latticework01

June 16, 2009 at 10:11 am

Posted in quote

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