Seth Klarman, popularly known as ‘The Oracle of Boston’ is a legendary hedge fund manager who manages Baupost Group, one of the largest hedge fund. Klarman currently has $30 billion assets under management and has generated more than 20 percent compounded return on investment.
An avid follower of Value Investing, Klarman has authored a highly acclaimed book on investing named ‘Margin of Safety’. His insights on investing are oriented towards protecting one’s capital (management of risk) through the use of margin of safety principle on investing.
Here are some of the best investing insights from the legendary hedge fund manager Seth Klarman.
Best Investing Insights From Seth Klarman
# The first and foremost responsibility of every investor is preservation of capital.
# Avoidance of loss is the surest way to ensure a profitable outcome.
# All investors need to learn how to be at peace with their decisions.
# In reality, no one knows what the market will do. Trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.
# If the stock market has a period of out-performance of its long-term return, it is inevitably followed by some period of under-performance. But people being optimistic and greedy by nature take the recent short-term out-performance of stocks as a sign of good things to come, rather than a warning of bad things to come.
# Selling, in particular, can be a challenge; many investors are tempted to become more optimistic when a security is performing well. This temptation must be resisted; tax considerations aside, when a security reaches full valuation, there is no longer a reason to own it.
# Sometimes buying early on the way down looks like being wrong, but it isn’t.
# Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.
# One of the nice things about investing is there are many different disciplines that work. You should find one that you’re comfortable with.
# All an investor can do is follow a consistently disciplined and rigorous approach; over time the returns will come.
# You need to balance arrogance and humility when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay an 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything.
# When the next fear-inspired panic occurs, investors’ finger-pointing will almost certainly be aimed outward, while a good part of the blame should instead be directed inward.
# As Graham, Dodd and Buffett have all said, you should always remember that you don’t have to swing at every pitch. You can wait for opportunities that fit your criteria and if you don’t find them, patiently wait. Deciding not to act is still a decision.
# It is always easiest to run with the herd; at times, it can take a deep reservoir of courage and conviction to stand apart from it. Yet distancing yourself from the crowd is an essential component of long-term investment success.
# We would rather under perform in a huge bull market than get clobbered in a really bad bear market.
# In investing it is never wrong to change your mind. It is only wrong to change your mind and do nothing about it.
# Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.
# Value investing is the discipline of buying shares at a significant discount from their current underlying values and holding them until more of their value is realized. The element of a bargain is the key to the process.
# The single greatest edge an investor can have is a long-term orientation.
# Interestingly, we have beaten the market quite handsomely over this time frame, although beating the market has never been our objective. Rather, we have consistently tried not to lose money and, in doing so, have not only protected on the downside but also outperformed on the upside.
# Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.
# Risk is a perception in each investor’s mind that results from analysis of the probability and amount of potential loss from an investment. If an exploratory oil well proves to be a dry hole, it is called risky. If a bond defaults or a stock plunges in price, they are called risky. But if the well is a gusher, the bond matures on schedule, and the stock rallies strongly, can we say they weren’t risky when the investment after it is concluded than was known when it was made.
# Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.
# Successful investors like stocks better when they’re going down. When you go to a department store or a supermarket, you like to buy merchandise on sale, but it doesn’t work that way in the stock market. In the stock market, people panic when stocks are going down, so they like them less when they should like them more. When prices go down, you shouldn’t panic, but it’s hard to control your emotions when you’re overextended, when you see your net worth drop in half and you worry that you won’t have enough money to pay for your kids’ college.
# Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgement, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and it’s price fluctuations is a key factor in his or her ultimate investment success or failure.