February 2020 – This month, Scott Morrison selects Seth Klarman’s Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.
Seth Klarman, one of the best investors of the last generation, wrote this book in 1991. He speaks to how investors need to incorporate the mindset of building a “margin of safety” when it comes to evaluating securities. This margin of safety is to provision for unknown factors that can negatively affect the stock market, not unlike the current outbreak of coronavirus.
“Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon”
“Investors are sometimes their own worst enemies. When prices are generally rising, for example greed leeds investors to speculate, to make substantial, high risk bets based on optimistic predictions, and to focus on return while ignoring risk. At the other end of the emotional spectrum, when prices are generally falling, fear of loss causes investors to focus solely on the possibility of continued price declines to the exclusion of investment fundamentals.”
“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.”
“How do value investors deal with the analytical necessity to predict the unpredictable. The only answer is conservatism.”
“At times when interest rates are unusually low, however, investors are likely to find very high multiples being applied to share prices.”