One name from the investment world that you should know about is Seth Klarman. Klarman is a reclusive hedge fund manager and investor. In 1991, Klarman managed over $400 million in assets. Klarman is now the CEO and president of the Baupost investment firm, headquartered in Boston. Baupost manages over $27 billion in assets. Klarman himself is estimated to have a net worth of over $1.3 billion.
So, why should you know the name Seth Klarman? Well, in 1991, he wrote a 250-page book called Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor with you in mind in mind as its target audience. Klarman set out to write a book about value investing that would be understandable to the layperson and offer actionable and practical advice.
Seth Klarman and Margin of Safety
HarperCollins published Margin of Safety in 1991 with virtually no advertising. Klarman said that the publishers, “Didn’t advertise it. Editors kept getting fired—I don’t think because of me—and by the third editor we finished the book, and then it sold about 5,000 copies, and it died out. It was dead. It died.” By 1991, the 5,000-print run of Margin of Safety sold for $25 and was a commercial failure that was forgotten in its time.
However, history sometimes proves that some of the greatest ideas can be decades ahead of its time. Margin of Safety now sells for over $2,500 on Amazon – and $2,500 is the cheapest price. You would be hard pressed to find used copies anywhere else for under $500, at best. So, what is value investing? Why is Klarman’s book so appreciated, and collector valued, decades after its initial release? What are ten tips to glean from the book? Let’s do a deep dive into Margin of Safety.
What is Value Investing?
It’s the difference between investing in Facebook 10 or 13 years ago, as opposed to today, for example. Value investing requires you to know the value of an undervalued company and to believe that its profitability and value will grow in the future. In Margin of Safety, Klarman wrote, “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 mindset to succeed.”
Why is Margin of Safety Appreciated and Valued Now as Opposed to 1991?
The average salary in 1991 was less than $20,000. Most people at the time assumed they couldn’t afford to invest and/or were intimidated by their own investing inexperience. Klarman wrote Margin of Safety to make value investing easy to understand and to prove that anyone prepared for investing could do it. Value investing is, “simple enough for anyone to follow,” and it’s “logical, commonsensical, and proven to work,” said Klarman.
Klarman’s goal was to make value investing sound easily comprehensible to anyone reading Margin of Safety. “I tried to write it to be accessible to the layperson, or a professional entering the field…I tried to use layman’s language, and make it accessible,” said Klarman. However, along with being appreciated long after its release, Margin of Safety is also a collector’s item.
Only 5,000 copies exist. The book regularly sells for $2,500, although some copies have sold for as much as $3,300. Illegal, scanned, bootlegged copies of the book began appearing on Amazon in 2018 for as low as $10. Klarman’s lawyers got Amazon and other sites to shut down such transactions.
10 Big Ideas from the Margin of Safety
1. There is nothing easy about value investing. It takes intensive research, discipline, patience, an understanding of the financial market, and a mindset to think long-term when contemplating profitability.
2. Timing is everything. The most optimal time to invest, and to utilize value investing research, may be when the stock market is falling. Investors who lose money usually believe that the market will never go down. Or, that market conditions would always be ripe for profiting. Investing with a margin of safety buffer protects value investors in low markets.
3. Trust your research, not the market or market experts. The stock market is a continuum of buyers and sellers who may be investing out of emotion, fear, or hype, but not research. Market experts have agendas. Use the market as a reference guide to execute your own disciplined research strategies.
4. Stock market fluctuations should not precipitate panic or hype decisions. The stock market falls, rises, and corrects itself. No, you shouldn’t ignore the market. But your business reality and research should dictate your decisions, not panic or hype.
5. Invest based on considerations of value and price, not one over another.
6. Invest dispassionately. Research and strategy will help you invest rationally. Ignorance and emotional hype will have you incessantly worrying over your investment.
7. The stock market is not a get rich quick scheme. Stock experts with, “hot tips,” have agendas. Greed can make you sell at the most inopportune time. Invest with a long-term strategy.
8. The stock market rises and falls in cycles. Emotional investors follow stock prices only instead of strategically considering how an undervalued company may increase in value.
9. Diversify your portfolio as a buffer against loss. Investors lose money due to mistakes or bad luck. Diversify your portfolio and always be prepared for the worst.
10. Focus on the investment process and identify risk, not the goal. You can’t earn 20% against an investment annually from sheer force of will. Focus on long-term investment strategies and identifying areas of risk.
Should You Buy Seth Klarman’s Margin of Safety?
So, if you really want to read the book, its probably best to get a copy – you can alaways resell it. In fact, the book was selling for $1,500 ten years ago, now it costs $2,500 – so you’ll probably make money.
You can get a copy here.
Don’t treat Margin of Safety as a hype or collectible buy. Treat it as a comprehensible blueprint for value investing.
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Obligatory Wikiepedia link about Seth Klarman here.
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.