Value Ideas Blog
Value Essentials: Margin of Safety
VALUE ESSENTIALS: MARGIN OF SAFETY (SETH KLARMAN)   This post is essentially going to cover the most important points of the well-known “Margin of Safety” by Seth Klarman. It might be just as useful for people new to the topic as to those who have read it several times and would like a short summary.   The first chapters basically explain how institutional investors can cause market inefficiency or, in other words, says why value investing works. To keep the length of this post appropriate and not to go into every detail (we do still recommend reading the book!), we would like to jump to the overview of value investing that Klarman gives. Three elements are crucial:   The bottom-up strategy separates the value investor from others; the investment focus should lie on specific investment opportunities. Know a few companies really well instead of knowing little about very many. In the best case, you can focus on just one company at a time, by trying to buy a bargain and to wait.   Focus on absolute instead of relative performance. You cannot beat the market every year. In fact, most of the time you are going to be wrong. But every investment that has been valuated correctly has the potential to help you beat the market in the long-term, which are you are very likely to do. It is necessary to tolerate long periods of underperformance. Cash reserves are crucial when no bargain is available. If the portfolio is fully invested and an opportunity comes along, get rid of companies closest to being fully valued.   read more