Finance
by Seth Klarman
What if losing less is the secret?
Seth Klarman, who runs the Boston investment firm Baupost, wrote this book in 1991. His case is that most investors chase returns and barely think about risk. He puts avoiding loss first, and argues that this is how good long-term returns actually get made.
Hear a sample · read by Laura
Klarman says an investor buys a business for the cash it will produce. A speculator buys a piece of paper because someone might pay more for it later. The investor can check his thinking against the business. The speculator is guessing at other people's moods.
Valuing a business is imprecise, so Klarman thinks in ranges, never one exact number. He buys only at a steep discount to his cautious estimate. That gap is the margin of safety. It protects him from his own mistakes, from bad luck and from the swings of a volatile market.
Brokers and banks earn fees when people buy, so Klarman says Wall Street tilts towards optimism. It rarely tells anyone to sell. It brings new shares to market when prices are high, because that's when the owners want to sell. Its interests and yours often differ.
Klarman takes aim at fund managers who are judged every quarter against an index. To avoid looking bad, they hold what everyone else holds and dump anything that lags. Keeping the job wins out over making good returns, and Klarman says the client is the loser.
Investing
Investors buy things for what they're worth. Speculators buy hoping someone will pay more later.
Wall Street
Brokers and fund managers earn fees whether you win or lose, so their advice leans towards activity.
Losses first
Focus on avoiding losses before chasing gains, because a big loss takes years to recover from.
The gap
Buy only at a big discount to what a business is worth, since your estimate might be wrong.
Ranges
A business has no exact value. The best you can do is a rough range.
A story from the book
When sardines vanished from the waters off Monterey, California, traders bid the price of a can higher and higher. One buyer finally opened a can to eat and felt ill. He complained to the seller, who explained that these were trading sardines, never meant for eating.
One thing to try
Before you next buy a share, or anything you might sell again, write down what it would be worth if things went badly. Compare that with the price. If there's no cushion, wait. Klarman looks at what he could lose before what he could make.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Margin of Safety comes with a Spot the Trap case to make it stick.
Get the whole book on KnotdOpen in the appWhat if losing less is the secret? Seth Klarman, who runs the Boston investment firm Baupost, wrote this book in 1991. His case is that most investors chase returns and barely think about risk. He puts avoiding loss first, and argues that this is how good long-term returns actually get made.
Two ways to own a share; Buy with room to be wrong; Wall Street leans one way; The performance derby.
Before you next buy a share, or anything you might sell again, write down what it would be worth if things went badly. Compare that with the price. If there's no cushion, wait. Klarman looks at what he could lose before what he could make.
Yes. Knotd has the key ideas from Margin of Safety in a few minutes, in plain words, plus a Spot the Trap case to test them. It's one of 250+ non-fiction books in the app.
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