Sunday, April 12, 2009

Margin Of Safety, By Seth Klarman: Chapter 1

In the next few weeks, we'll be doing a chapter-by-chapter run-down of Seth Klarman's sought after book, Margin Of Safety. We've discussed Klarman on the site before, as he has consistently demonstrated an ability to generate market beating returns over a long period of time. You can find Klarman's limited edition book selling on ebay for hundreds of dollars.

Chapter 1

Klarman starts out by distinguishing investing from speculating. He uses a Mark Twain quote to illustrate the two times in life when one shouldn't speculate: "when you can't afford it, and when you can!". Speculators buy in the hopes or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later, while investors buy the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!)

Examples are provided which describe various speculative bubbles, discussing the faulty logic that first propells speculators to bid up prices followed by the inevitable bursting which destroys the wealth of many.

Klarman suggests that what determines whether an investor will make money in the market or not is his psychological make-up. If he does his own stock analysis and views the prices offered by Mr. Market as an opportunity to buy low and sell high, he will do fine. If Mr. Market's offering prices guide the investor's outlook of what the stock price should be, he should get someone else to manage his money!

Klarman argues that most market fluctuations are the result of day-to-day distortions between supply and demand of particular stocks, not of changes in fundamentals. Investors who take advantage of these distortions by focusing on the fundamentals will be successful. Those who invest with their emotions are sure to fail in the long-run.


Anonymous said...

This book is darn expensive!! :)
One of the reviews I read concluded that books from Peter Lynch and Graham were more detailed regarding their investment decisions and analysis as compared to this book.
I suppose this review was taking into account the heavy price tag on this book.
But nontheless looking forward to your chapter-by-chapter discussion of the book.

Thanks Saj and Regards.
Long live Value Investing

Anonymous said...

You can download a pdf for free on internet. Just search in google.

Saj Karsan said...

Hi Anon1,

Yes you are right, I did find the book less detailed than Graham's Security Analysis, which we've also reviewed on this site. Nevertheless, many of the topics Klarman discusses are very relevant and help readers understand why and how value investing works.

bsivia said...

did you guys buy the book or download a free copy? if you dont mind me asking, how much did you pay for the book?

Saj Karsan said...

Hi bsivia, I received it as a gift (don't know the price)

Unknown said...

Would y'all be interested in a pdf copy of the book?