Sunday, April 26, 2009

Margin Of Safety: Chapter 5

In the previous four chapters, Klarman focused on describing how investors go wrong. Chapter 5 is an introduction to the second part of the book, where Klarman describes the philosophy of value investing.

Klarman quotes Buffett's first two rules of value investing:

1) Don't Lose Money
2) Never Forget Rule #1

While it is easy to say these rules, Klarman said by themselves they don't help investors. Klarman seeks to make it clear that the future is uncertain. Future GDP growth rates, inflation rates, and other relevant factors to stock price returns are always unknown. Furthermore, stocks are junior securities to debt and other firm obligations, making their future values even more uncertain. Stocks are certainly not risk free, but in the following chapters, Klarman seeks to describe strategies investors can follow that will help them follow the above rules.

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