Sunday, May 24, 2009

Margin Of Safety: Chapter 13

This chapter is about trading and portfolio management from a value investing point of view.

Portfolio management is described as an on-going process that is never complete. While certain businesses may be fairly stable, its prices will fluctuate over time, and so the investor must constantly monitor the situation. Value investors are not into buying certain industries or business ideas without regard to price, and so price changes are a fundamental factor that drive portfolio decisions.

Klarman also points out the need for portfolios to be somewhat liquid. Investors are advised not to purchase their entire positions at one go, but rather to leave room to buy in at cheaper prices should the stock go down. A good test for an investor is to consider whether he would indeed buy more of the stock were it to drop; if he is not, he is probably speculating and should not be buying in the first place!

The decision of when to sell a stock is also discussed. Determining when to buy a stock is usually a much easier decision for a value investor, since the stock at that time is trading below what the investor considers an adequate margin of safety. But when the stock is trading within the range of values the investor believes it to be worth, what is the investor to do? Klarman argues against selling after percentage gain thresholds or price targets have been reached. Instead, the investor should compare the investment to available alternative investments: it would be foolish to sell if there were no better investments and the stock was still undervalued, but it would be foolish not to sell if there are better bargains around!

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