Notes From Seth Klarman's Margin of Safety ~ market folly

Wednesday, April 18, 2012

Notes From Seth Klarman's Margin of Safety

Thanks to a reader for sending us the following notes from Seth Klarman's famous book, Margin of Safety. Written by Ronald Redfield, these notes provide a great summary of Klarman's book for those of you who don't want to pay $1,000 for a now out-of-print copy.

Why should you care about this? Well, for those of you who are unfamiliar, Klarman's Baupost Group is one of the top 10 hedge funds by net gains since inception. And since numbers do the talking in the investing world, it's time to pull up a chair and learn from the best.

Redfield singles out prudent quotes from Klarman such as this gem on risk:

"Targeting investment returns leads investors to focus on potential upside rather on downside risk ... rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk."

And by focusing on risk, Klarman of course hints that investors should seek a margin of safety in their investments. He goes on to specifically address this topic, writing:

"A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world."

Redfield points out that Klarman says investors can battle risk via diversification, hedging, and investing with a margin of safety.

Klarman also touches on other tricky aspects of investing, such as forced selling. He writes, "The trick of successful investors is to sell when they want to, not when they have to. Investors who may need to sell should not own marketable securities other than U.S. Treasury Bills."

John Burbank of Passport Capital has echoed this via his timeless quote: "cash is most valuable when others don't have it." This refers to cash's utility as a hedge during a downturn as well as its ability to fund opportunistic purchases while others are forced to do otherwise.

For more investing wisdom, we've also posted up Seth Klarman's recommended reading list.

Embedded below are notes from Seth Klarman's Margin of Safety (email readers click the link to come view):

And if you want to read the original book, you can try to purchase one here.

For our past posts on the Baupost Group founder, head to:

- Collection of Baupost Group letters

- Interview with Seth Klarman

- Profile of Seth Klarman & Baupost Group

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