Seth Klarman

There´s a gene for this stuff. When the market starts to go down a lot of people start to overreact and start to panic. For me it´s natural. For a lot of people it´s fighting human nature.

Seth Klarman

If you can remember that stocks arent´t pieces of paper that gyrate all the time – they are fractional interests in the businesses – it all makes sense.

Seth Klarman

You have to slow the game down. I can buy this thing for a huge fraction of what it´s worth. What am I worried about of it goes down a little bit more.

Seth Klarman

The analysis is the easy part.

Seth Klarman

Investing is the intersection of economics and psychology.

Seth Klarman

The economics, the valuation of the business, is not hard. The psychology – how much do you buy? Do you buy it at this price? Do you wait for lower prices? What do you do when it looks like the world might end? Those are the harder things!

Seth Klarman

With time and experience the psychological aspects of investing can be learned, but you have to have the right psychological makeup in the first place.

Seth Klarman

Value investors need to be patient and disciplined, but what I really think is you need to not be greedy. Those who are greedy and leverage, are the ones that blow up.

Seth Klarman

Almost every financial blow up is because of leverage.

Seth Klarman

We´ve made mistakes where we underestimated the leverage in the situation. Leverage can magnify your returns and your losses.

Seth Klarman

You need to balance arrogance and humility. When you buy anything it´s an arrogant act. You´re saying to markets that are gyrating; somebody wants to sell this to me and I know more than everyone else so I´m going to stand here and buy it. That´s arrogant. You need humility to say; I might be wrong…

Seth Klarman

I am not worried about gyrations in the stock market. I don´t have a Bloomberg terminal on my desk. I don´t care. I have a giant pile of papers, I have a computer and a phone.

Seth Klarman

The only reason we [Baupost] care about gyrations is so we can buy something cheaper.

Seth Klarman

We benefit from volatility; we provide liquidity when people want to sell in a hurry. We sort of are with the most opposite. We buy when the market is down. We sell when it´s up.

Seth Klarman

Buying is easier. Selling is hard. It´s difficult to know the exact timing for when to get out. You can never tell how big a bargain you might get tomorrow. You need to buy it and leave a little room to buy more…

Seth Klarman

A lot of stocks are cheap for a reason. A value investor will figure out the reason.

Seth Klarman

There are stocks that have been perennially undervalued because they are run by somebody who fits that profile. Good management in a company adds value because they can buy back a stock when it is undervalued. Bad management will hurt the stock. Those are early but profound lessons…

Seth Klarman

We are looking for people who put the clients first. If you put them second, that´s when the whole thing can blow up.

Seth Klarman

The single greatest edge an investor can have is long-term orientation.

Seth Klarman

Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.

Seth Klarman

Value investing is at its core the marriage of a contrarian streak and a calculator.

Seth Klarman

Most investors are primarily oriented toward return, how much they can make, and pay little attention to risks, how much they can lose.

Seth Klarman

The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.

Seth Klarman

In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing is based upon that prediction is a speculative undertaking.

Seth Klarman

Investment success cannot be captured in a mathematical equation or a computer program.

Seth Klarman

Value investing is risk aversion.

Seth Klarman

Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.

Seth Klarman

Sometimes buying early on the way down looks like being wrong, but it isn’t.

Seth Klarman

As Graham, Dodd and Buffett have all said, you should always remember that you don’t have to swing at every pitch. You can wait for opportunities that fit your criteria and if you don’t find them, patiently wait. Deciding not to act is still a decision.

Seth Klarman

In a world in which most investors appear interested in figuring out how to make money every second and chase the idea du jour, there’s also something validating about the message that it’s okay to do nothing and wait for opportunities to present themselves or to pay off. That’s lonely and contrary a lot of the time, but reminding yourself that that’s what it takes is quite helpful.

Seth Klarman

There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate, and invest with a margin of safety. It is a precisely because we do not and cannot know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.

Seth Klarman

The cost of performing well in bad times can be relative underperformance in good times.

Seth Klarman

Here’s how to know if you have the makeup to be an investor. How would you handle the following situation? Let’s say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you’re an investor. If you don’t, you’re not an investor, you’re a speculator, and you shouldn’t be in the stock market in the first place.

Seth Klarman

A simple rule applies: if you don’t quickly comprehend what a company is doing, then management probably doesn’t either.

Seth Klarman

Rather, risk is a perception in each investor’s mind that results from analysis of the probability and amount of potential loss from an investment. If an exploratory oil well proves to be a dry hole, it is called risky. If a bond defaults or a stock plunges in price, they are called risky. But if the well is a gusher, the bond matures on schedule, and the stock rallies strongly, can we say they weren’t risky when the investment after it is concluded than was known when it was made.

Seth Klarman

Unlike return, however, risk is no more quantifiable at the end of an investment that it was at its beginning. Risk simply cannot be described by a single number. Intuitively we understand that risk varies from investment to investment: a government bond is not as risky as the stock of a high-technology company. But investments do not provide information about their risks the way food packages provide nutritional data.

Seth Klarman

In the financial markets, however, the connection between a marketable security and the underlying business is not as clear-cut. For investors in a marketable security the gain or loss associated with the various outcomes is not totally inherent in the underlying business; it also depends on the price paid, which is established by the marketplace. The view that risk is dependent on both the nature of investments and on their market price is very different from that described by beta.

Seth Klarman

Macro worries are like sports talk radio. Everyone has a good opinion which probably means that none of them are good.

Seth Klarman

If only one word is to be used to describe what Baupost does, that word should be: ‘Mispricing’. We look for mispricing due to over-reaction.

Seth Klarman

The risk of an investment is described by both the probability and the potential amount of loss. The risk of an investment-the probability of an adverse outcome-is partly inherent in its very nature. A dollar spent on biotechnology research is a riskier investment than a dollar used to purchase utility equipment. The former has both a greater probability of loss and a greater percentage of the investment at stake.

Seth Klarman

At Baupost, we constantly ask: ‘What should we work on today?’ We keep calling and talking. We keep gathering information. You never have perfect information. So you work, work and work. Sometimes we thumb through ValuLine. How you fill your inbox is very important.

Seth Klarman

It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic.

Seth Klarman

While knowing how to value businesses is essential for investment success, the first and perhaps most important step in the investment process is knowing where to look for opportunities

Seth Klarman

The real secret to investing is that there is no secret to investing.

Seth Klarman

A value strategy is of little use to the impatient investor since it usually takes time to pay off.

Seth Klarman

Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.

Seth Klarman

Avoiding where others go wrong is an important step in achieving investment success.

Seth Klarman

Individual and institutional investors alike frequently demonstrate an inability to make long-term investment decisions based on business fundamentals.

Seth Klarman

Investment success cannot be captured in a mathematical equation or a computer program.

Seth Klarman

The focus of most investors differs from that of value investors. Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.

Seth Klarman

A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss.

Seth Klarman

As Buffett has often observed, value investing is not a concept that can be learned and gradually applied over time. It is either absorbed and adopted at once, or it is never truly learned.

Seth Klarman

Once you adopt a value-investment strategy, any other investment behaviour starts to seem like gambling.

Seth Klarman

Investors buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.

Seth Klarman

Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses.

Seth Klarman

Speculators are obsessed with predicting-guessing-the direction of stock prices. Every morning on cable television, every afternoon on the stock market report, every weekend in Barron’s, every week in dozens of market newsletters, and whenever business people get together.

Seth Klarman

In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.

Seth Klarman

Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgement, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and it’s price fluctuations is a key factor in his or her ultimate investment success or failure.

Seth Klarman

Yet if the security were truly a bargain when it was purchased, the rational course of action would be to take advantage of this even better bargain and buy more.

Seth Klarman

You cannot ignore the market – ignoring a source of investment opportunities would obviously be a mistake – but you must think for yourself and not allow the market to direct you.

Seth Klarman

Value in relation to price, not price alone, must determine your investment decisions. If you look to Mr Market as a creator of investment opportunities (where price departs from underlying value), you have the makings of a value investor. If you insist on looking to Mr Market for investment guidance however, you are probably best advised to hire someone else to manage your money.

Seth Klarman

Supply and demand imbalances can result from year end tax selling, an institutional stampede out of a stock that just reported disappointing earnings, or an unpleasant rumour.

Seth Klarman

Investors will frequently not know why security prices fluctuate.

Seth Klarman

Many investors greedily persist in the investment world’s version of a search for the holy grail: the attempt to find a successful investment formula. It is human nature to seek simply solutions to problems, however complex.

Seth Klarman

When a Wall Street analyst or broker expresses optimism, investors must take it with a grain of salt.

Seth Klarman

Wall Street research is strongly oriented toward buy rather than sell recommendations. There is more business to be done by issuing an optimistic research report than by writing a pessimistic one.

Seth Klarman

The problem is that with so much attention being paid to the upside, it is easy to lose sight of the risk.

Seth Klarman

Overvaluation is not always apparent to investors, analysts, or managements. Since security prices reflect investors’ perception of reality and not necessarily reality itself, overvaluation may persist for a long time.

Seth Klarman

Financial market innovations are good for Wall St but bad for clients.

Seth Klarman

The value of a company selling a trendy product, such as television shopping, depends on the profitability of the product, the product lifecycle, competitive barriers, and the ability of the company to replicate it’s current success.

Seth Klarman

There will always be cycles of investment fashion and just as surely investors who are susceptible to them.

Seth Klarman

In 40 years [1950-1990] the share of institutional ownership in all publicly traded US equity securities increased from 8% to 45%.

Seth Klarman

Today institutional investors dominate the financial markets accounting for roughly ¾ of stock exchange trading volume. All investors are affected by what the institutions do, owning to the impact of their enormous financial clout on security prices. Understanding their behaviour is helpful in understanding why certain securities are overvalued while others are bargain priced and may enable investors to identify areas of potential opportunity.

Seth Klarman

It is worth noting that few institutional money managers invest their own money along with their clients’ funds. The failure to do so frees these manager to single-mindedly pursue their firms’, rather than their clients’ best interests.

Seth Klarman

An investor’s time is required both to monitor current holdings and to investigate potential new investments.

Seth Klarman

In addition to the influences of the investment business, money managers (institutional) despite being professionals frequently fall victim to the same forces that operate on individual investors: the greedy search for quick and easy profits, the comfort of consensus, the fear of falling prices, and all the others. The twin burdens of institutional baggage and human emotion can be difficult to overcome.

Seth Klarman

The return per dollar invested declines as total assets increase. The principal reason is that good investment ideas are in short supply.

Seth Klarman

The flexibility of institutional investors is frequently limited by a self-imposed requirement to be fully invested at all times. Many institutions interpret their task as stock picking, not market timing; they believe that their clients have made the market timing decision and pay them to fully invest all funds under their management.

Seth Klarman

Being fully invested at all times will at best generate mediocre returns; at worst they entail both a high opportunity cost – foregoing the next good opportunity to invest – and the risk of appreciable loss.

Seth Klarman

Neither the stock nor the bond market is infinitely deep. Vast sums cannot be instantaneously switched from one area to the other without moving the markets and incurring considerable transaction costs as well.

Seth Klarman

By contrast value investing is predicated on the belief that the financial markets are not efficient. Value investors believe that stock prices depart from underlying value and that investors can achieve above-market returns by buying undervalued securities. To value investors the concept of indexing is at best silly and at worst quite hazardous. Warren Buffett has observed that I ‘in any sort of contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.’ I believe that over time value investors will outperform the market and that choosing to match it is both lazy and short sighted.

Seth Klarman

Investors must try to understand the institutional investment mentality for two reasons. First institutions dominate financial market trading; investors who are ignorant of institutional behaviour are likely to be periodically trampled. Second, ample investment opportunities may exist in the securities that are excluded from consideration by most institutional investors. Picking through the crumbs left by the investment elephants can be rewarding. Investing without understanding the behaviour of institutional investors is like driving in a foreign land without a map. You may eventually get where you are going, but the trip will certainly take longer, and you risk getting lost along the way.

Seth Klarman

[Junk Bonds] Early investors did well, emboldening others; subsequent deals were performed at still higher multiples of earnings and cashflow.

Seth Klarman

Without high-priced takeovers there were no upfront investment banking fees, no underwriting fees on new junk-bond issues, and no management fees on junk-bond portfolios. This would not be the first time on Wall Street that the means were adapted to justify the end. If a historically accepted investment yardstick proves to be overly restrictive, the path of least resistance is to invent a new standard.

Seth Klarman

Predicably these studies used a historical default-rate analysis and neglected to consider the implications of either a prolonged economic downturn or a credit crunch that might virtually eliminate refinancings.

Seth Klarman