Margin Of Safety By Seth Klarman!!!

Off late I have started to get interested in value investing! Actually reading is an old habit in the family so when it came to reading I decided why not finance (try it…it puts you to sleep in 5 minutes flat, if you aint got the stomach for it!). Anyway since I was keen on learning Value Investing and not knowing where to start I bought myself The BIBLE; Security Analysis by Graham and Dodd. Buying was the easiest thing; reading was easy too (well I can read ENGLISH), but comprehending was a wee bit (in fact a lot bit I must say) outta my league (damn should have paid attention in college!). Anyway so in my quest to enhance my knowledge I started searching for mentors (no luck so far, If you think you can help me I AM ALL (Y)EARS!) or anyone who could guide me on the correct path.

I started by writing to Sanjay Bakshi and he recommended that I read through all the Berkshire Hathaway annual reports (Warren Buffet at his BEST!). I must say it was indeed quite a recommendation coz I don’t regret what I read (half way through already) on those pages, they themselves are a treatise on Value Investing. Ok now what’s this post all about? It’s about the book by Seth Klarman called Margin of Safety. Seth Klarman who? For the ignorant (Well I was too one of ya before I came across this book), Seth A. Klarman is the President of The Baupost Group which averaged about 20% per year for 24 years with only one negative year. And why am I discussing him or his book? Well because I feel it’s a must read by anyone going on the Value Investing path, because it’s easy, concise, simple and pretty lucid. Personally I think reading this book first, would make it easier for you to understand Graham and Dodd. I am attempting to put a brief summary of the above mentioned book (please do excuse me, coz I know a noob like me, commenting on Klarman’s book is a bit to audacious!).

Well to start with Klarman also advocates what is Buffet’s Guru Mantra; “Rule #1: Don’t lose money. Rule #2: Never forgot Rule #1.” A lot of Buffetlogy quoted in the book.

Like everybody else Karman also advocates that u should do your own analysis & take what the market gives you. Don’t let the market bias influence you. There is one fundamental difference between speculators & the investors that the speculators thrive on activity while investors don’t. Klarman puts forward a nice statistic about the FII participation “from 8% in 1950 to almost 45% by 1990”. FII also needs to thrive on activity (actually if you put it loosely then FII are no more than traders) and thus have to be invested 100% all the time, any idle cash is an unwelcome sight in their books. Therefore this makes FII shortsighted in their approach. Since the FII rank themselves relatively to the index, therefore the need to be invested at all times, even if the valuations are expensive. The major difference between FII’s and the Investors is their approach to analysis, while the FII prefer Top down analysis the Investors do Bottom up analysis.

In one of the chapters he also discusses investment fads like junk bonds which are created by the market to lure the innocent investors. He says these fads will always come and go and the prudent investor needs to be wary of these exotic products.

I fear this is going to be one long post and would put many to sleep and it aint easy writing it at one go so I am going to break into three parts perhaps? A trilogy kinda thing! So till I put the second part through, why not listen to Klarman here!