Seth Klarman is one of the best-known value investor. He run a company called The Baupost Group for 33 years. In this list published last January the assets under management are $27 bn.
I started his book, “Margin of Safety”, and I wanna to share my notes here, just to re-read it in the future.
Chapter 1: Speculators and Unseccessful Investors.
- Stocks represent fractional ownership of underlying business and bonds are loans to those businesses.
- Investors in a stock thus expect to profit in at least one of three possible ways:
- From FCF generated by the underlying business, reflected in a higher share price or distributed as dividends.
- From an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share prices.
- By a narrowing of the gap between share price and underlying business value.
- Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall in price. Many speculatores attempt to predict the market direction by using technical analysis as a guide.
- Market participants do not wear badges that identify them as investors or specculators.
- Value investors pay attention to financial reality in making their investment decisions. Speculators have no such thether.
- Assets and securities can often be characterized as either investments or speculations. Difference: investments throw off cash flow for the benefit of the owners.
- 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 judment, they respond to market forces not with blind emotion but with calculated reason.
- Two markets view: efficient markets and inefficient priced. The last one, create opportunities for investors to profit with low risk. Mr. Market by Benjamin Graham.
- Sometimes Mr. Market sets prices at levels where you would neither want to buy nor sell. Frequently, however, he becomes irrational.
- Value investors, who buy at discount from underlying value, are in a position to take advantege of Mr. Market´s irrationality.
- The fact that a stock price rises does not ensure that the underlying business is doing well or that the price increase is justified by a corresponding increase in underlying value.
- You cannot ignore the market but you must think for yourself and not allow the market to direct you.we
- Unsuccessful investors: dominated by emotion.
- There are countless examples of investor greed in recent financial history.
- Given the complexitities of the investment process, it is perhaps natural for people to feel that only a formula could lead to investment success.