November 28, 2011

Charlie Rose interviewed respected value investor, Seth Klarman on November 1, 2011. Klarman was wonderful in his discussion and thoughts during this interview. This certainly is a must see for students of Klarman.

Here is a link to the video:

The following are some notes I took as I watched the interview:

Everyone appreciates a bargain, when markets are going down, people get scared and over-react. “My stock is going down, what am I going to do?” This is typical Buffett and Graham. I think there is a value investing or contrarian gene. For me it is natural, for others it is fighting human nature. When you find out about it, it is like being let in on a little secret.

Stocks are fractional interests in businesses. Stocks aren’t merely pieces of paper that gyrate all the time. When you are investing, you need to slow it down, just like a game of baseball.

The analysis is the easy part of investing. Investing is the intersection of economics and psychology. One has to determine how much to buy, and what price to pay for an investment. This is more difficult than the economics of investing. You learn this with experience. Perhaps your analysis is wrong, and you need to sell. This is where psychology comes in. Investing is an exercise of humility.

A true value investor needs the right psychological makeup. Value investors must be patient and disciplined. You need not to be greedy. Leverage has been involved in every blow-up.

You need to balance arrogance and humility. When you buy anything it is an arrogant act. Humility gives you the ability to say, “I might be wrong.”

Warren Buffett evolved from three stages (possibly a new fourth stage):
1. Buying cigar butts and getting the last few puffs for free.
2. Buying good companies at great prices.

3. Buying great companies at so so prices.

4. Buying weird securities from crappy businesses at better than market prices. Klarman indicated that Buffett’s recent purchase of Bank of America special preferred stock might be an example of this.

“I think Buffett is a better investor than me, because he has a better eye for great businesses.”

“I don’t have a Bloomberg on my desk.”

“I am sitting at my desk, and thinking big thoughts.”

We are making medium to long term investments. We aren’t interested in the gyrations, other than catching bargains. We provide liquidity when people want to sell things in a hurry. Our rhythm is opposite of typical market rhythms.

Buying is easier than selling. You never know if the price you pay today is going to be different than tomorrow. Try to leave more money to buy more. The dilemma is not figuring out what something is worth today, but finding out that the value is worth less tomorrow. Use Greece as an example. All of a sudden a dollar is no longer worth a dollar; perhaps it is now worth $0.50.

Look at the management of a company. Good management adds value. A new value investor might think a stock is cheap fundamentally, but in reality the management is poor. For example, perhaps the management is looking at their compensation packages, and not looking out for the shareholder.

Put the clients first. If you do that, you can do great. Relative performance and short term thinking is bad for investors. If someone said, “Seth makes me money by the end of the year.” (Ron’s note: Klarman states that just can’t be done. He knows over time he will make money in his investing via his techniques.)

Sovereign Crisis – Banks that own the debt are concerning.

The following is a link to our notes on Seth Klarmans’ book ‘Margin of Safety.” Link

Here is a page I keep on Seth Klarman Link