This book is one of the hardest finance books to track down today. Published in 1991, it is now out of print, and sells on Amazon and Ebay for over $1000. It is even one of the most-stolen library books, making it very difficult to find a copy to read.
Seth Klarman, the portfolio manager of The Baupost Group, is a very successful practitioner of the value investing strategy. In this book, he sets out to educate the reader on this concept, stressing the advantages of a risk-averse approach. In his introduction, Klarman states that even if this book, as a side effect of educating more people to invest in a more sophisticated manner, causes diminished returns to himself - he considers it well worth it for the public good. While I highly applaud this mentality, it begs the question: why was the book not published again? Considering what I mentioned in the first paragraph, clearly there is significant demand to read it. Anyway, on to the book itself...
"Margin of Safety" is divided into three portions. The first part discusses where most investors make mistakes and stumble - it covers investing vs. speculation, the nature of Wall Street, and how institutional investing results in a short-term performance derby (of which the client is ultimately the loser). It also encapsulates the presented information in a thoughful case study of junk bonds in the 1980s. The second portion of the book introduces the details of the value-investment philosophy, primarily focusing on risk and how it is crucial to invest with a margin of safety. The last part provides useful applicable advice on actually following the value-investment process: where to find investment opportunities, how to invest in these opportunities, and various aspects of overall portfolio management.Read more ›
This book review is different. I liked this book a lot, but I don't want you to buy it. Why? I'm a value investor, that's why. More on that in a moment.
What commends this book to our attention? It is a well-written book on value investing by one of its leading practicioners, Seth Klarman. I love reading books on value investing written by the experts who have done it so well. It is useful to get their differential insights. It sharpens you.
What I found in Margin of Safety was a very good basic book on value investing. It contains the usual warnings against speculation, which most retail investors do, and how Wall Street frequently overcharges and misleads retail investors. Even institutional investors get cheated by focusing on relative performance, rather than absolute performance, according to Mr. Klarman. As an absolute value investor, he wants to make money all the time, not just beat the market. (A word here, if stocks beat safe bond investments on average, then there may be some validity to relative value investing.)
The book was written in 1991, after the junk bond market collapse, and contains a decent amount of criticism of the era. Buying high yields is not enough, those yields be realizable from companies that can produce cash flows to support the price of the bonds.
The book also reflects the author's early career in the investment shop founded by Max Heine, and run by Michael Price, until it was sold to Franklin Resources. The Mutual Series Funds did ordinary value investing, but they also bought special situations, did deal arbitrage, bought distressed debt, and more.
The eponymous and key idea of the book is Ben Graham's concept of a margin of safety.Read more ›
If you want to invest like Seth but can't afford his book, just look up Baupost's 13F on Edgar.gov website. It's free and lists all of his latest holdings from the previous qtr. You can do this with other famous investors too such as Bruce Berkowitz's Fairholme Fund or Mohnish Pabrai's Pabrai Investment Fund. The 13F filing form is a very important tool for investing. I still would not just invest in any of their stocks without further researching them but it is a great start.
Whalewisdom is another website where you can get a more user friendly 13F forms to review.
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When I first heard about this book, being a novice yet avid investor, I was very enthusiastic to get my hands on it. My friends and I went on a scavenger hunt to every public and university library that might have had it. When we finally found it, we were definitely excited because we thought, "Why would this book be valued so highly, if it didn't have very good insights on how to beat the market and gain above average returns?" Needless to say it was an average book on value investing. And I stress average. If you're going to spend anything over $100 for this book, don't. If you still need to read it, get it from a library, but you'll still see that it probably wasn't worth it. All the clout that this book gets from being so pricey doesn't merit either trying to find it, or paying the price. That being said, the author didn't have enough real life examples. He talked about a few companies that he realized significant gains on, but the intricacy of how he did it is not really discussed at length like Peter Lynch does in his books. All in all, don't waste your money, and read one of the more popular Lynch or Graham books on value investing which are better written and more detailed.