Customer Reviews: Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
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on July 25, 2007
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.

Simply put, the book is fantastic. Klarman writes in an amazingly clear manner. His language is neither too simplistic nor overly difficult - just right. I definitely experienced a "wow" feeling when I began reading, after the finance books I have read recently. In addition, Klarman provides a myriad of examples to illustrate the points he brings up, which is very helpful, because it puts a reality spin on his writings.

Don't, however, mistake "clear writing" for "easy content." While the book is clear, precise, and very straight-to-the-point (i.e. there is no useless fluff frequently found in books advocating certain investment approaches), Klarman's content is not trivial. The first and even the second portions of the book are relatively quick and simple - after all, the material presented (a discussion of various common investor mistakes, followed by the basic explanation of value investing) is not overly difficult. The third and last portion of the book, however, is very dense: a lot of information is presented quickly. I actually found myself having to re-read a few of the later chapters multiple times, making sure I understand what Klarman was trying to illustrate. I took notes while reading, so that helped absorb the material - but it still wasn't easy.

This brings me to the only personal gripe I had with the book. There were multiple instances in the later chapters where I wished that Klarman would elaborate more on some of his statements and examples (for instance, calculating NPV for certain businesses, more discussion on thrift institutions, etc.). The author certainly assumes some previous experience, as some of his non-basic explanations are clearly not geared for outright beginners. There was never a point, however, where I felt completely out of the loop. I had to read some portions over again and even look up additional information on the web, but in the end Klarman's words always made sense.

This book is absolutely the best overview of value investing I have ever read or heard. Klarman stresses the importance of carefully evaluating risk (as we often only focus on return) and investing with a margin of safety. He repeats this main point over and over again throughout the entire book. Amazingly, it doesn't feel overly repetitive - but instead, a constant timely reminder of the ideas behind the value investing process. A major theme in the book is that we can't predict the future, and hence we must always be ready for anything - and the only way to do this is to protect our investments with a sufficient margin of safety (essentially investing in a security at a significant discount to underlying value).

Aside from a clear explanation of his investing philosophy, Klarman provides tons and tons of useful practical advice, from how to valuate businesses (he makes sure to distinguish his preferred methods from other widespread strategies) to where to find excellent investment opportunities for value investors. He devotes multiple chapters to discussing the frequently neglected portions of the market where low-risk and potentially high-return investments can be made. In the last two chapters, Klarman takes a step back from discussing individual investments and focuses on overall portfolio management and various alternatives for the individual investor.

One may wonder how applicable some of the specific advice is today. Are thrift conversions really still good places to find hidden value? Maybe not. Is manually calculating the cash flow of a business through the faulty measure of EBITDA still a problem today? Not really, since cash flow statements are now part of the required financial statements for public companies. But a lot of Klarman's essential advice (do your analysis carefully - look behind the numbers) and much of his presented "fertile ground for opportunities" still applies and exists today. Furthermore, the wonderful thing about value investing is that it is contrarian in its nature - which essentially implies that, as investments in various portions of the market come in cycles, a value investor can patiently wait for a popular area to "overflow", collapse, and offer excellent opportunities to invest while the herds of investors shy away and sell out. So even if some of Klarman's hunting grounds may seem outdated right now, they will again be attractive in the future.

One thing to note is that each chapter contains a set of footnotes. I advise the reader not to ignore these - they sometimes contain interesting examples and valuable advice. Unfortunately, they are easy to skip, as they're not printed at the bottom of the page which references the footnote, but rather at the back of each chapter.

In conclusion, I highly recommend Klarman's book to... anyone, really! Seasoned veterans will undoubtedly find excellent insight into things that may have before seemed ordinary and trivial. Beginners will learn fantastic advice that may help steer them away from poor decisions made by many inexperienced investors today. I personally don't think it is worth paying the market price for the book today just to read it (although many may argue that even the going price is at a huge discount from the underlying value) - but I suggest trying to obtain the book through an Inter-Library Loan. It may take some time and effort to find a copy, but it's well worth it.

+ clear and concise writing, no fluff
+ lots and lots of illustrative examples
+ very clear explanation of the basic concept of value investing and a margin of safety
+ useful methods for researching and valuating a business
+ tremendous amount of applicable advice on finding and analyzing investment opportunities
+ lots of other real-world advice on various topics from portfolio management to money manager selection

- last portion of the book is dense, may require careful reading and re-reading
- a small portion of the material may be slightly out of date (don't let this deter you)
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on August 14, 2007
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.
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on March 29, 2008
First, let me say that I've only actually seen a physical copy of this book once. I did have an opportunity to read it when a stained, paper-clipped pile of 15th or 20th generation photocopied pages comprising the entire book made the rounds at my office. Since that time, a PDF has circulated online and now, the content is freely available, effectively quashing any 'utilitarian' arguments for buying it.

The content is impressive, somewhat unique and very incisive, however, I think that in the year 2008, with copies of this book selling for $1500+, Margin Of Safety is now only 50% "book" with the remaining 50% being folklore and mythology. Owning a physical copy of MOS has become like a $25,000 wristwatch for value investors. It isn't about telling time... It's about how much you spent and showing the world what you have... and yes, you will find that the "value investors" who spent four figures for a copy of this book will defend their prize purchase to their dying breaths.

That Klarman has never ordered a reprint of this book tells us that he probably regrets having published it in the first place, not because it's a bad book but quite to the contrary, because it's a very good book that outlines much of his game plan; the profitability of which is greater the fewer competitors he has practicing it along with him.

Having finally "proven" everything he wrote in MOS with the Buffett'esque performance of his Baupost Group, I would wager that if he could go back in time and 'unpublish' this book, he probably would.

Still, would I ever pay this kind of money for a copy?
Heck no. Of course, I won't buy a $10,000 wristwatch, either.
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on June 3, 2013
If you want to invest like Seth but can't afford his book, just look up Baupost's 13F on 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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on October 27, 2007
Although I wouldn't spend $1000 for this book, he surprised me by summing up in a few simple sentences...

- how the mortgage tranched CDOs are flawed,
- how the rating agencies are claiming it was unforseeable, and
- how it could all blow up by a credit crunch.

But the most amazing part was that he did this in 1991 (when the book was published) and that is way before the mortgage CDOs were in full swing.

I just wish I had read the book earlier.
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on November 12, 1998
Few people outside the value investment arena know who the author is, but take my word for it: he's an investment superstar. Seth runs a private investment firm in Cambridge, MA called the Baupost Group, and isn't soliciting your money! Klarman is on par with Buffett, Ruane & Cuniff, et. al. His book is a MUST read for it's intelligent, frank discussion of intrinsic value investing. Don't look for this book if you're long E-Bay right now. You can probably find the book in a large library, I would look for it if you already found your way to this review!
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on April 27, 2007
I come to know about this book from the recommended booklist of Greenblatt's "You Can Be a Stock Market Genius". Indeed, I found that most of Greenblatt's ideas may actually originate from this book.

The author gave a strong case for value investing. And, I think if one really follows Seth's way of value investing, investment success is close to a sure thing. By reading the investment examples in the book, I understand how strict requirements Seth has for an investment to be considered worth investing.

I think the idea is that

1. If you dont understand it, pass it;
2. If you do understand it but the price is too high, pass it;
3. If you do understand it and the price is really low, take it.

All in all, I would agree with another reviewer that this book is worth its weight in gold.

P.S. The other two investment books I'd recommend are:

1. The Aggressive Conservative Investor by Martin Whitman
2. You Can Be a Stock Market Genius by Greenblatt
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on August 25, 2008
Price aside, this is one of the best value investing books I've read. Of course a lot of the ideas have been put forward before--Klarman is a longtime resident of "Graham and Doddsville". But he does a great job explaining the philosophy and process in clear and simple language, and there are a few gold nuggets scattered throughout that might even be worth the $1000+ price tag. One simple rule he proposes: "If you don't quickly comprehend what a company is doing, then management probably doesn't either". Many investors in 2007 also could have benefited from Klarman's 1991 advice to "shun" financial institutions speculating in junk bonds or "complex mortgage securities". The book is full of these simple yet brilliant observations. Ignore the price, and spend an afternoon at the library with a copy. You'll be glad you did.
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on September 16, 2011
Margin of Safety (1991) is expertly written, clearly communicating financial concepts without unnecessary jargon and tangential facts to cloud the point the author is trying to get across. But do not misunderstand the target audience. Klarman's book is written for professional investors and very experienced retail investors. It is a sort of index of financial folly, an open letter to investors to resist temptation and shun financial instruments whose intrinsic value is difficult to assess.

Margin of Safety only has three pages of discussion at the end for the inexperienced retail investor. A better book for new retail investors is Louis Rukeyser's How to Make Money on Wall Street (1974), a guide to investing that has not lost any of its effectiveness despite the intervening four decades and the advent of low cost brokerages, access to terabytes worth of free research on the Internet, and the widespread availability of derivative instruments and asset-class based ETFs to the public.

The title of Klarman's book refers to one of legendary value investor Benjamin Graham's (Security Analysis, 1934) aphorisms. Always insure there is a margin of safety in your investments, the spread between the market value of an asset and its intrinsic value. In this scenario even if the intrinsic value falls due to falling sales or some other business condition, the investor's capital is still preserved. Of course every theory has an Achilles heel, and in the case of Graham's there is the requirement that the concept of the efficient market theory be invalid. Information must be imperfect so investors can exploit research to discover undervalued assets and make rational investments.

That value investing is superior to all other types of investing is debatable. Legendary investor Warren Buffett himself has suggested that the heyday of the value investor may have already come and gone. In an interview in 1999 he noted that prospects of a value investor during the previous seventeen years might have been one of the most advantageous periods in the history of the U.S. stock market. Even so, Buffett observed that many famous value investors failed to beat the return of the S&P 500 during that time. Buffett also presciently predicted that the value potential of the next seventeen years would be at best mediocre. These observations do not invalidate the principles found in Margin of Safety. But it is important to remember that Graham and Klarman's principles are not necessarily a formula for success.

The future prospects of value investing may not really matter. It is said that it takes money to make money, and nowhere is that more true than it is in money management. The best a retail investor can hope for in terms of betting money other than her own is to trade on margin, where there are limits to the leverage that can be incurred (typically not better than 2-1, except in currency trading and similar types of advanced trading) and there is an obligation to pay vigorish to the broker (typically 3%-9% APR in 2011, depending on balance). There is also the risk of meeting margin calls when the value of the portfolio declines. Contrast that with the advantages of the private money manager, who collects a percentage of the portfolio as an annual fee regardless of performance, and then as much as 30% of the profits above a threshold. There are no margin calls, no interest, and no leverage limitations. In fact the proprietary position could be zero. In these conditions it behooves the money manager to be a value investor. Speculative investing could lead to volatile returns that might lead to excessive redemption, or outright fund liquidation. Better to take the long view and leverage the access to substantial amounts of capital to their advantage. Leave the practice of manufacturing profits to the investment banking houses. In light of these facts the advice in Margin of Safety could be viewed as self serving.

Klarman clearly despises financial engineering. In Margin of Safety he skewers junk bond trading, multi-tranche synthetic securities that divy up the principal and interest from underlying instruments, and portfolio risk hedging, among other techniques. Financial engineering, he warns, benefits only the investment banks that sponsor it, generating commissions and fees galore while exposing clients and the market to substantial loss of principal. Those clients are typically institutional investors who are battling the law of large numbers and trying to generate returns that beat the performance of the S&P 500. This in itself is ironic as there are numerous index funds that are pegged to indices such as the S&P 500, which in turn generates additional demand for the securities that make up the index. Thus many institutional investors are chasing a moving target that levitates through the self-reinforcing demand of their peers.

Although many associate Buffett with Graham, Klarman being a Graham disciple does not mean he is a Buffett clone. Klarman is a private equity fund manager whose philosophy is to buy distressed assets overlooked by the market and hold them until either rationality returns or when the artificial condition depressing the perceived value of the asset is lifted. In either case his model depends on finding a willing buyer for his portfolio that will purchase these assets once the return to be gained from continuing to hold them falls below a certain cutoff. There may also be a need for an exit strategy driven by provisos in his investment vehicles that he sets up with his clients. None of these conditions apply to Buffett, an entrepreneurial industrialist who holds assets indefinitely, or at least until they stop performing at a certain level, or he needs to raise money so as to acquire a better performing asset. Buffett buys assets for the float that they generate so he can expand his proprietary trading. That the assets generate a profit is a nice bonus. In effect Buffett raises money for free, without the need to pay dividends or interest, respond to redemptions, or even hit a particular performance benchmark. Most money managers like Klarman have to do some or all of these, and in addition, be worried about the risk of losing their clients' money. "Don't lose money" is in fact a mantra that he lays out early in his book.

Both Klarman and Buffett owe a significant portion of their success to circumstances not available to usual retail investors and even some professionals. This is well understood by Wall Street insiders, but may be something of a surprise to some others. For example, Buffett is the son of a four-term congressman and investment banker, a happenstance that made it possible for him to study at Columbia with Graham and to command a network of wealthy contacts willing to invest in his partnerships at the start of his career. His salary and personal profits earned while working at Graham's brokerage gave him grubstake that he was able to leverage dozens of times over in order to produce returns that earned him a cut of 20% of total profits. After just thirteen years in business for himself Buffett's personal fortune had reached critical mass, enabling him to cut his investors loose, close his partnerships, and became chairman of Berkshire Hathaway. Klarman's story has a similar ring. He is the son of a Johns Hopkins and NYU economics professor. While studying for his masters at Harvard Business School he met an adjunct professor and prominent real estate investor named William Poorvu, a serendipitous meeting that led to joining a firm that had the capital to put his value investing theories to work. In less than ten years he grew Baupost Group's assets to the point that he became a phenom in the financial industry, an outcome that led to him writing Margin of Safety. In both cases the common denominator is a start in relatively privileged conditions with an access to the necessary contacts that would, in addition to their own acumen, give Buffett and Klarman the boost needed to be successful in investing.

This is not to say that an investor cannot apply the principles in Margin of Safety and earn a substantial rate of return equal to or even greater than Klarman himself. Value investing is based on sound concepts revolving around a focus on the preservation of capital and an applied discipline in acquiring assets below their market value. Klarman also discusses in his book a number of unusual securities that through the short attention span of the market offer opportunities for relatively easy profit. But it is important to understand that Margin of Safety does not capture all of the necessary variables present in successful investing, and it understates how the broad the divide is between publicly available research and the insider information that is usually necessary to exploit inefficient markets. But taken as a primer Margin of Safety excels, and should be required reading for all professional and many retail investors.
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on March 6, 2011
Warren Buffett once said that value investing can't be taught. If the concept does not resonate with you the first time that you are exposed to it, it probably never will and you will never become a true value investor. So if you are ready to pay close to $1,000 for a book on value investing, I am afraid that the Chairman was right one more time and very little enlightenment will come from reading this book.

Joke apart, the book is decent not great. I would recommend "The Intelligent Investor" and other books by Joel Greenblatt and Bruce Greenwald over it.

The book is divided in three parts: (1) why it is hard to make money in the markets, (2) what is the philosophy of value investing, (3) where to look for value investing opportunities.

The first part addresses the common themes of why speculators lose money, why Wall Street is tilted against you, and why indexing will only deliver subpar results. The author concludes that only value investing will deliver solid profits in the long run while limiting your downside risks.

The second part elaborates on the philosophy of value investing. It revisits the ideas of "Mr. Market" proposed by Ben Graham and the analogy between baseball and investing made by Warren Buffett. "Investing is like a pitching game where the referee does not keep track of balls and strikes, strikes in particular. Just swing when the perfect pitch that you can handle comes along". The core principles of value investing are then discussed. It is a bottom up approach where the investor focuses on absolute risk and downside risk. Finally, three valuation methods are briefly examined.

The third and last part of the book gives examples of where to look for value investing opportunities. The usual themes of spin-offs, arbitrage, and bankruptcy are visited one more time.

So who should read this book? Perhaps someone who starts his investment career and would like to read a general audience book about value investing. Someone already familiar with the concept will not learn much from the book especially because there are very few concrete examples about the topics discussed.

The lack of example is in my opinion the main weakness of the book. Value investing is after all not a difficult concept to understand, albeit few people follow the strategy in practice. So the marginal contribution of a book on value investing that does not delve into details can only be limited.

I would rather suggest books by Ben Graham. "The Intelligent Investor" to start; "How to Interpret Financial Statements" to continue; and "Security Analysis" for an in-depth treatment of the topic of valuation. I also enjoyed reading books by Joel Greenblatt "You can be a stock market genius" or by Bruce Greenwald "Value Investing: From Graham to Buffett and Beyond". Both authors provide clear illustrations of value investing at work.

Good luck in your quest for betterment and knowledge and by the way, the book is available free on-line. So no need to spend the $1,000 unless you want it as a collectible.
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