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Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor Hardcover – October 1, 1991
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- Publisher : HarperCollins; 1st edition (October 1, 1991)
- Language : English
- Hardcover : 249 pages
- ISBN-10 : 0887305105
- ISBN-13 : 978-0887305108
- Item Weight : 1.05 pounds
- Dimensions : 6.75 x 1 x 9.75 inches
- Customer Reviews:
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Klarman is focused on absolute performance, not relative performance. Thus unlike the bubbleheads on CNBC he doesn’t have to be invested all of the time. He is rightly skeptical of Wall Street research and the exotic products their investment bankers come up with.
The key earnings metric for Klarman is rightly free cash flow. It is not earnings per share and it is not EBITDA. Depreciation is real and so too are capital expenditures which do not enter the income statement.
The reader has to remember that this book was written in 1991 against the backdrop of the 1987 crash, the junk bond collapse and the 1990 bear market. He is critical of newly issued junk bonds (high yield in today’s terminology). Little did he realize that 27 years later high yield would dominate the new issues. He is also critical of the index funds that now dominate today’s stock market. For the average investor index funds make a great deal of sense.
Why? Simply put the average investor doesn’t have the talent or the time to be a value investor like Klarman. To be another Seth Klarman takes more than a few brains and much hard work.
“Margin of Safety” is written inclear and concise language. My two criticisms are that there are far too few examples of value investing in action and it is obviously dated. Nevertheless the lessons to be learned from reading the book are timeless.
It is rumored that ex-CBS Value Investing alums such as Louis Bacon, Leon Cooperman, William Von Mueffling and even Warren Buffett has a copy. This book is worth its weight in gold.
Part 1: Just like Charlie Munger's saying "All I want to know is where I'm going to die so I'll never go there", Seth Klarman devotes the first part of the book to highlight how most investors stumble:
- confusing speculation with investing,
- falling victim to Wall Street,
- failing to understand advisor's incentives,
- short-term orientation, and
- emotions and faulty behavioral biases.
Part 2: Here Seth Klarman explains the core fundamentals of value investing:
- understanding risk,
- focusing on minimizing risks first as opposed to focusing on returns,
- the importance of bottom-up fundamental analysis
- the importance of a margin of safety,
- the need for discipline to avoid many unattractive temptations,
- the need for patience to wait for the right opportunities, and
- the need for judgment to distinguish between the two.
Part 3: In the final part of the book the author what a value-oriented investment process looks like and where investors may begin to search for attractive opportunities.
It doesn't promise investment fortunes but if followed thoroughly it will certainly keep investors away from misery. On top, it is highly likely to make investors wealthy over time.