Seeking Wisdom IV – “Value Investing”


“The real secret to investing is that there is no secret”
Seth Klarman, CEO of Baupost Group, proponent of value investing and author

As the saying goes: “When the going gets tough, the tough get going!”  Even though the month of April showed some clemency, even optimism, as I outlined here a month ago, Mr. Market in May seems to be of a more jittery and moody disposition.  That is why I dug deep once again in order to seek wisdom and quench any whim of nervous trading activity.  It is not the house-style anyway, as our philosophy is “Value Investing”.

Benjamin Graham, Professor (of Warren Buffett, among others!) at Columbia University Business School, is the author of “Security Analysis”.  In 1934, he wrote the book that laid the foundation for what is now called “Value Investing”. At the time, the New York Times talked about a “common-sense guide for investors”, which turned out to be a thick textbook that went through six editions. In the latest one (from 2009) Seth Klarman’s preface states: “You may not get rich quick, but you will keep what you have, and if “Value Investing” resembles its past, you are likely to get rich slowly. As investment strategies go, this is the most that any reasonable investor can hope for.“

The 3 basic ideas – and none of them are complicated or require any mathematical talent or anything of that sort – are:

  1. Look at stocks as part of ownership of a business.
  2. Look at market fluctuations in terms of his Mr. Market example and make them your friend rather than your enemy by essentially profiting from folly.
  3. Look at margin of safety, i.e build a 60 ton bridge if you’re going to be driving a 40 ton truck across it.

Although these sound simple and commonplace and that it seems like a waste to go to school and get a PhD in Economics, it kind of all comes back to these 3 basic ideas.  It’s like spending 8 years in divinity school and having someone tell you that the 10 commandments were all that counted.  There is, however, a certain natural tendency to overlook anything that simple and yet so important.

And let us remember that patience is key: in the wise words of the Sage of Omaha:

“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”