Money and Finance
- Seth Klarman Letter Excerpt From 1999
From Seth Klarman in June 1999: Students of financial history can point to historic levels of valuation to suggest that we are in a bubble. But students of psychology may be needed to complete the picture. For one thing, the financial markets have been...
- Seth Klarman Quote
From Seth Klarman, via Margin of Safety:Because investing is as much an art as a science, investors need a margin of safety. A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human...
- Seth Klarman On Worrying About Asset Deflation...
From Seth Klarman, via Margin of Safety:Should investors worry about the possibility that business value may decline? Absolutely. Should they do anything about it? There are three responses that might be effective. First, since investors cannot predict...
- Seth Klarman: Adopt An Absolute-performance Orientation
From Margin of Safety:Most institutional and many individual investors have adopted a relative-performance orientation...They invest with the goal of outperforming either the market, other investors, or both and are apparently indifferent as to whether...
- Waiting For The Right Pitch
From Seth Klarman via Margin of Safety:Waiting for the Right PitchWarren Buffett uses a baseball analogy to articulate the discipline of value investors. A long-term-oriented value investor is a batter in a game where no balls or strikes are called, allowing...
Money and Finance
Seth Klarman on margin of safety and intangible assets...
From Seth Klarman, via Margin of Safety:
Even among value investors there is ongoing disagreement concerning the appropriate margin of safety. Some highly successful investors, including Buffett, have come increasingly to recognize the value of intangible assets – broadcast licenses or soft-drink formulas, for example – which have a history of growing in value without any investment being required to maintain them. Virtually all cash flow generated is free cash flow.
The problem with intangible assets, I believe, is that they hold little or no margin of safety. The most valuable assets of Dr Pepper/ Seven-Up, Inc., by way of example, are the formulas that give those soft drinks their distinctive flavors. It is these intangible assets that cause Dr Pepper/ Seven-Up, Inc., to be valued at a high multiple of tangible book value. If something goes wrong – tastes change or a competitor makes inroads – the margin of safety is quite low.
Tangible assets, by contrast, are more precisely valued and therefore provide investors with greater protection from loss. Tangible assets usually have value in alternate uses, thereby providing a margin of safety. If a chain of retail stores becomes unprofitable, for example, the inventories can be liquidated, receivables collected, leases transferred, and real estate sold. If consumers lose their taste for Dr Pepper, by contrast, tangible assets will not meaningfully cushion investors’ losses.
How can investors be certain of achieving a margin of safety? By always buying at a significant discount to underlying business value and giving preference to tangible assets over intangibles. (This does not mean that there are not excellent investment opportunities in businesses with valuable intangible assets.) By replacing current holdings as better bargains come along. By selling when the market price of any investment comes to reflect its underlying value and by holding cash, if necessary, until other attractive investments become available.
Investors should pay attention not only to whether but also to why current holdings are undervalued. It is critical to know why you have made an investment and to sell when the reason for owning it no longer applies. Look for investments with catalysts that may assist directly in the realization of underlying value. Give preference to companies having good managements with a personal financial stake in the business. Finally, diversify your holdings and hedge when it is financially attractive to do so.
- Seth Klarman Letter Excerpt From 1999
From Seth Klarman in June 1999: Students of financial history can point to historic levels of valuation to suggest that we are in a bubble. But students of psychology may be needed to complete the picture. For one thing, the financial markets have been...
- Seth Klarman Quote
From Seth Klarman, via Margin of Safety:Because investing is as much an art as a science, investors need a margin of safety. A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human...
- Seth Klarman On Worrying About Asset Deflation...
From Seth Klarman, via Margin of Safety:Should investors worry about the possibility that business value may decline? Absolutely. Should they do anything about it? There are three responses that might be effective. First, since investors cannot predict...
- Seth Klarman: Adopt An Absolute-performance Orientation
From Margin of Safety:Most institutional and many individual investors have adopted a relative-performance orientation...They invest with the goal of outperforming either the market, other investors, or both and are apparently indifferent as to whether...
- Waiting For The Right Pitch
From Seth Klarman via Margin of Safety:Waiting for the Right PitchWarren Buffett uses a baseball analogy to articulate the discipline of value investors. A long-term-oriented value investor is a batter in a game where no balls or strikes are called, allowing...