Margin of Safety

Risk-Averse Value Investing Strategies for the Thoughtful Investor

"Hard Work, Unusually Strict Discipline, and a Long-Term Investment Horizon" - Seth Klarman's of Margin of Safety

Investors are all too often lured by the prospect of instant millions and fall prey to the many fads of Wall Street. The myriad approaches they adopt offer little or no real prospect for long-term success and invariably run the risk of considerable economic loss - they resemble speculation or outright gambling, not a coherent investment program. But value investing - the strategy of investing in securities trading at an appreciable discount from underlying value - has a long history - has a long history of delivering excellent investment results with limited downside risk.

Taking its title from Benjamin Graham's often-repeated admonition to invest always with a margin of safety, Klarman's 'Margin of Safety' explains the philosophy of value investing, and perhaps more importantly, the logic behind it, demonstrating why it succeeds while other approaches fail. The blueprint that Klarman offers, if carefully followed, offers the investor the strong possibility of investment success with limited risk. 'Margin of Safety' shows you not just how to invest but how to think deeply about investing - to understand the rationale behind the rules to appreciate why they work when they work, and why they don't when they don't.

"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.

About the Author

Seth Klarman is the CEO and portfolio manager of The Baupost Group, L.L.C., which currently manages approximately $30 billion on behalf of individual and institutional clients. He has had primary responsibility for managing the investments of Baupost since the company was formed in May 1982. Baupost uses a value discipline with an event-driven bias to find global opportunities in such diverse areas as publicly traded and private equities, bankrupt and financially distressed debt, and real estate. He is a 1982 graduate of Harvard Business School (HBS), where he was a Baker Scholar, and received his Bachelor of Arts, magna cum laude, in economics from Cornell University in 1979.

Klarman is co-chair of the leadership council of Facing History and Ourselves, a teacher training organization. He is also a member of the board of dean’s advisors at HBS, where he has been a senior lecturer on value investing, and was a 2011 recipient of the school’s Alumni Achievement Award. Klarman serves on the board of directors of the Broad Institute. He is also vice chair of Beth Israel Hospital’s board of managers and a member of their board of trustees. Klarman is chairman of The Klarman Family Foundation.