Seth Klarman, the author of
Margin of Safety, is one of the value investors profiled in
Value Investing: From Graham to Buffett and Beyond by Bruce Greenwald (
Investment Book Reviews: Bruce Greenwald Archives). (The profile is 14 pages out of a 300 page book that lists for $20.) In a nutshell, Klarman looks at risk before he looks at return. He prefers "
margins of safety" (note the plural), so that if one of the expected safety factors disappears, there are other safety factors to fall back on(i.e., the "belt and suspenders" approach to safety).
He likes "motivated sellers," such as institutional investors who have to sell a security if it gets dropped from an index, along with spin-offs, bankruptcies, and reposesed real estate (i.e., the seller doesn't want to own the asset for reasons unrelated to economics and just wants to get rid of it). He likes "missing buyers," which happen because many institutional investors can't own the type of asset (e.g., small caps, spin offs, and distressed debt). The "edge" for Klarman in these situations is that investors sell first and think later; Klarman likes to buy when some investors sell without thinking (which drives the price way below instrinsic value) and then sell when other investors finally realize what a bargain these assets are (which drives up the price to instrinsic value).
He also likes reasons other than Mr. Market as to why an asset might pay off (because sometimes it takes Mr. Market too long to get into a good mood). Distressed debt, liquidations, and takeovers fall into this category.
Like the pioneer Daniel Boone (who believed that it was time to move on when you could see the smoke from your neighbor's chimney), Klarman likes to be one of the first to the party when a new category of assets is put on sale and then move on when others start to show up in droves. Examples include the conversion of thrifts from mutual to shareholder owned, along with the savings and loan bailout through the Resolution Trust Corporation, that happened back in the 1980s. People were reluctant to buy at first because they didn't understand these assets. Once they realized what a good deal they were, however, they started buying and Klarman was happy to sell his to them at much higher prices than what he had paid.
P.S., I highly recommend
Value Investing: From Graham to Buffett and Beyond (
Amazon.com: Value Investing: From Graham to Buffett and Beyond (Wiley Finance): Books: Bruce C. N. Greenwald,Judd Kahn,Paul D. Sonkin,Michael van Biema).
11-25-2007, 11:26 PM
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