With visitors to The Value Perspective likely to be gearing up for a few weeks away this summer, we thought it might be helpful to highlight some value investing classics – one or two of which you might choose to toss into your suitcase with the rest of your holiday reading. Rather than offering a traditional review, however, we will instead touch on the lessons we personally took from the books themselves.
First up is Seth Klarman’s excellent Margin of Safety (1991) – though immediately we should nod to the irony of tipping holiday reading that costs more to buy on Amazon than many families will be spending travelling to the sun. One of the most coveted of all investment books – you will be hard-pressed to find a library whose copy has not been stolen – this blog goes so far as to wonder if Klarman would now even buy his own book.
Rather than shelling out upwards of £700 for a second-hand copy, however, we would suggest you try and track one down to borrow and we suspect Klarman – one of our favourite investors, here on The Value Perspective – likely would too. After all, one the key lessons of his book is the importance of being patient and disciplined in the pursuit of bargains – and the latter route does chime nicely with that approach.
What else did we learn from Margin of Safety?
* Klarman underscores the importance of the margin of safety itself – as you might expect from a book with this title. It was Benjamin Graham, the father of value investing, who first described the secret of a sound investment as a “margin of safety” – by which he meant the price you pay for any investment should be cheap enough to allow for a range of unexpected adverse outcomes. Graham also argued “the purpose of the margin of safety is to render the forecast unnecessary” – a sentiment with which we heartily concur.
* Klarman also highlights the importance of thinking about investing in ‘absolute’ terms – how much money you actually make (or do not make) – rather than in ‘relative’ terms – how much money you make (or do not make) relative to a benchmark such as a stockmarket index..
* Contrary to the perceptions of many people, value investment – when it is done properly – is both a defensive and a constructive strategy. It is also, as Klarman illustrates, an investment strategy that is “intellectually elegant”.
* Finally, Klarman is critical of index-focused investing – a discipline that, much like today, was gathering huge momentum when he was writing his book. Indeed, Margin of Safety was published the year before Vanguard launched its Total Stock Market Index tracker – now one of only a handful of passive funds greater than $100bn (£75bn) in size.
Whether or not you agree with his analysis on this point, it is just one more way in which Klarman’s classic remains supremely relevant to modern investors more than a quarter of a century after it was written.