Seth Klarman

Investing is the intersection of economics and psychology
If only one word is to be used to describe what Baupost does, that word should be: ‘Mispricing’. We look for mispricing due to over-reaction
A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about the loss
Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mindset to succeed
To a value investor, investments come in three varieties: undervalued at one price, fairly valued at another price, and overvalued at still some higher price. The goal is to buy the first, avoid the second, and sell the third
Value investing by its very nature is contrarian
I find value investing to be a stimulating, intellectually challenging, ever-changing, and financially rewarding discipline
Value investing is the discipline of buying shares at a significant discount from their current underlying values and holding them until more of their value is realized. The element of a bargain is the key to the process
By investing at a discount, Benjamin Graham knew that he was unlikely to experience losses
Individual and institutional investors alike frequently demonstrate an inability to make long-term investment decisions based on business fundamentals
Do not trust financial market risk models. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science
Flexible approach – will look at ALL asset classes
The best protection against risk is knowing what you are doing
All an investor can do is follow a consistently disciplined and rigorous approach; over time the returns will come
The limit risk with Deep analysis Bargain purchase Sensitivity analysis
Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgment, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and it’s price fluctuations is a key factor in his or her ultimate investment success or failure
Having great clients is the key to investment success
Gold is unique because it has the age-old aspect of being viewed as a store of value. Nevertheless, it’s still a commodity and has no tangible value, and so I would say that gold is speculation. But because of my fear about the potential debasing of paper money and about paper money not being a store of value, I want some exposure to gold
Speculators are obsessed with predicting: guessing the direction of stock prices. Every morning on cable television, every afternoon on the stock market report, every weekend in Barron’s, every week in dozens of market newsletters, and whenever businesspeople get together. In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a purely speculative undertaking
The overwhelming majority of people are comfortable with consensus, but successful investors tend to have a contrarian bent
The effects of compounding even moderate returns over many years are compelling, if not downright mind-boggling
You need humility to say ‘I might be wrong’
Speculators are obsessed with the predicting-guessing-the direction of stock prices. Every morning on cable television, every afternoon on the stock market report, every weekend in Barron’s, every week in dozens of market newsletters, and whenever businesspeople get together
In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking
The way to maximize outcome is to focus on the process
The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions
Value investing is at its core
One must understand the importance of an endless drive to get information and seek value
Hold cash when opportunities are not presenting themselves
As Buffett has often observed, value investing is not a concept that can be learned and gradually applied over time. It is either absorbed and adopted at once, or it is never truly learned
Once you adopt a value-investment strategy, any other investment behavior starts to seem like gambling
Value investing is risk aversion
While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology
Recessions and stock market declines are not new. They have happened since financial markets have existed
Yet if the security were truly a bargain when it was purchased, the rational course of action would be to take advantage of this even better bargain and buy more
Somehow, we only think about ‘the good times’ – bull markets – when we invest. Rarely do investors consider the possibility that share prices could fall during recessions
The investors that don’t understand that stock prices rise and fall will sell at the worst possible time. What matters is not how low a stock price gets at any one time
You cannot ignore the market – ignoring a source of investment opportunities would obviously be a mistake – but you must think for yourself and not allow the market to direct you
What matters is that the underlying businesses of the stocks you own are likely to grow over the long run. This has been the course of history. Over long periods, the average total return of the S&P 500 is about 9% a year. Some businesses have done much better (and others, much worse)
Avoiding where others go wrong is an important step in achieving investment success
It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic
Individual and institutional investors alike frequently demonstrate an inability to make long-term investment decisions based on business fundamentals
Investment success cannot be captured in a mathematical equation or a computer program
I think markets will never be efficient because of human nature
Value in relation to price, not price alone, must determine your investment decisions. If you look to Mr Market as a creator of investment opportunities (where price departs from underlying value), you have the makings of a value investor. If you insist on looking to Mr. Market for investment guidance, however, you are probably best advised to hire someone else to manage your money
Sometimes buying early on the way down looks like being wrong, but it isn’t
The focus of most investors differs from that of value investors. Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose
Investors buy securities that appear to offer an attractive return for the risk incurred and sell when the return no longer justifies the risk
Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses
Investors will frequently not know why security prices fluctuate
Here’s how to know if you have the makeup to be an investor. How would you handle the following situation? Let’s say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you’re an investor. If you don’t, you’re not an investor, you’re a speculator, and you shouldn’t be in the stock market in the first place
When a Wall Street analyst or broker expresses optimism, investors must take it with a grain of salt
The single greatest edge an investor can have is a long-term orientation
Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night
In a world in which most investors appear interested in figuring out how to make money every second and chase the idea du jour, there’s also something validating about the message that it’s okay to do nothing and wait for opportunities to present themselves or to pay off. That’s lonely and contrary a lot of the time, but reminding yourself that that’s what it takes is quite helpful
Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mindset to succeed
Targeting investment returns leads investors to focus on the potential upside rather on downside risk … rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk
Interestingly, we have beaten the market quite handsomely over this time frame, although beating the market has never been our objective. Rather, we have consistently tried not to lose money and, in doing so, have not only protected on the downside but also outperformed on the upside
If you can remember that stocks aren’t pieces of paper that gyrate all the time –they are fractional interests in businesses — it all makes sense
You need to balance arrogance and humility when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay a 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything
While knowing how to value businesses is essential for investment success, the first and perhaps most important step in the investment process is knowing where to look for opportunities
The real secret to investing is that there is no secret to investing
A value strategy is of little use to the impatient investor since it usually takes time to pay off
Avoiding round trips and short-term devastation enables you to be around for the long term
Selling, in particular, can be a challenge; many investors are tempted to become more optimistic when security is performing well. This temptation must be resisted; tax considerations aside, when a security reaches full valuation, there is no longer a reason to own it
If the stock market has a period of outperformance of its long-term return, it is inevitably followed by some period of underperformance. But people being optimistic and greedy by nature take the recent short-term outperformance of stocks as a sign of good things to come, rather than a warning of bad things to come

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