Seth Klarman is one of the most underrated investors of all time. Over the past 30 years with his investing fund, he has achieved an average return of 20%. Some people think he is a younger Warren Buffett & he’s ridden one of the most famous investing books of all time a book called ‘Margin of Safety’ which sells $3000 a pop on Amazon.
Now the question then becomes how this great investor achieved such a high return for such a long period. How did he grow his investing fund to $27 billion & dominate the investing game?
5 Investing Rules
Rule 1: Invest, Don’t Speculate
- This is a mistake that a lot of investors make. Especially beginner investors & those working on Wall Street. There are two types of investors out there. You have those who look at a stock & think of it as a ticker symbol on the stock market sometimes going up & sometimes going down. Again you have those who view a stock as a business.
- The earlier group is always worried about the day-to-day prices of a stock & they’re very emotional when a stock goes up & when a stock goes down. The second group knows that they own a business & if their business does well it does not matter too much what the price of the stock is as long as the fundamentals look good.
At the end of the day when you buy a stock, you own a business. This is why it’s so important to determine if is this a good business that you want to own in the long term.
Do they keep generating money?
Are they growing their sales & profits?
Are they growing their equity?
Is the management team honest with shareholders?
Are they reducing their debts?
Looking at stocks as businesses instead of ticker symbols is one principle that has ensured a great return for Seth Klarman.
Rule 2: Don’t Just Invest in Value, Try to Find it at a Bargain Price
- The thing about buying a stock so few people behave this way is trying to buy the stock at a bargain price. What most investors do when they see the stock’s price going down getting cheaper is they look to sell the stock because they panic & realize they don’t know the true value of the stock. Because most investors panic & sell this normally drags the stock’s price down even further.
- What you really should be doing is buying more of a stock when it gets cheaper if the fundamentals of the business haven’t changed & it’s short-term news & emotions of the stocks’ price. Basically, what should you do is buy stocks with a price below their intrinsic value & have high expected returns.
Rule 3: Be extremely patient
- At the moment Warren Buffett has a lot of cash in his portfolio & he’s not buying that many stocks. But still, every day he goes into his office he is doing his work & looking for opportunities out there in the stock market. But still, he is still waiting to buy the stock when he can’t find it at a bargain price. So, he has been patient & at the end of the day, opportunity comes to those who wait & also have the right mentality.
Rule 4: A Value Investing Strategy is the Best
Seth Klarman believes that value investing is the best form of investing.
“It is helpful to note that Buffett did not consider whether Washinton Post was a component of a stock market index or about to be added to one. He did not weigh the market capitalization of the company or its daily trading volume in his purchase decision. He didn’t worry about whether the stock was about to split pay or omit a dividend. He most certainly did not evaluate the stock’s beta using the capital-asset pricing model or consider whether its purchase would move his portfolio to the efficient frontier. He simply valued the business and bought a piece of it at a sizable discount.”
Seth Klarman
Rule 5: Trade & Rebalance your Portfolio
- A good investor should always be prepared for all market conditions they should look at having portfolio hedges like gold or cash or diversified through sectors & even countries but often one position is doing well it can put your portfolio out of balance & this is why it’s always important to look at a portfolio & try to rebalance it.
