[7/31/06] Seth Klarman's 1991 work, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, came and went without much notice at the time and is long out of print. Klarman holds the copyright but has never revised or even reprinted it.
Still, over the past few years this work has taken on iconic stature among value investors. Originally listed at $25, the title trades for top prices on the used-book market. About a half-dozen copies are for sale online: The best deal is $700 from a seller at Amazon.com (AMZN ). Another vendor offers it for nearly $2,500.
Since Klarman and his book are hard to come by, here's a quick summary. The term "margin of safety" refers to the cushioning, or wiggle room, that investors should build into what they pay for a security. He doesn't claim to have invented the term, which comes from Graham & Dodd. "How can investors be certain of achieving a margin of safety?" writes Klarman. "By always buying at a significant discount to underlying business value, and giving preference to tangible assets over intangibles....By replacing current holdings as better bargains come along. By selling when the market price of an investment comes to reflect its underlying value and by holding cash, if necessary, until other attractive investments become available."
Although definitions of "underlying value" abound, Klarman's interpretation opts for a more no-nonsense view that's shorn of intangible assets such as goodwill. "Since investors cannot predict when values will rise or fall," he writes, "valuation should always be performed conservatively, giving considerable weight to worst-case liquidation value as well as to other methods."
[12/5/05] Perhaps more accurate than 'buy low' is 'buy cheap'. [Seth] Klarman has identified a new class of investor he has termed value pretenders ... "These investors apply a dip strategy. They buy what's down, not what's cheap."
[11/24/05] Finding a great idea is fantastic. It's also very difficult. Harder still is waiting for your great idea to play out. The market sometimes makes your great ideas seem, well, not so great. In 2001, both McDonald's (NYSE: MCD) and Home Depot (NYSE: HD) were mauled -- the stock market simply abandoned them to the inevitability that their competitive dominance had waned. That turned out to be a pretty massive mistake; folks who bought these two stalwarts have seen their stocks triple and double, respectively. For some of us though -- those of us who already owned one or both of these stocks -- the drops in these share prices should have caused us to tremble with greed. As an owner, you have that advantage. You can act when your company is unfairly or irrationally thrown out with the trash.
