The purpose of margin of safety is to render the forecast unnecessary.
All posts filed under “Notes”
Diplomacy and Power
Diplomacy and power are not discrete activities. They are linked, though not in the sense that each time negotiations stall, you resort to force. It simply means that the opposite number in a negotiation needs to know there is a breaking point at which you will attempt to impose your will. Otherwise, there will be a deadlock or a diplomatic defeat. That point is dependent on three components: the possession of adequate and relevant power, tactical willingness to deploy it, and a strategic doctrine that disciplines a society’s power with its values.
Process Integrity and Self-Discipline
When attractive opportunities are plentiful, value investors are able to sift carefully through all the bargains for the ones they find most attractive. When attractive opportunities are scarce, however, investors must exhibit great self-discipline in order to maintain the integrity of the valuation process and limit the price paid. Above all, investors must always avoid swinging at bad pitches.
Note Taking
I’ve never taken notes. I never kept notes when I was a student. I just read what I please when I feel like reading it, and I think what I think when I feel like thinking it. And that’s my system. I don’t think it’s the right system for everybody, but it seems to have worked well enough for me to enable me to get by.
Good Statistics
Useful statistics have two features. First, they are persistent, which means what happens in the present is similar to what happened in the past. If the job you do is predominantly a matter of skill, you can expect to be able to repeat your performance reliably.
Good statistics are also predictive of the goals you seek. Let’s say that we keep track of the percentage of shots that a player makes in a basketball game, and the goal of the team is to score points when playing offense. We see that, all things being equal, the higher percentage of shots a player makes, the more points he produces…This is an obvious case, of course, but not all relationships between cause and effect are as clear.
Writing Isolates An Argument’s Flaws
I think that if you write your argument down, you might recognize flaws in it.
Investing and Self-Control
Investing is not about beating others at their game. It’s about controlling yourself at your own game.
Oddly, risk moves to the forefront of investor consciousness only when things are already going badly. Losing money is perhaps the only thing that makes most investors worry about losing money. With so much pressure for competitive short-term performance, worrying about what can go wrong may seem like a luxury. Ironically, when almost no one is focused on the downside, even a minor increase in investor perception of risk can trigger dramatic market declines.
While we believe it is crucial to worry about what can go wrong, unproductive worrying will not and cannot make a difference. Worrying that your favorite team will lose is obviously unproductive. Worrying that you might have an ulcer could even prove counterproductive. Productive worrying, on the other hand, enables you to identify action that reduces or eliminates the source of concern, often at little or no cost. Concerned that it might rain? Pack a raincoat and umbrella. Worried you will be late? Leave earlier than originally planned.
Successful investing goes hand in hand with productive worrying. Worried that a stock you hold might fall sharply? Reduce your holdings or buy some puts. Concerned that interest rates may rise or the dollar fall? Establish an appropriate hedge. Worried that the stock you bought on a tip might be a bad idea? Sell it and move on. Worry enough during the day and you can, in fact, sleep justifiably well at night.
All of us are subject to biases that can impair our objectivity in investment decision-making. Striving to overcome these biases is crucial for long-term investment success. Have we been too optimistic in our assumptions? Have we blindly ignored new information because we are clinging too tightly to our original thesis? Have we held onto an investment because it keeps going up, irrationally ignoring that it has become overvalued? Without a healthy dose of reflective worry, we are unlikely even to identify our lapses in judgment, let alone correct them. In other words, only by actively, productively, relentlessly worrying about what can go wrong can we maximize the odds that things will go right, by doing everything within our control to perfect our decision-making. You rarely, if ever, make money from worrying; it does not typically enhance return. But by avoiding loss, you are able to hang on to what you have accumulated, which is a cornerstone of successful investing.
Seth Klarman
Price and Value
For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.
When people say flatly, “we only buy A” or “A is a superior asset class,” that sounds a lot like “we’d buy A at any price … and we’d buy it before B, C or D at any price.” That just has to be a mistake. No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right.