Wise Words from Seth Klarman and Howard Marks


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Jae Jun

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Heads up that starting on Monday, I’ll be starting our series on the INVEST1000 case study.

I’ll be going over the details of the project and introduce our case study hero, brave enough to disclose his thoughts throughout the whole process.

For this week’s VIP email, I wanted to share one of my all-time favorite articles. I’ve read it more than 10 times for sure and frequently go back to the highlights of it when I need to re-calibrate my behavior.

The Value of Not Being Sure – Seth Klarman

This was written in early 2009 just before the start of the great bull market we are still experiencing.

My highlights from the article.

The greatest challenge of investing in this environment is neither the punishing price declines nor the extraordinary volatility. Rather, it is the sharply declining economy, which makes analysis of company fundamentals extremely difficult. When securities decline, it is crucial to distinguish, as possible causes, legitimate reaction to fundamental developments from extreme overreaction.

Buying early on the way down looks a great deal like being wrong, but it isn’t. It turns out you won’t be able to accurately tell who’s been swimming naked until after the tide comes back in.

If you look to “Mr. Market” for advice, or if you imbue him with wisdom, you are destined to fail. But if you look to Mr.Market for opportunity, if you attempt to take advantage of the emotional extremes, then you are very likely to succeed over time.

Controlling your process is absolutely crucial to long-term investment success in any market environment.

Successful investing requires resolve. When taking a contrary approach, one has to be able to stand one’s ground, be unwavering when others vacillate, and take advantage of others’ fear and panic to pick up bargains. But successful investing also requires flexibility and open-mindedness. Investments are typically a buy at one price, a hold at a higher price, and a sale at a still higher price.

Ditto – Howard Marks

Another one of my favorites. Comes from Howard Marks.

No asset is so good that it can’t be bid up to the point where it’s overpriced and thus dangerous. And few assets are so bad that they can’t become underpriced and thus safe (not to mention potentially lucrative).

The riskiest thing in the investment world is the beliefe that there’s no risk. On the other hand, a high level of risk consciousness tends to mitigate risk. I call this the perversity of risk.

1. When economic growth is slow or negative and markets are weak, most people worry about losing money and disregard the risk of missing opportunities. Only a few stout-hearted contrarians are capable of imaging that improvement is possible.

2. Then the economy shows some signs of life, and corporate earnings begin to move up rather than down.

3. Sooner or later , economic growth takes hold visibly and earnings show surprising gains.

4. This excess of reality over expectations causes security prices to start moving up.

5. Because of those gains – along with the improving economic and corporate news – the average investor realizes that improvement is actually underway. Confidence rises. Investors feel richer and smarter, forget their prior bad experience, and extrapolate the recent progress.

6. Skepticism and caution abate; optimism and aggressiveness take their place.

7. Anyone who’s been sitting out the dance experiences the pain of watching form the sidelines as assets appreciate. The bystanders feel regret and are gradually suckered in.

8. The longer this process goes on, the more enthusiasm for investments rises and resistance subsides. People worry less about losing money and more about missing opportunities.

9. Risk aversion evaporates and invests behave more aggressively. People begin to have difficulty imagining how losses could ever occur.

INVEST1000 Case Study Starting Monday

Remember starting next week, I’m sharing the details of INVEST1000.

The goal of INVEST1000 is to show current OSV Insiders the process that I follow. I provide guidelines, tips and interpretations of numbers.

For new investors or somebody not familiar with Old School Value, it’s a good way to see how you can create your portfolio from scratch like how our INVEST1000 investor does it.

Pick the best value stocks with our Stock Ranks, screening and valuation tool. Try the live demo today.

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