Book review: Margin of Safety – Seth Klarman

It is kind of a cult-book, sold out for many years, and has become a collector’s item. The plain normal hardcover edition is selling on Amazon for 880 – 3300 $.

Full title: Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor – 1st Edition

1st edition (October 1991) (well there is only one edition – that’s why it is sold out!)

Klarman

The author is legendary fund manager Seth Klarman. Klarman has run the Baupost Group, a fund which is normally closed for ordinary investors. There is a waiting list with practically zero chance if you want them to manage your money. Klarman obviously did very well with his investments, he is worth 1500 million $. He is famous for buying agressively during the stock market downturn of 2008. By the end of 2008 the investors in his hedge fund that had been with him since 1983 had enjoyed annual compound returns of 16.5% after fees and expenses. That was more than 6.5% better than the annual return of the S&P 500 (with dividends reinvested) over that same period.

Anyway, the book.

His main point is: buy value. Value is when you do your homework, and you can purchase a security (stock, bond, whatever) considerably lower than that value. You are never sure about the exact calculation of the value, neither whether the price of the security will move substantially towards the value. So to protect you from losses, you need to purchase far below value, with a large ‘margin of safety’.

Most of the book is devoted to the approach to value investing, the attitude of an investor, rather than exact accounting details or formulas. Focus is on risk, warnings, how to be a careful investor.

To determine value, he provides (vaguely) a few approaches, of which discounted cash flows seems the best (to him).

Part one goes to warnings. Part two is about how to do value investing and is the part where I learned most.

In the third part of the book, there are chapters on special situations (mergers, liquidations, bankrupcy situations etc. ) which are a very small niche of investing and less applicable to today’s investors.

The style and message of the book remind of Graham’s classic work ‘The intelligent investor’.

Bottom line

All in all, a useful book, not the best I ever read, but from a master like Klarman, there are more than sufficient nuggets in the book to justify your time reading it.