Recently I started to read Margin of Safety – Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman from 1991. Pretty much, one of the few must-reads about value investing…
This is Part 1 of my book-review, covering the first of three sections of the book called: I. Where Most Investors Stumble.
Part 2 covers value investment philosophy.
In Part 3 Klarman lays out the most important aspects of a value investment process.
Even though Part One merely serves as an introduction to the value investment topic, it reminds the reader quite well of some common mistakes to avoid as an investor.
One such mistake is to be a speculator instead of an investor. A speculator basically buys an asset because he believes its price will increase and he can sell it for more than he paid (to a greater fool). the buying decision is not basd on analysis of a companys fundamentals.
Additionally, Klarman explains that Wall Streets interests are mostly not aligned to your or mine investment goals. Wall Street is mostly interested in generating profits from transactions. The more transactions (trades, mergers, …) the better for them.
In another chapter, Klarman discusses institutional investors. He describes that they often do not strive for the best long-term returns for their clients but are often interested to come up with a better short-term performance relative to competitors to attract new funds …, often foregoing higher returns for their clients. A fact to consider is, that institutional investors are very much index focused and usually only buy stocks of companies with a certain minimum market capitalization.
He also raises awareness not to follow investment hypes about certain industries, topics or new products (i.e. Junk bonds) without critical thought.
Preventing such common mistakes as a long-term investor can contribute a lot to the overall performance mitigating serious losses on a few investments.