STRATEGY: Seth Klarman Why take on what was surely a time-con- suming role with this book? Seth Klarman: First of all, it was an honor to be asked and I don’t think one says “no” lightly to something like that. But on top of that, I feel a huge amount of loy- alty to Graham and Dodd. Their thinking has influenced mine right from the begin- ning, so what could be more of an honor – and more of a responsibility – than to contribute to updating their work? What tenets of Graham and Dodd have most influenced you as an investor? SK: I think Graham and Dodd’s writing is not actually about investing, but about thinking about investing. Any book can say, “Buy stocks that fit the following cri- teria,” but Graham and Dodd go beyond that to fully explain why. It’s like the dif- ference between being able to divide two numbers using a calculator and actually knowing long division. A Graham and Dodd investor understands both the num- bers and the concepts behind the numbers. In a world in which most investors appear interested in figuring out how to make money every second and chase the idea du jour, there’s also something vali- dating about the message that it’ s okay to do nothing and wait for opportunities to present themselves or to pay off. That’s lonely and contrary a lot of the time, but reminding yourself that that’s what it takes is quite helpful. Timeless Wisdom for Troubled Times In the new edition of Graham and Dodd's Security Analysis, several of today's most accomplished investors update what Warren Buffett calls the “roadmap for investing that I have now been following for 57 years.” E arly in the process of defining how to update Graham and Dodd’s Security Analysis, the acknowledged “bible of value investing,” lead editor Seth Klarman and his assembled team abandoned any notion of editing the text of 1940’s second edition. “It would have taken a decade to rewrite, with absolutely no assur- ance we could h ave improved upon it anyway,” he says. Instead, Klarman assem- bled a who’s who of promi- nent value investors – includ- ing Glenn Greenberg, David Abrams, Howard Marks and Thomas Russo – to write introductory commentary to each of the book’s sections, drawing out the timeless wis- dom in the original text and combining it with additional insight and examples relevant to today’s market. In the book’s preface, Klarman him- self describes the intellectual debt value investors owe to Graham and Dodd – for their focus on such things as mar- gin of safety and limiting risk, in-depth fundamental analysis, a disciplined long-term approach, and the importance of resisting crowd psychology. Klarman also addresses modern-day developments that have both aided and complicated the value investor’s task. Among sev- eral he cites: More sophisticated business analysis, made possible by readily available information and advances in computer tech- nology. While promoting far more useful analysis of industries and business models, Klarman cautions that such new tools can also “lead to a spurious precision of which Graham would have been quite dubious.” A shift in focus from corporate earnings and dividend pay- ments as barometers of a company’s health to free cash flow. “Investors have rightly concluded that following the cash – as the manager of a business must do – is the most reliable and revealing means of assessing a company,” he writes. The balance sheet’s diminished importance – when most stocks trade far above book value – in arriving at estimates of intrinsic value, but it’s critical role in assessing downside risk. Says Klarman: “Astute observers of corporate balance sheets are often the first to see business vulnerability as inventories and receivables build, debt grows, and cash evaporates.” The increasingly global nature of investing, for which he argues Graham and Dodd’s principles fully apply, and where he sees greater opportunity to take advantage of them: “International markets are even more subject to the vicissi- tudes of investor sentiment – and thus more inefficiently priced – than the U.S. market is today.” The growing propensity of the Federal Reserve to intervene in financial markets, which he argues encourages speculation and prolongs periods of overvaluation – but which can also cause market dislocations that the disciplined value investor can capitalize upon. Cable television’s “cheerleading pundits” who do view ers a disservice, Klarman argues, by giving “the impression that up is the only rational market direction and that selling or sitting on the sidelines is almost unpatriotic. Graham would have been appalled.” In honor of the release later this week of the new SecurityAnalysis edition, Klarman spoke with us about his participation in the book project, how Graham and Dodd have most influenced him as an investor and how he believes their philosophy sheds light on today’s precarious market environment. He also allowed us to excerpt a passage from the book’s preface in which he discusses the key questions investors face today that haven’t changed much from Graham and Dodd’s time. Plus ça change …. Value Investor Insight 19 September 30, 2008 www.valueinvestorinsight.com Channeling Graham and Dodd A Conversation with Seth Klarman
5
Embed
Klarman - Channeling Graham and Dodd_VII_Security_Analysis_2008
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
8/14/2019 Klarman - Channeling Graham and Dodd_VII_Security_Analysis_2008
Why take on what was surely a time-con-suming role with this book?
Seth Klarman: First of all, it was an honor
to be asked and I don’t think one says
“no” lightly to something like that. But
on top of that, I feel a huge amount of loy-
alty to Graham and Dodd. Their thinking
has influenced mine right from the begin-
ning, so what could be more of an honor
– and more of a responsibility – than to
contribute to updating their work?
What tenets of Graham and Dodd havemost influenced you as an investor?
SK: I think Graham and Dodd’s writing is
not actually about investing, but about
thinking about investing. Any book can
say, “Buy stocks that fit the following cri-
teria,” but Graham and Dodd go beyond
that to fully explain why. It’s like the dif-
ference between being able to divide two
numbers using a calculator and actually
knowing long division. A Graham and
Dodd investor understands both the num-bers and the concepts behind the numbers
In a world in which most investors
appear interested in figuring out how to
make money every second and chase the
idea du jour, there’s also something vali
dating about the message that it’s okay to
do nothing and wait for opportunities to
present themselves or to pay off. That’s
lonely and contrary a lot of the time, but
reminding yourself that that’s what i
takes is quite helpful.
Timeless Wisdom for Troubled TimesIn the new edition of Graham and Dodd's Security Analysis, several of today's most accomplished investors
update what Warren Buffett calls the “roadmap for investing that I have now been following for 57 years.”
Early in the process of defining how to update Graham andDodd’s Security Analysis, the acknowledged “bible of valueinvesting,” lead editor Seth Klarman and his assembled team
abandoned any notion of editing the text of 1940’s second edition.“It would have taken a decade to rewrite, with absolutely no assur-ance we could have improved upon it anyway,” he says.
Instead, Klarman assem-bled a who’s who of promi-nent value investors – includ-ing Glenn Greenberg, DavidAbrams, Howard Marks andThomas Russo – to writeintroductory commentary toeach of the book’s sections,
drawing out the timeless wis-dom in the original text andcombining it with additionalinsight and examples relevantto today’s market. In thebook’s preface, Klarman him-self describes the intellectualdebt value investors owe toGraham and Dodd – for theirfocus on such things as mar-gin of safety and limiting risk,
in-depth fundamental analysis, a disciplined long-term approach,and the importance of resisting crowd psychology.
Klarman also addresses modern-day developments that have
both aided and complicated the value investor’s task. Among sev-eral he cites:
More sophisticated business analysis, made possible byreadily available information and advances in computer tech-nology. While promoting far more useful analysis of industriesand business models, Klarman cautions that such new toolscan also “lead to a spurious precision of which Grahamwould have been quite dubious.”
A shift in focus from corporate earnings and dividend pay-ments as barometers of a company’s health to free cash flow.“Investors have rightly concluded that following the cash – asthe manager of a business must do – is the most reliable andrevealing means of assessing a company,” he writes.
The balance sheet’s diminished importance – when moststocks trade far above book value – in arriving at estimates ofintrinsic value, but it’s critical role in assessing downside risk.Says Klarman: “Astute observers of corporate balance sheetsare often the first to see business vulnerability as inventoriesand receivables build, debt grows, and cash evaporates.”
The increasingly global nature of investing, for which heargues Graham and Dodd’s principles fully apply, and where
he sees greater opportunity to take advantage of them:“International markets are even more subject to the vicissi-tudes of investor sentiment – and thus more inefficientlypriced – than the U.S. market is today.”
The growing propensity of the Federal Reserve to intervene infinancial markets, which he argues encourages speculationand prolongs periods of overvaluation – but which can alsocause market dislocations that the disciplined value investorcan capitalize upon.
Cable television’s “cheerleading pundits” who do viewers adisservice, Klarman argues, by giving “the impression that upis the only rational market direction and that selling or sittingon the sidelines is almost unpatriotic. Graham would havebeen appalled.”
In honor of the release later this week of the new Security Analysis edition, Klarman spoke with us about his participation inthe book project, how Graham and Dodd have most influenced himas an investor and how he believes their philosophy sheds light ontoday’s precarious market environment. He also allowed us toexcerpt a passage from the book’s preface in which he discussesthe key questions investors face today that haven’t changed muchfrom Graham and Dodd’s time. Plus ça change ….
Value Investor Insight 19September 30, 2008 www.valueinvestorinsight.com
Channeling Graham and Dodd A Conversation with Seth Klarman
8/14/2019 Klarman - Channeling Graham and Dodd_VII_Security_Analysis_2008
Looking for investment ideas thatstand out from the crowd?
Subscribe now and receive a full year of Value Investor Insight – includingweekly e-mail bonus content andaccess to all back issues – for only $349.That’s less than $30 per month!