Margin of safety
The disciplined pursuit of bargains makes value investing very much a risk-averse approach. The greatest challenge for value investors is maintaining the required discipline. Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking. A value investor may experience poor, even horrendous, performance compared with that of other investors or the market as a whole during prolonged periods of market overvaluation. Yet over the long run the value approach works so successfully that few, if any, advocates of the philosophy ever abandon it. - Author.
Stats for nerds
12recommend
18mentions
15people
2008–2024years
78% recommend17% neutral6% critical
Mentions per year
What Hacker News says
- Seth Klarman, in Margin of Safety, is refreshingly clear on this. The aim is always to buy something worth a dollar, for less than a dollar. You, not the market, must determine what the asset is worth. That generally requires a significant amount of investigation.
If you are not up for that, Klarman explicitly notes that index investing will be fine, but not spectacular, and in particular the index will trade in stocks for no good (investment) reason but simply because they have to keep the index balanced.
Trading on news and events is essentially gambling, although you can use other people's reaction to news to time investments so long as you've already decided to invest and were simply waiting for the price to meet your criteria to make the trade.
- I personally want to be a stock investor. I read a lot of investing books such as Margin of Safety - Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman, memos and books from Howard Marks, other books about Buffett. Investing help me to minimize risks for my startup. I also want to have multiple passive income sources. Stocks and apps are great options.
- I don't generally recommend the Intelligent Investor. I think it's almost always a mistake for ... 99% of new investors to bother with Benjamin Graham. His material is far too dense and often advanced for anyone that isn't quite an experienced investor. I'm sure there are exceptions, however I've found it's a huge turn-off for most new or newish investors, it delays / stunts their learning process, it's an obnoxious book to try digest if you're starting out. It'll make you hate investing or think that value investing is difficult (it's not, it's simultaneously the best approach for generating consistently high returns over time and very easy to learn).
Here is what I point new investors to:
- Buffett: The Making of an American Capitalist, by Roger Lowenstein.
- Margin of Safety, by Seth Klarman
- The Little Book That Still Beats the Market, by Joel Greenblatt
- Common Stocks and Uncommon Profits, by Philip Fisher
- Business Adventures: Twelve Classic Tales from the World of Wall Street, by John Brooks
- This article from 1984 by Warren Buffett: https://www8.gsb.columbia.edu/articles/columbia-business/sup...
- Peter Lynch also has a couple of optional books that are decent and very easy to digest for a new investor, very common sense oriented.
- Also optionally, Buffett's various writings are often excellent, however they're all over the place in focus, so it's hard to pick one. His annual letters for example can be acquired on the Kindle or from Berkshire's website and many are worth reading (if somewhat boring for most people I suspect).
The single most important thought in investing, in my opinion, is to always be cognizant of price vs value. What you're paying, what you're getting in return. Then always be aware of, always estimate as best you can, what your moat is for the investment at the price you're paying (what Klarman and others have called a margin of safety). How much can go wrong with your investment before you drown? How much room for error is there in the price that you paid? I like the Buffett book I reference above, because it pounds home that concept while introducing how Buffett came up, how he thinks (I don't particularly like his book, The Snowball, for that).
Also, Margin of Safety is out of print. However, there is a certain Archive site with a time machine, that if you were to put this url into it:
https://files.leopolds.com/books/Margin.of.Safety.1st.Editio...
You'll find an archived copy of the book in PDF format. Alternatively you can put that file name into Google and find some other copies of it floating about still (Klarman refuses to put it back into print and had been having the PDF copies taken down).
- I entirely self-manage, for the past ~24 years now. That involves a persistent investment of time for a lifetime (a never ending process of reading and learning), and I happen to enjoy it. I could never stand to pay someone else to earn mediocre returns on my money. It's a beautiful time to be an investor, between zero-fee trades and easy access to a lot of excellent information and tools (in most cases now packaged with a common brokerage account).
My advice would be to do exactly what you're doing in regards to index funds, since this is your first money going into the market. If this very richly valued market drops at some point, it's going to sting, don't let that dissuade you from the long-term course, which is: investing as a matter of routine over time, you're in it for a lifetime, not a short-term flip; and during that lifetime, there will be many ups and downs. Always do your best to hold a long-term mentality about what you're trying to accomplish.
Depending on your personality, your preferences for learning about investing and managing your own money (it's incredibly boring to many people in my experience), you might consider setting aside a small slice of your investment money to invest into specific companies that you're interested in (ideally sticking to higher-quality, well-known, longer track record companies, so as to improve your odds of avoiding the Nikolas out there). Use that stake as a self-interest booster to practice reading about a company, following their progress, read their financials, read their quarterly and annual reports, read some of their archived annual reports. Practice basic due diligence on an investment that you're interested in (eg AMD, whatever it happens to be). Get used to the terminology, teach yourself to be able to digest financial information about companies rapidly, so that it's second nature. Then with a better grasp, begin practicing comparing companies, which will help you build some baseline comparison capabilities (so you'll be able to more rapidly grasp good or bad numbers from a company). Occasionally read business news, although don't bother with the bulls & bears type junk, the clickbait of the business & financial news world; read about concepts and events (like mergers & acquisitions, or stock issuances, IPOs, conflicts), to further educate yourself about how the markets work and get a feel for that world. This basic learning aspect doesn't take a lot of time, an hour per week, kept up over time. The end result is extremely valuable: considerably improved financial literacy; it gives you a leg up, as the vast majority of populations even in affluent nations tend to have a weak understanding of financial markets and stocks.
I'm biased in my recommendations, I'm a modified value investor in terms of strategy. I look for what I perceive to be mistakes in price vs value in the market. If you have an interest in managing your own money over time, you'll likely gradually learn to lean into what you're good at.
I'd recommend a few introduction level books, from the perspective of my bias:
Buffett: The Making of an American Capitalist, by Roger Lowenstein. Not primarily to learn about Buffett, rather, to learn about the concept of value as it pertains to investing.
Business Adventures: Twelve Classic Tales from the World of Wall Street, by John Brooks.
The Little Book That Still Beats the Market, by Joel Greenblatt.
Margin of Safety, by Seth Klarman. This book is excellent, however it has been out of print for some time. You may be able to find a copy of it somewhere though (there have often been PDFs of it floating around).
Common Stocks and Uncommon Profits, by Philip Fisher.
Peter Lynch has a few worthwhile books as well. Some of this will seem out of date, it's not. The lessons are eternal.
A lot of people will jump to recommending The Intelligent Investor by Benjamin Graham, I absolutely do not recommend his books for anyone new to investing. They're extremely dense, even for an average investor with years of experience.
I'd read this article by Warren Buffett from 1984 (The Superinvestors of Graham-and-Doddsville):
https://www8.gsb.columbia.edu/articles/columbia-business/sup...
There is always a wave of people that come around during the heady days in markets, proclaiming that value investing doesn't work, that markets are too efficient or the like. In the 1984 article (linked above) by Buffett, he references this as well, it was being argued to be an out-of-date approach just the same four decades ago; one might be inclined to question the authors of those arguments for what they're revealing about their particular interests. That's all bunk. I made a killing buying in March during the brief crash, by doing nothing more than specifically taking advantage of the sudden and considerable price vs value discounts that were made available (like Square trading for a mere three to four times sales; a belligerent discount vs their growth and potential), an inefficiency event in the market. It's down to being able to stand apart from the emotional crowd and make your own determinations about value. The approach will always work, and it applies to everything we do economically throughout life, not just investing in stocks.
- imho we are going to see something like both scenarios... scenario 1, then scenario 2.
Also, when you say "in fact, the more money the Fed prints, the stronger the dollar", I don't think this is quite the case. The supply of US dollars isn't enough to match the global demand for US dollars. The Fed is having to "print" (basically enter some numbers into a computer) dollars to meet this demand otherwise it causes havoc... perfect example is the repo market spiking and the Fed having to intervene.
For a good explanation search for the 'dollar milkshake theory' by Brent Johnson.
I agree that the Fed's interventions can't keep on going... each intervention creates market distortions that end up requiring more interventions. However, one of my economics professors used to say, “In economics things take longer than you expect, and go quicker than you expect”. So, I take that to mean that the Fed will ‘save the day’, continue to distort the market, and we will have a catastrophic unwinding of the debt.
In terms of how I'm going to protect myself, I looked long and hard at Ray Dalio’s ‘All Weather Portfolio,’ but I've decided to implement Chris Cole's ‘Dragon Portfolio’ (search for ‘The Allegory of the Hawk and the Serpent’) with a tactical overlay taken from Seth Klarman's out-of-print investing book, 'Margin of Safety' which I highly recommend.
- Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor by Seth Klarman
https://en.m.wikipedia.org/wiki/Margin_of_Safety_(book)
https://www.amazon.com/Margin-Safety-Risk-Averse-Strategies-...
