Seth Klarman Discusses Value Investing With Charlie Rose

By on November 30, 2011

Seth Klarman - Baupost GroupCharlie Rose interviewed Seth Klarman, one of the most successful hedge fund managers (Baupost Group) of our time, earlier this month. Klarman wrote the book ‘Margin of Safety,’ now out of print, but which can be found at Ebay for $1,000 – $2,000 (incidentally, many years ago I bought the book for around $5 at a closeout book sale and sold it for $600 on Ebay about 5 years ago).

Klarman began the interview by discussing his interest in schools and how difficult historical facts are taught. He also explained the purpose and goals of his family foundation.

Klarman mentioned he learned a lot from Michael Price who gave him his first job.

Klarman discussed the origins of his book ‘Margin of Safety,’ its meager initial sales of 5,000 copies, and subsequently becoming a cult book.

Klarman believes there is a gene for successful value investing. Investors generally get scared and overreact when stocks go down as opposed to when a sweater gets marked down from $400 to $150.

Klarman indicated that market moves go against human nature and cause investors to make mistakes. He said investors should remember that stocks aren’t pieces of paper, but fractional interests in businesses.

Klarman considers the analysis of a businesses value the easy part. He tells business students, “investing is the intersection of economics and psychology.” The psychological aspects are harder, but can be learned from experience and having the right psychological make up in the first place.

Rose asked Klarman about his psychological make up. Klarman answered by saying investors have to be patient and disciplined, but it’s important not to be greedy and utilize leverage. He said almost all investors who use leverage blow up at some point.

Klarman said investors have to balance arrogance and humility. They must step in and say they know more than other investors when they buy a stock, but realize that they might be wrong.

Rose took the interview to a discussion of Warren Buffett and Charlie Munger. Like Buffett, Klarman doesn’t focus on the day to day movement of stocks and doesn’t consider himself a trader. He looks to hold things for 3-5 years.

The interview continued with discussions of mistakes small investors make, the process of buying bargains, Klarman’s mistakes, importance of quality of management, fiduciary responsibility and putting clients first, the dismal contributions of the finance industry, the sovereign crisis, and government involvement and mistakes made in the 2008 bailouts.

The video below is an excerpt of the interview between Rose and Klarman focusing on investing.

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