Sunday, 19 April 2015
Analyzing One Of Seth Klarman’s Best Quotes. What unsuccessful investors do is exactly what we should avoid..
I was reading Margin of Safety and ran into one of the most shocking quotes I have read in value investing. I have wrote about Seth Klarman(Trades, Portfolio) before, and I always highlight his raw comments that are both intelligent and concise. This is the complete quote:
“Unsuccesful investors are dominated by emotion. Rather than responding coolly and rationally to market fluctuations, they respond emotionally with greed and fear. We all know people who act responsibly and deliberately most of the time but go beserk when investing money. It may take them many months, even years, of hard work and disciplined saving to accumulate the money but only a few minutes to invest it. The same people would read several consumer publications and visit numerous stores before purchasing a stereo or a camera yet spend little or no time investigating the stock the just heard about from a friend. Rationality that is applied to the purchase of electronic and photographic equipment is absent when it comes to investing.”
“Many unsuccessful investors regard the stock market as a way to make money without working rather than as a way to invest capital in order to earn a decent return. Anyone would enjoy a quick and easy profit, and the prospect of an effortless gain incites greed in investors. Greed leads many investors to seek shortcuts to investment success. Rather than allowing returns to compound over time, they attempt to turn quick profits by acting on hot tips. They do not stop to consider how the tipster could possibly be in possession of valuable information that is not illegally obtained or why, if it is so valuable, it is being made available to them. Greed also manifests itself as undue optimism or, more subtly, as complacency in the face of bad news. Finally greed can cause investors to shift their focus away from the achievement of long-term investment goals in favor of short-term speculation.”
I loved this quote because as Munger says: Tell me where I am going to die so that I don’t go there. The quote begins by saying what unsuccessful investors do, which is exactly what he would like us to avoid. Overall, we know that the market is going to fluctuate and change, however, not all of us are able to respond in the same way.
The approach that Klarman takes in this quote is similar to Buffett’s, when he provides a daily-life example so that it is clear for us readers. Many times when we shop around, we go online and dig deeply into the characteristics of our potential purchase. Not only that, but we compare across a wide sample of retailers to find the best value for our money. When it comes to investing, however, we become blinded by our greed and fear, causing us to buy (or continue buying) at very high prices, regardless of intrinsic value, or to sell at very low prices, even when we know that we are not getting what we deserve. (Or perhaps that is exactly what we deserve for not applying rationality).
Emotions are part of our nature as human beings, but we are also entitled with the ability to think rationally. While getting a hold of our emotions is difficult, it can be done as shown by many successful value investors such as Klarman, Munger and Buffett. Greed, as Klarman mentions, it reflected in undue optimism, which makes us overpay and dampen our returns, without mentioning putting our capital at risk of permanent loss.
What are your thoughts on this quote?