Seth Klarman is a legendary Value Investor nicknamed the “next Warren Buffett”. Klarman follows many of the traditional philosophies of Warren Buffett such as investing within his “circle of competence” and using a “Margin of Safety”.

He even wrote a book on the subject.  Now Seth Klarman runs the Baupost group which focuses on traditional value investing with a few advanced investing techniques.  Investing Strategy:  Value Investor , Long Term, Low Risk, Contrarian  .

30. Nobody can predict the future

“Be sceptical of those who say they can predict the future, pursue strategies which survive whatever may occur” – Seth Klarman.

There is always an “expert” on CNBC telling you what they think will happen to the stock market, interest rates, inflation etc. Now although is entertaining be aware that the accuracy of these predictions is most likely false and if they do come true luck may have played apart.

The Legendary Investor Howard Marks once said, “There are two types of forecasters, those who don’t know and those you don’t know they don’t know”.

Legendary Investor Peter Lynch also stated “Nobody can consistently predict interest rates or the economy” and “if you spend more than 15 minutes a year on economic analysis…you have wasted 10 minutes [Crowd laughs]”.

29. Know the Risk and Return

“The most important metric is not returns achieved but returns weighed against risk incurred, sleeping sound is vital” – Seth Klarman (Value investor) .

It is very easy to look at the returns on a portfolio or asset class (such as cryptocurrency) and automatically say “that is a great investment, look at the amazing returns” However, identifying the risk incurred is vital to understanding the risk to reward ratio.

Legendary Investors Ray Dalio and Mohnish Pabrai look for low risk, high reward opportunities.

28. Be a Value investor

“When you adopt a value investing mindset, any other investment type feels like gambling” – Seth Klarman (Value investor) . Value investing is simple to understand but hard to implement long term. You are basically looking Value a company (a stock is a portion of a company) , then buy below fair value ideally with a margin of safety. 

This sounds simple however, many people (even intuitional investors) don’t value stocks and instead invest using momentum (what has gone up recently) and from news etc. That is the reason Seth Klarman says other strategies feel alot like gambling.  The foundations of Value investing were paved by Benjamin Graham and Warren Buffett. 

27. Avoid Crowd Psychology 

“Value Investing emphasizes in depth fundamental analysis & resisting crowd psychology” – Seth Klarman (Value Investor) .

The starting point with value investing is doing independent , in depth analysis of a businesses fundamentals. Cash Flow, Growth and Risk.

  The trick is to resist the noise from the crowd and outside media who say a company is really good or really bad, you have to use your own internal compass. 

As the old saying goes “A stupid man stands in a crowd…a wise man stands alone”.

26. Buy stocks on the Way down

“Buy on the way down, there is more volume and less competition than the way back up” – Seth Klarman (Value Investor). 

When stocks crash fear reigns and many hesitate to buy, when in fact (usually) this is the best time to buy as stocks are cheaper.

However, you should know the reason for the stock market crash and if the fundamentals of the business have changed. When stocks are falling more people are selling which means there is greater trading volume & liquidity available for bold buyers.

25. Greater the Stigma, the better the bargain

“Generally the greater the stigma, the better the bargain” – Seth Klarman (Value Investor). When bad news hits a company, the stock tends to crash, this volatility can equal a potentially buying opportunity as the stock is cheaper. But be sure to find out the reason for the decline and ask “Have the fundamentals changed?”, if no than it can be a good investment.

24. Be an Independent Thinker

“It’s easy to run with the herd, it takes courage to stand apart…but this is the key to success” – Seth Klarman (Value Investor) Herd Mentality is seductive, we all want to be “part of something” whether that be a winning football team or a stock or asset which is going up. It is easy to follow the crowd as it “feel’s safe” but often it can be the most dangerous thing to do when investing.

23. No Bargains = Time to sell

“When there are no bargains to be found & little worth buying…there is often much worth selling” – Seth Klarman (Value investor) . Klarman is using what Charlie Munger calls “Inversion” it is obvious that there are no bargain stocks to be found, thus that may mean it is a great time to sell the highly valued stocks.

22. Know your Circle of Competence

“An Investor is better knowing alot about a few investments, than little about many” – Seth Klarman (Value Investor). Warren Buffett often talks about the power of knowing your “Circle of competence”, this is what you know and don’t know. In order to find a mispricing in the stock market it is often useful to go deep in order to discover a unique insight. 

21. Don’t Swing at Every pitch

“You don’t have to swing at every pitch, deciding not to act is still a decision” – Seth Klarman (Value Investor) . Klarman is paraphrasing Warren Buffett here who often talks about “waiting for the right pitch” as there are “No called strikes” in investing. You can sit there and watch pitch after pitch go by until you find an opportunity. 

20. Complexity limits competition

“Complexity limits competition” – Seth Klarman (Value Investor) . Complex industries (cloud computing, technology, biotech or specialist manufacturing) may be difficult to understand and thus limit competition from investors. Having specialist knowledge in an area can be immensely beneficial. 

19. Don’t be forced to sell stocks

“Successful investors sell when they want to, not when they have to” – Seth Klarman (Value investor). Aim to not leave yourself in a position where you are forced to sell your stocks, for example at the bottom of a stock market crash!

This could be because you need the money to live or are experiencing an opportunity cost. A rule of thumb is to not invest any money which you can’t afford to lose and keep a cash position of approximately 20% of your portfolio. This is “dry powder” ready to deploy when opportunities arise. 

18. Buy with a Margin of Safety

“Buy with a Margin of Safety, below the fair value this lowers the risk from bad luck or error” – Seth Klarman (Value Investor). Seth Klarman wrote a book called “Margin of Safety”, but the term is often used heavily by the father of value investing Benjamin Graham and Warren Buffett. 

What is a Margin of Safety?

A “Margin of Safety” is an engineering term which often means adding extra to compensate for error. For example when great bridges were built in Ancient Roman the architect & workers were made to stand under the bridge before it opened to show they had faith in the strength!

This means they made sure they added a margin of safety and kept the quality high. In investing the idea is the value a companies stock then buy below that “fair value”, Buffett is very disciplined and patient in this area and looks for at least a 20% margin of safety!

For example, if a stock was valued using our advanced valuation model  at $20 per share, then 20% lower would be $16 per share or less, this would be Buffett’s buy point. 

17. Focus on Process not outcome

“Focus on the process, not the outcome” – Seth Klarman (Value investor). Luck & randomness plays a role in many successful outcomes especially in the stock market. A bad process can give great results & a good process can give bad results.

However, without a strategy you are effectively gambling and over the long term a good strategy tends to yield the best results. 

16. Invest Long Term

 “The single greatest edge an investor can have is a long term mindset” – Seth Klarman (Value Investor). There say “diversification is the only free lunch in investing” but I personally think it’s having the ability to think long term see past the recent headlines and bad news. 

15. Invest against the crowds

“Over the Long run…the crowd is always wrong” – Seth Klarman (Value Investor). There is a phenomena called “wisdom of crowds” but also “madness of crowds” .

Seth Klarman seems to believe the later and thus is a true contrarian investor which bets against the herd. I personally believe in the stock market “madness of crowds” is strong in the short term but in the long term “wisdom of crowds” generally occurs…great companies become obvious. 

14. History doesn’t repeat, but it does rhyme

“History doesn’t repeat but it does rhyme” – Seth Klarman (Value investor). We can learn alot from history, past stock market crashes, bubbles etc. However, we also must be aware past outcomes doesn’t  mean the future will be the same. But it may be “similar.”

13. Investing is Economics & Psychology

“Investing is Economics & Psychology combined” – Seth Klarman (Value Investor) . This is one of the reasons I find investing so interesting it is a multifaceted subject with roots in reality and human psychology. 

12. Humans cause volatility

“In the stock market, Human behaviour is responsible for overreaction” – Seth Klarman (Value Investor). Humans still make the majority of decisions when it comes to investing, this results in fear & greed being the main drivers of stock price moves…in the short term at least. 

11. Play the Intellectual Game

“I find value investing simulating, intellectually challenging & financially rewarding” – Seth Klarman (Billionaire investor). Investing is a game which simulates the mind and has large real world outcomes which can improve your finances massively. Thus it’s no surprise many Legendary Investors have a keen passion for investing well into their old age, examples include Warren Buffett, Ray Dalio and many more.

10. Look for Urgent selling

“Always look for forced urgent selling” – Seth Klarman  , Motivated sellers can result in great buying opportunities. Think about a clearance sale at a store “everything must go”. Thus identifying these opportunities can lead to great success, usually this in midst of some kind of crisis or stock market crash. 

In real estate looking for the three D’s can help you identify deals these are “Debt, Divorce or Death” this may sound morbid and unsensitive but it is just a strategy. .

Fun Fact: Blackstone real estate arm acquired the entire Hilton hotel group during the 2008 financial crisis when the company was in trouble.

9. Be a Contrarian 

“Value investing is a marriage between a contrarian streak and a calculator” – Seth Klarman (Value Investor).  Betting against the consensus and being right is a great strategy for success in the market.

This is being a “Contrarian” similar to Sir John Templeton who is famous for “investing when there is blood on the streets”. But remember to be a “calculator” know your numbers and have an insight the market doesn’t know.

8. Deal in Probabilities

“We don’t deal in absolutes, we deal in probabilities” – Seth Klarman (Value Investor). I have many friends (including myself) who are from a science or engineering background, they often come to the stock investing game looking for the “formula of success”.

However, in investing and with all great success in life there is no strict rule book which always works. Great Investing is about have a great strategy then letting randomness and luck play apart in the outcome. Howard Marks mentioned “Remember the 6foot man who drowned crossing the river which was only 5ft deep…on average”.

7. Have Cash & Courage

“An Investor only needs two things Cash & Courage” – Seth Klarman. I mentioned previously about the rule of thumb for keeping approximately 20% of your portfolio in cash ready for opportunities.

Warren Buffett is famous for his enormous cash pile at Berkshire which is approaching approximately $140 Billion! You can be assured just like in the 2008 financial crisis when stocks crash Buffett is ready to deploy & buy value. 

6. Buy Below Fair Value

“Value investing is buying shares at a discount to their intrinsic value & holding until their value is realised” – Seth Klarman (Value Investor) Buying shares below fair value with a Margin of Safety is one part of the strategy. Then you need to hold long term until the market realises their true value. 

5. Learn from the mistakes of others

“Avoiding where others go wrong is an important step in achieving success”  – Seth Klarman (value investor) .  Learn from the mistakes of others is a shortcut and less painful than learning solely from your own mistakes. 

4. Assess Risk First 

“Loss avoidance must be the cornerstone of your investment philosophy” – Seth Klarman (Value Investor). Focus on assessing risk first and minimising the downside, then let the upside take care of itself. As Warren Buffett once said, “Rule Number One of investing is don’t lose, rule number 2, is don’t forget rule number 1”.

3. Be Disciplined with your strategy

“Value investing requires hard work, discipline and a long term view…few people have this mindset” – Seth Klarman (Value Investor) Warren Buffett is the epitome of these traits, immensely disciplined with a super long term focus.  

2. Know what motivates people

“The markets are governed by Behavioural science not physical science” – Seth Klarman (Value investor) . 

Humans are driven by Greed and fear, understanding these helps you to understand stock market fluctuates. As Benjamin Graham once said “In the short run the stock market is a voting machine, in the long run it’s a weighing machine”

1. Price is all that matters 

“Price is all that matters, at some point an asset is a buy, at another time it’s a sell or hold” – Seth Klarman (Value investor). People often mistake “a great company” or a “great technology, crypto/blockchain” for a great investment. A great investment is price dependent. At one price it’s a buy at another not so much. 

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