12 Brilliant Value Investing Insights from Seth Klarman

Recently, in a rare in-depth interview with Charlie Rose, Seth Klarman shared the following 12 brilliant nuggets of value investing wisdom.

1. There’s a “gene” for value investing.

Klarman said being a value investor is completely natural for him.

“There’s a gene for this stuff,” he said.

When the market starts to go down, he explained, a lot of people overreact and start to panic.

“For me it’s natural. For a lot of people it’s fighting human nature.”

2. Value investors have to “slow the game down.”

“If you can remember that stocks aren’t pieces of paper that gyrate all the time –they are fractional interests in businesses — it all makes sense.”

He says you have to “slow the game down.”

“I can buy this thing for a huge fraction of what it’s worth. What am I worried about if it goes down a little bit more?”

However, the analysis is the easy part, he said.

3. They realize investing is the intersection of economics in psychology.

“Investing is the intersection of economics and psychology.”

That’s what Klarman tells business school students.

“The economics, the valuation of the business, is not hard. The psychology — How much do you buy? Do you buy it at this price? Do you wait for a lower price? What do you do when it looks like the world might end? Those are the harder things.”

He said with time and experiences those things can be learned, but you also have to have the right psychological make up in the first place, he added.

4. Good value investors know that greed blows you up.

“Value investors have to be patient and disciplined, but what I really think is you need to not be greedy.”

The reason, he explained, is the greedy and leveraged are the ones that blow up.

“Almost every financial blow up is because of leverage,” Klarman told rose.

5. Value investors have to realize leverage can magnify both potential for returns and losses.

Klarman told Rose that he’s been very fortunate to have not really screwed up at work.

“We’ve made mistakes where we underestimated the leverage in a situation.”

Leverage can magnify your returns and your losses, he said.

6. They should balance arrogance and humility.

“You need to balance arrogance and humility,” Klarman said.

“When you buy anything it’s an arrogant act. You’re saying to markets are gyrating and somebody wants to sell this to me and I know more than everyone else so I’m going to stand here and buy it. That’s arrogant,” he said.

“You need humility to say ‘I might be wrong.’”

7. They don’t worry about gyrations in the stock market.

Klarman said he’s not worried about gyrations in the stock market.

That being said, he also confessed that he doesn’t have a Bloomberg Terminal at his desk.

“I don’t care,” he said. “I have a giant pile of papers…I have a computer and a phone.”

8. Value investors ONLY care about market gyrations to score cheaper deals.

Baupost makes medium to long term investments, Klarman said.

“The only reason we care about gyrations is so we can buy something cheaper.”

9. Common sense: They buy when the market is down.

“We benefit from volatility,” he said adding that his fund provides liquidity when people want to sell in a hurry.

However, Klarman emphasized that he does not root for bad times.

“We sort of are with the most opposite. We buy when the market is down. We sell when it’s up.”

10. For value investors, buying is easier than selling.

“Buying is easier. Selling is hard,” according to Klarman.

That’s because it’s difficult to know the exact timing for when to get out.

“You can never tell how big of a bargain you might get tomorrow. You need to buy it and leave a little room to buy more…”

11. Value investors shouldn’t get in bed with bad people.

“Don’t get in bed with bad people,” Klarman said.

OK. That’s not what he really means literally. He’s talking about cheap stocks here.

“A lot of stocks are cheap for a reason,” Klarman said. “A value investor will figure out the reason.”

“Everyone else is sick of management raping and pillaging a company, taking advantage of shareholders,” he said. “There are stocks that have been perennially undervalued because they are run by somebody who fits that profile.”

Good management in a company adds value because they can buy back a stock when it’s undervalued. Bad management will hurt the stock.

“Those are early, but profound lessons. “

12. Instead, they want to form relationships with good people.

“We are looking for people who put the clients first,” Klarman said.

If you put them second, he explained, that’s when the whole thing can blow up.