Margin of Safety - The most notable quotes from Seth Klarman's investment classic - part I

I just finished re-reading Seth Klarman's "Margin of Safety". This time I made notes of all the important lessons from the book. I will be putting these up in the next few posts. Read them at your leisure. In it is some of the best wisdom on the stock markets from a person who is a "Investment-Hall-of-Fame" life-member.


Part II
Part III


On investing

To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses. Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don't know, don't care about, or prefer to ignore. They buy securities to appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.


Investments, even long term investments like newly planted timber properties, will eventually throw off cash flow. A machine makes widgets that are marketed, a building is occupied by tenants who pay rent, and trees on a timber property ultimately are harvested and sold. By contrast, collectibles throw off no cash flow; the only cash they can generate is from their eventual sale.


There is nothing esoteric about value investing. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance frenzy that engulfs most market conditions.


On Margin of Safety
A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others.



There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate, and invest with a margin of safety. It is precisely because we do not and cannot know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.


The trick of successful investors is to sell when they want to, not when they have to. Investors who may need to sell should not own marketable securities other than US treasury bills.