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Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor [Hardcover]

Seth A. Klarman
5.0 out of 5 stars  See all reviews (3 customer reviews)

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1 of 1 people found the following review helpful
5.0 out of 5 stars Classic April 6 2008
Margin of Safety is written by Seth Klarman, a superinvestor who found Baupost Group, which achieved investment returns of over 20% annually since 1983. The book is now out of print and only available from the library or resellers on Amazon or Ebay for $1000+.

The book is divided in three sections: Where Most Investors Stumble, A Value-Investment Philosophy, and The Value-Investment Process.

In the first section, Klarman distinguished between investors and speculators and why Wall Street cannot help investors to achieve better results. In “A Value-Investment Philosophy”, Klarman wrote about the importance of margin of safety, avoiding losses and the advantage of selecting securities using bottom up analysis. In the last section, Klarman wrote about where investors can find attractive stock ideas.

This book is not a book where investors can find a secret formula to achieve investment success. It is more of a book about the philosophy of investing. Klarman only spent around 50 pages on the value-investment process, whereas the bulk of the book is emphasis on how investors should approach investing and the mindset required to be a successful investor. Klarman also listed real world examples from time to time to illustrate how the philosophies can be applied. By approaching investing with the philosophies Klarman described, investors would become more sophisticated and invest with minimal risk. I highly recommend anyone to read the book to learn about principles of value investing. It will change the way you think about investing forever.

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5.0 out of 5 stars Great Book May 13 2013
I was lucky enough to get a hold of this book and must say it was a great read. Not only was the reading simple but so are the ideas. Seth Klarman is one of the better investors of our time and this book lays out he key concepts and strategies in such a way that most people could understand them.
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1 of 2 people found the following review helpful
5.0 out of 5 stars DONT MISS THIS READ May 5 2009
Most important book on investing ever written :
1. security analysis
2. margin of saftey.

Enough said.
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183 of 188 people found the following review helpful
5.0 out of 5 stars An excellent overview of a risk-averse approach to value investing July 25 2007
By Vasiliy Zhulin - Published on Amazon.com
This book is one of the hardest finance books to track down today. Published in 1991, it is now out of print, and sells on Amazon and Ebay for over $1000. It is even one of the most-stolen library books, making it very difficult to find a copy to read.

Seth Klarman, the portfolio manager of The Baupost Group, is a very successful practitioner of the value investing strategy. In this book, he sets out to educate the reader on this concept, stressing the advantages of a risk-averse approach. In his introduction, Klarman states that even if this book, as a side effect of educating more people to invest in a more sophisticated manner, causes diminished returns to himself - he considers it well worth it for the public good. While I highly applaud this mentality, it begs the question: why was the book not published again? Considering what I mentioned in the first paragraph, clearly there is significant demand to read it. Anyway, on to the book itself...

"Margin of Safety" is divided into three portions. The first part discusses where most investors make mistakes and stumble - it covers investing vs. speculation, the nature of Wall Street, and how institutional investing results in a short-term performance derby (of which the client is ultimately the loser). It also encapsulates the presented information in a thoughful case study of junk bonds in the 1980s. The second portion of the book introduces the details of the value-investment philosophy, primarily focusing on risk and how it is crucial to invest with a margin of safety. The last part provides useful applicable advice on actually following the value-investment process: where to find investment opportunities, how to invest in these opportunities, and various aspects of overall portfolio management.

Simply put, the book is fantastic. Klarman writes in an amazingly clear manner. His language is neither too simplistic nor overly difficult - just right. I definitely experienced a "wow" feeling when I began reading, after the finance books I have read recently. In addition, Klarman provides a myriad of examples to illustrate the points he brings up, which is very helpful, because it puts a reality spin on his writings.

Don't, however, mistake "clear writing" for "easy content." While the book is clear, precise, and very straight-to-the-point (i.e. there is no useless fluff frequently found in books advocating certain investment approaches), Klarman's content is not trivial. The first and even the second portions of the book are relatively quick and simple - after all, the material presented (a discussion of various common investor mistakes, followed by the basic explanation of value investing) is not overly difficult. The third and last portion of the book, however, is very dense: a lot of information is presented quickly. I actually found myself having to re-read a few of the later chapters multiple times, making sure I understand what Klarman was trying to illustrate. I took notes while reading, so that helped absorb the material - but it still wasn't easy.

This brings me to the only personal gripe I had with the book. There were multiple instances in the later chapters where I wished that Klarman would elaborate more on some of his statements and examples (for instance, calculating NPV for certain businesses, more discussion on thrift institutions, etc.). The author certainly assumes some previous experience, as some of his non-basic explanations are clearly not geared for outright beginners. There was never a point, however, where I felt completely out of the loop. I had to read some portions over again and even look up additional information on the web, but in the end Klarman's words always made sense.

This book is absolutely the best overview of value investing I have ever read or heard. Klarman stresses the importance of carefully evaluating risk (as we often only focus on return) and investing with a margin of safety. He repeats this main point over and over again throughout the entire book. Amazingly, it doesn't feel overly repetitive - but instead, a constant timely reminder of the ideas behind the value investing process. A major theme in the book is that we can't predict the future, and hence we must always be ready for anything - and the only way to do this is to protect our investments with a sufficient margin of safety (essentially investing in a security at a significant discount to underlying value).

Aside from a clear explanation of his investing philosophy, Klarman provides tons and tons of useful practical advice, from how to valuate businesses (he makes sure to distinguish his preferred methods from other widespread strategies) to where to find excellent investment opportunities for value investors. He devotes multiple chapters to discussing the frequently neglected portions of the market where low-risk and potentially high-return investments can be made. In the last two chapters, Klarman takes a step back from discussing individual investments and focuses on overall portfolio management and various alternatives for the individual investor.

One may wonder how applicable some of the specific advice is today. Are thrift conversions really still good places to find hidden value? Maybe not. Is manually calculating the cash flow of a business through the faulty measure of EBITDA still a problem today? Not really, since cash flow statements are now part of the required financial statements for public companies. But a lot of Klarman's essential advice (do your analysis carefully - look behind the numbers) and much of his presented "fertile ground for opportunities" still applies and exists today. Furthermore, the wonderful thing about value investing is that it is contrarian in its nature - which essentially implies that, as investments in various portions of the market come in cycles, a value investor can patiently wait for a popular area to "overflow", collapse, and offer excellent opportunities to invest while the herds of investors shy away and sell out. So even if some of Klarman's hunting grounds may seem outdated right now, they will again be attractive in the future.

One thing to note is that each chapter contains a set of footnotes. I advise the reader not to ignore these - they sometimes contain interesting examples and valuable advice. Unfortunately, they are easy to skip, as they're not printed at the bottom of the page which references the footnote, but rather at the back of each chapter.

In conclusion, I highly recommend Klarman's book to... anyone, really! Seasoned veterans will undoubtedly find excellent insight into things that may have before seemed ordinary and trivial. Beginners will learn fantastic advice that may help steer them away from poor decisions made by many inexperienced investors today. I personally don't think it is worth paying the market price for the book today just to read it (although many may argue that even the going price is at a huge discount from the underlying value) - but I suggest trying to obtain the book through an Inter-Library Loan. It may take some time and effort to find a copy, but it's well worth it.

+ clear and concise writing, no fluff
+ lots and lots of illustrative examples
+ very clear explanation of the basic concept of value investing and a margin of safety
+ useful methods for researching and valuating a business
+ tremendous amount of applicable advice on finding and analyzing investment opportunities
+ lots of other real-world advice on various topics from portfolio management to money manager selection

- last portion of the book is dense, may require careful reading and re-reading
- a small portion of the material may be slightly out of date (don't let this deter you)
55 of 57 people found the following review helpful
5.0 out of 5 stars Book Review from the Aleph Blog Jan. 23 2010
By David Merkel - Published on Amazon.com
This book review is different. I liked this book a lot, but I don't want you to buy it. Why? I'm a value investor, that's why. More on that in a moment.

What commends this book to our attention? It is a well-written book on value investing by one of its leading practicioners, Seth Klarman. I love reading books on value investing written by the experts who have done it so well. It is useful to get their differential insights. It sharpens you.

What I found in Margin of Safety was a very good basic book on value investing. It contains the usual warnings against speculation, which most retail investors do, and how Wall Street frequently overcharges and misleads retail investors. Even institutional investors get cheated by focusing on relative performance, rather than absolute performance, according to Mr. Klarman. As an absolute value investor, he wants to make money all the time, not just beat the market. (A word here, if stocks beat safe bond investments on average, then there may be some validity to relative value investing.)

The book was written in 1991, after the junk bond market collapse, and contains a decent amount of criticism of the era. Buying high yields is not enough, those yields be realizable from companies that can produce cash flows to support the price of the bonds.

The book also reflects the author's early career in the investment shop founded by Max Heine, and run by Michael Price, until it was sold to Franklin Resources. The Mutual Series Funds did ordinary value investing, but they also bought special situations, did deal arbitrage, bought distressed debt, and more.

The eponymous and key idea of the book is Ben Graham's concept of a margin of safety. Invest in assets where your likelihood and severity of loss is low, given your purchase price. Don't take risks unless you are handsomely paid to take them. If you buy enough of them cheap enough, you will do well in the long run.

All in all, a very good book on value investing. Why not buy it? Too expensive. The book is good, but very basic. You can do better for free with:

* Warren Buffett's stockholder letters.
* Marty Whitman's shareholder letters.
* And others...

So how much would it cost to buy a copy? $900-$2000. You can see the results at Ebay and Amazon. Put on your cost-sensitive sunglasses before viewing.

It's a very good book, but relative to what is available for free or at nominal (<$30) cost, it doesn't make sense to buy it, aside from bragging rights.

So, how did I end up with a copy? I don't have a copy. I borrowed it via Interlibrary loan and quickly read it, sending it back to the nice library in Florida that lent it to my library. I recommend that you do that as well, if you want to read the book. If you are game, I also ask that you write Seth Klarman at:

10 St. James Avenue - Suite 1700
Boston, MA 02116


Write a nice letter, asking him to do a second edition of the paperback version for a new generation of young value investors.
120 of 145 people found the following review helpful
2.0 out of 5 stars Overvalued AND Average Aug. 14 2007
By Alex Maione - Published on Amazon.com
When I first heard about this book, being a novice yet avid investor, I was very enthusiastic to get my hands on it. My friends and I went on a scavenger hunt to every public and university library that might have had it. When we finally found it, we were definitely excited because we thought, "Why would this book be valued so highly, if it didn't have very good insights on how to beat the market and gain above average returns?"
Needless to say it was an average book on value investing. And I stress average. If you're going to spend anything over $100 for this book, don't. If you still need to read it, get it from a library, but you'll still see that it probably wasn't worth it. All the clout that this book gets from being so pricey doesn't merit either trying to find it, or paying the price.
That being said, the author didn't have enough real life examples. He talked about a few companies that he realized significant gains on, but the intricacy of how he did it is not really discussed at length like Peter Lynch does in his books.
All in all, don't waste your money, and read one of the more popular Lynch or Graham books on value investing which are better written and more detailed.
23 of 25 people found the following review helpful
5.0 out of 5 stars Want to Invest Like Seth? Look at his 13F File to the SEC. June 3 2013
By hardcore - Published on Amazon.com
If you want to invest like Seth but can't afford his book, just look up Baupost's 13F on Edgar.gov website. It's free and lists all of his latest holdings from the previous qtr. You can do this with other famous investors too such as Bruce Berkowitz's Fairholme Fund or Mohnish Pabrai's Pabrai Investment Fund. The 13F filing form is a very important tool for investing. I still would not just invest in any of their stocks without further researching them but it is a great start.

Whalewisdom is another website where you can get a more user friendly 13F forms to review.
18 of 20 people found the following review helpful
4.0 out of 5 stars This book is a fascinating indictment on a very odd side to human nature March 29 2008
By Bess - Published on Amazon.com
First, let me say that I've only actually seen a physical copy of this book once. I did have an opportunity to read it when a stained, paper-clipped pile of 15th or 20th generation photocopied pages comprising the entire book made the rounds at my office. Since that time, a PDF has circulated online and now, the content is freely available, effectively quashing any 'utilitarian' arguments for buying it.

The content is impressive, somewhat unique and very incisive, however, I think that in the year 2008, with copies of this book selling for $1500+, Margin Of Safety is now only 50% "book" with the remaining 50% being folklore and mythology. Owning a physical copy of MOS has become like a $25,000 wristwatch for value investors. It isn't about telling time... It's about how much you spent and showing the world what you have... and yes, you will find that the "value investors" who spent four figures for a copy of this book will defend their prize purchase to their dying breaths.

That Klarman has never ordered a reprint of this book tells us that he probably regrets having published it in the first place, not because it's a bad book but quite to the contrary, because it's a very good book that outlines much of his game plan; the profitability of which is greater the fewer competitors he has practicing it along with him.

Having finally "proven" everything he wrote in MOS with the Buffett'esque performance of his Baupost Group, I would wager that if he could go back in time and 'unpublish' this book, he probably would.

Still, would I ever pay this kind of money for a copy?
Heck no. Of course, I won't buy a $10,000 wristwatch, either.
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