In this presentation to Bruce Greenwald’s class, Value Investing With Legends, in March 2018 Seth Klarman discussed the competitive edges that his firm had developed in order to be successful investors. Here’s an excerpt from that presentation:

One of the things that has not changed, that gives me great optimism about the future of investing in general, and value investing in particular is the markets are unbelievably short term. They were short term oriented in 1982-83, and they’re still short term oriented, arguably even more short term oriented than they were.

The way we constructed our firm was to take advantage of this. We thought about what’s everybody else doing? Because as I said at the beginning, you need an edge. So what kind of an edge could an investor like us have? Remember at the beginning it was just me in a small dumpy room in Harvard Square… So it was very slow to grow. We thought about our edges two ways. One was in a short term oriented world we would take a long term view.

What does that exactly mean? Because a long term view can just be an excuse. Corporate managers use it as an excuse to say you know we made this investment, it hasn’t paid off yet. Give us time. Our stock’s down. It’ll work out. Well, it might be true but it also might just be a lame excuse for making a bad investment or, an investment that never pays off. It’s probably not a great investment.

In my view, the unconventional way to define it, but a long term orientation has something to do with not caring where it trades in-between. So if you find a stock that you think is trading at twenty and it’s worth forty. It should be moving to forty over the next couple of years. If there’s going to be bad news soon, almost non of our competitors will buy it.

They want to see it turnaround. They don’t want their boss yelling at them. How could you buy it at twenty, now it’s fourteen? We’re seeing over and over stocks that seem ridiculously cheap, no-one will touch, and then actually when they report earnings and they’re not as bad as people thought, they actually move higher, and you actually can’t buy them.

So, I think it’s really important to not care where it trades. If you can tolerate, even for three or six months, buying something that might go down, and look everything might go down, this is not rocket science. Everything might go down but people’s paranoia around buying something that might miss earnings, and get yelled at, and get fired by your clients and your boss.

You can watch the entire presentation here. Klarman starts speaking around the 2:00 minute mark:

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