Seth Klarman: The Market Will Regularly Tell You You’re An Idiot!

Johnny HopkinsSeth KlarmanLeave a Comment

During his recent interview with Capital Allocators, Seth Klarman explained why the market will regularly tell you you’re an idiot! Here’s an excerpt from the interview:

Klarman: Bill Ackman once said to me that value investing in a classical sense is like watching paint dry, but I bring a hairblower.

I thought, well that’s a good definition of activism. And certainly I’m not one to just want to own stocks forever and sit on them forever. There are times when it actually can be challenging. In effect the hard thing about investing in general is the market tells you you’re wrong all the time.

That the very reason that you can find a mispricing, the very reason that you can find a market inefficiency that causes a stock to go to a discount might well still apply after you own it, and it might go to a bigger discount. And that’s not lost on Graham and Dodd.

That’s right there in Security Analysis. But the idea of that is perhaps there are ways you can speed it up. Maybe you can apply Bill Ackman’s hairdryer into the process. One of the things that Baupost has done over the years. We follow the basic principles. We’re looking for bargains, we’re patient, we’re disciplined, we’re willing to say no a lot.

As Warren Buffett says, we’re not afraid to just leave the bat on our shoulder and not swing. But at times you do swing. And then you’ve got to be comfortable with some of the important elements of value investing. You’ve got to be comfortable that a bargain can become an even bigger bargain.

And this is what resonated with me maybe the most. If you look to the market for feedback, the market might regularly say, you’re an idiot. You bought it, now it’s down. You don’t know what you’re doing. But the reality is you’ve got to see that a little bit differently.

You’ve got to see that as the market is now offering you a better bargain. Either you have confidence in yourself or you believe in the market as giving you valuable information. And then as Graham and Buffett say, if you look to the market for the answers, you’re going to just be following popular opinion.

But if you look to the market as a manic counterparty that sometimes sells you something at a big discount from what it’s worth, and other times pays you more than it’s worth. Now you’re talking. Now you’re going to be able to take advantage of the erratic market to profit as an investor.

You can listen to the entire discussion here:

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