Wharton Journal Interview: Seth Klarman

Seth Klarman introduces the "value pretender" investor. With regards to some of the blogs I have read recently, I have a feel for what Klarman is talking about; I see a fair amount of people quoting Buffett (while making other errors) as though quoting Buffett alone were a sufficient condition to become a value investor.

This made me think: value investing carries a dangerous enticement for the self-confident fool, because one of the core concepts in successful value investing is learning to be confident in your decisions if/when others disagree.

If you are an expert, and people disagree, then this concept is about learning to prevent noise from overriding your own sound thought process.

However, it's about as easy to misconstrue this idea, particularly if your disagreement with consensus stems from misunderstanding some basic things that the consensus "knows" - such as the difference between firm value and equity value (yes, I've seen this).

Let's just say that there aren't a lot of clever Buffett/Graham quotes to help with that one. 

With regards to the example Klarman gives - it's hard to fault people for buying when things fall in price as that was identified by Tweedy Browne to be one of the ~9 things that has "worked in investing" (more on this to come), although I grant that Tweedy also named 8 criteria that tend to occur alongside the drop in price. - Ed

Link: Seth Klarman's Guide to Finding Value

Klarman warns that value investing popularity has hit a new high over the last few years. When you couple that with an overwhelming influx of capital into the hands of newly minted fund managers, he says, what you get is investment opportunities in short supply - no fun when you've got $5.4 billion to deploy.

Furthermore, Klarman has identified a new class of investor he has termed value pretenders (and you wondered why his book is so expensive!). "These investors apply a dip strategy. They buy what's down, not what's cheap."