Unfortunately it took me to almost to mid-2023 to review a book that I read in 2022. Better late than never, here’s my Margin of Safety Book Review. Margin of Safety is a great book for anyone who is interested in DIY investing or value investing. Investing is not without risk, but if you have a larger margin of safety, this moat reduces the risk to help you avoid investment losses.
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Table of Contents
Who is Seth Klarman?
Seth Klarman is a baby boomer (in his mid 60’s) and is a billionaire investor. He is a proponent of value investing and is often called the “Oracle of Boston”. He manages $30 billion in assets for Baupost Group, a hedge fund that he founded. He has achieved a compound annual growth rate of 20% annually since 1983, his fund’s inception.
He follows the Benjamin Graham investing philosophy, buying deeply discounted companies when they are undervalued. Margin of Safety was a book he wrote about his thoughts on value investing and it was published in 1991.
Margin of Safety Book Review
This book is very much out of print and a copy of Margin of Safety sells for almost $2000 on Amazon because there are only 5000 copies printed. As much as I like reading about investing, that’s too much to spend to read about investing. Thankfully there are PDF copies of the book available easily online.
This book is divvied up into three sections:
Where Most Investors Stumble
The author states that most investors fail because they act as speculators rather than investors, favouring short term trading profits vs long term business fundamentals.
Also, that the up-front fees and commissions are Wall Street’s primary conflict of interest. Frequent transactions are favoured even when they are not necessarily profitable for you because of the commissions garnered from the advisor.
A Value-Investment Philosophy
Seth Klarman then talks about the value-investment philosophy, and how it can be a lonely undertaking. You could be spending all this time looking at a company and not investing in it. You see a lot of pitches go by without swinging your bat. Individuals who are less patient and less into delayed gratification may have trouble with this investment style.
I personally don’t have the patience for value investing, that’s why I’m have more of a blue chip dividend + index investing style. My husband on the other hand could spend hours, days, and weeks reading up on companies, and waits a long time to take action (waiting for the right time).
In addition, a value investor can experience poor performance for a long time during when the market is overvalued. This happened when people where saying maybe Warren Buffett was “getting out of touch” during the bull market. Of course 2022 happened and value stocks tend to do better during times like these.
Value investing really tends to shine during down markets.
The Value-Investment Process
Although the author doesn’t provide a formula to determine deep value companies, he talks about the general philosophy of assessing these companies. He wants the book not to be considered a book about investing, but a book about thinking about investing.
What I Liked About Margin of Safety
I liked how Seth Klarman talked about how money management is a lucrative business. That this is one of the few businesses where mediocre performance is acceptable. Money managers are too busy spending time accumulating assets under management (because most are paid by percentage commissions of assets under management) rather than investing.
Another excerpt that I liked is how investors must recognize that while over the long term investing is generally a positive sum activity, on a day-to-day basis most transactions have zero sum consequences.
This reminds me of the common saying: “An investment portfolio is like a bar of soap: The more you touch it, the smaller it gets”.
This is why I buy and hold instead of swing trading, looking at candles, and trade options.
What I DIdn’t Like About Margin of Safety
One of the downsides about this book was that he wasn’t a big proponent of index investing. Seth Klarman proposes that the more retail investors choose index investing, the less efficient the market becomes. He thinks that indexing is just another Wall Street fad.
I have thought about how the market will be more flat if more and more people invest in index funds. The drop in the S&P for 2022 wasn’t “that bad” or at least as bad as 2008, and I wonder if it is attributed to more and more people index investing.
In general, the Margin of Safety book is a must-read if you are interested in DIY investing and looking at how to value companies instead of simply using index investing.
You may also be interested in:
- Common Stocks and Uncommon Profits Book Review
- Retirement Income for Life Book Review
- Irrational Exuberance Book Review
- The Most Important Thing Book Review
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.