How We Think

The Mind of a Value Investor

Seth Klarman, one of the best investment thinkers and writers within our discipline, recently gave an insightful perspective on the mindset of value investors during an interview with Charlie Rose:

Value investors have to be patient and disciplined, but what I really think is you need not to be greedy – if you’re greedy and you leverage, you blow up.  Almost every financial blow-up is because of leverage.  And then you need to balance arrogance and humility.

When you buy anything, it’s an arrogant act.  You’re saying: The markets are gyrating and somebody wants to sell this to me, and I know more than everyone else so I’m gonna stand here and buy it.  I’m gonna pay 1/8 more than the next guy wants to pay and buy it.  That’s arrogant.  And you need the humility to say: But I might be wrong.  And you have to do that on everything.

The human condition is such that investors are rarely deficient in arrogance, but humility in decision making tends to be in short supply.   We are relentlessly trying to impose a system of checks in an effort to resist this negative natural propensity, including constantly challenging the assumptions key to every current and potential holding.   Nevertheless, mistakes are inevitable, which is why the exercise of planning for them and then over-engineering — insisting upon a margin of safety by price paid being a fraction of appraised value — is vital to investing success.   This foundational element of Ben Graham’s method helps to guard against basic human foibles.