On March 17, 2009, eight days after the market's crisis low, Seth Klarman joined George Athanassakos' value investing class at Ivey Business School by video. I hadn't gone back to this talk in over five years — rereading it now, the lines that hold up are the ones on risk and psychology, not the market calls. These are the ones I kept underlining.
On temperament
“I’ve often thought that people’s temperament in the business is colored by the day they come into the business.”
“If you remember how cheap things can get, you don’t easily forget that lesson.”
“Being down that much actually causes your thinking to blur. It causes you to stare into the abyss and wonder: if you’ve lost half, how hard would it be to lose the rest?”
On risk
“Volatility is not risk. Volatility is volatility. Volatility creates opportunities and isn’t necessarily risk at all, unless you absolutely needed to sell the day that the price was very low.”
“Rather, risk is the probability of losing and how much you can lose if you lose.”
“That biotech stock had $16 or $17 of cash and traded at $6. If that stock suddenly drops to $3, does that make it more risky because it’s very volatile, or does it make it a ludicrously good bargain, because it’s now trading for half the price?”
“Academics say the riskier it is, the more return; we’d say the less risky it is, the more return. So we’re really talking at complete odds with each other.”
On relative performance
“Our view is that the idea of sending a letter to a client saying, ‘Dear client, the markets were down 30%, we were down 28%,’ would make us sick. Your goal is not to lose less.”
“If you benchmark me, I don’t want to know about it, because I don’t want it to influence our product. Our product is our product.”
On who’s on the other side of the trade
“If you’re buying something and there’s a chance the person selling knows more than you, there’s a chance you’re the sucker.”
“They’re not analyzing it and saying, ‘That’s a great sale at 40 cents on the dollar.’ They’re saying, ‘Get me out.’”
“Spin-offs are a really interesting thing to look at, because there’s a natural constituency of sellers and there’s not a natural constituency of buyers.”
On the worst case
“There are a lot of people who can call one recession or one bear market, but inevitably they get hung up on overstaying their welcome, or looking for the same thing to happen more than once, and history doesn’t exactly repeat.”
“We don’t think the world’s ending. We don’t understand how people could think the world’s ending; the world doesn’t end that easily.”
“We are modeling several years of serious GDP decline into everything we do, and only buying when we can get comfortable that we earn a very high return even under that. That makes us comfortable that we’re sort of prepared for a depression, and we’ll have positive optionality if we get anything short of a depression.”
“Now, I don’t know how many things you can buy that will be worth 20% more in Armageddon, and that is as close to Armageddon as we can get.”
“We have so many opportunities out there in this kind of turmoil that we just don’t need to do everything. We’re comfortable saying no.”
On valuation
“Your cost of capital changes based on your stock price and your bond price, so how can that be a way to value a business?”
“If everyone’s looking for stocks in the S&P 500, you’d want to look at the S&P 501: a stock that hasn’t quite made it.”
“If you would only buy 2% of a company at a price but would be afraid to own it all, it kind of highlights that maybe you’re speculating rather than investing.”
“If you drive a car and you know everything about it (it’s never been in an accident, it has 18,000 miles on it, it’s a two-year-old model), you still don’t know what it’s worth within $2,000 or perhaps $5,000. So how can anyone know what a gigantic company’s business is worth to the exact dollar and cent per share?”
On concentration
“If you can tell a good idea from a bad idea, something to buy from something not worth buying, how can you not tell a great idea from a good idea?”
“Overdiversifying eliminates return and doesn’t really defend against risk very much.”
On selling
“We’ll be gone, and we’ll let somebody else make the last dollar or two.”
“As a friend of mine puts it, you feed the birdies when they’re hungry. You need to sell that stock on the way up.”
“So we’ll always sell too soon, we’ll always buy too soon, and hopefully we’ll make money somehow in between.”
On integrity
“If somebody comes in, has been here a week and asks, ‘Why are we doing this this way?’, the answer can never be ‘because we always have.’”
“Your reputation is the only thing you really have. You come into the earth with it, and all you can do is make it worse.”