Scarce, costly, and driving the investment community mad for two decades are all precise descriptions of Seth Klarman’s Margin of Safety. What is this book all about, though, and is it worth your hard-earned cash?
Can the secrets contained in this book written by a billionaire help you to make money on your investments, or is this another marketing scheme to make a rich man richer? We dive into the contents and every other aspect of this book to help you make an educated buying decision.
What Is Margin of Safety and What Is It About?
Understanding Margin of Safety is two-fold. The first aspect is the investment term, and the second is the content of the book itself. The terminology is important, as it helps you to understand more of what Klarman discusses in the chapters of the book.
While Margin of Safety is the title of the book, it refers to an aspect of the stock market. Simply put, it is “the difference between the intrinsic value of a stock and its market price.” It also refers to how far a business’ sales can fall before breaking even.
The principle behind it is to invest in securities, namely stocks, when their market price is well below the actual value. So, if Ford dropped to $4 a share from its current $11, then it would be the perfect time to buy up stock according to this principle.
By purchasing a stock below the actual value, you can set a “margin of safety” that coincides with how much you are willing to risk. Since the value has decreased significantly, you stand to lose less than you would at full price. On the flipside, you stand to gain a significant amount if the price returns to its original value.
Crunching hypothetical numbers, let’s say Ford is normally worth around $50. You hop on your favorite stock market watching website to find that its price has dropped to an astonishing $15. Choosing to buy a single stock now means you could only lose a maximum of $15, but could potentially gain $35 if the price returns to normal over time.
If you purchased 100 stocks, that means you could make an easy $3,500 for a minimal investment. If Ford tanked, then you lost $1,500 instead of the $5,000 you would have paid at the company’s intrinsic value. That’s the simple version of this investment tactic, but it’s easy to see how it creates a safety bubble for investors.
Margin of Safety is a book by Seth A. Klarman, a billionaire whose ideas are often described as out in left field when it comes to investing. An investor and hedge-fund manager, Klarman is currently the chief executive as well as the portfolio manager of Baupost Group, which is a private investment partnership in Boston.
Klarman’s Margin of Safety book is divided into three sections. The first focuses on several pitfalls that investors make, the second focuses on the importance of minimizing your risk with a margin of safety, and the third describes non-traditional investment opportunities.
Klarman starts by talking about self-defeating investment strategies, how Wall Street scams clients and the dangers of junk bonds. He argues that investment-grade bonds that became highly volatile perform better than ones that were junk bonds from the start, and also goes into the surge in junk bonds during the 1980s.
He warns against the risks associated with collateralized bond obligations, or CBOs, pointing out their associated failure with junk bonds in the 2007-08 recession. This section acts as a warning against poor investment practices and a guide on what types of bonds to avoid.
This section of the Margin of Safety book is where the title is mainly derived from. It discusses what that investment concept is as well as Klarman’s belief that intangible assets aren’t worth your dollar. He uses 7-Up as an example, saying that company’s value could quickly disappear if people’s tastes change in the future.
He also explains why he isn’t a fan of top-down investing. This approach involved viewing the economy as a whole then breaking it down into smaller, more refined details. Ultimately, those details would decide your investments. Klarman goes on to warn against precise valuations, aggressive valuation methods, and their ability to be highly inaccurate.
Finally, Klarman talks about unusual investment opportunities such as companies in bankruptcy and stocks with no analyst coverage. If you follow stock market gurus, this section shows how the author influenced Joel Greenblatt but also points out the differences in their beliefs.
While Greenblatt enjoys writing about the possibility for leverage to increase your returns, Klarman chooses to warn against their potential risks. This section also contains a lot of the author’s theories on investments for those looking to make the most of the market.
What Makes Margin of Safety Unique?
As a book, this print is unique in its exclusivity. Klarman quickly stopped production of his Margin of Safety book to make a limited print, making it a rare and expensive find. Its pages hold his unique views on the stock market and investing techniques while offering a more humanized version of how to properly invest.
The book’s ideas are what make it stand out from other books with related content. There are several key points that differentiate Klarman’s views on how someone can successfully make money through the market.
For instance, he believes that fundamental research is essential to investment, but also points out that it has a multitude of drawbacks. You could miss the big picture while focusing on extensive bottom-up research, see the companies you are examining change rapidly before your research is finished, or even watch your returns diminish past a certain point.
He believes that price opportunities are often missed while investors take the time to acquire extensive knowledge beforehand. Essentially saying that investing with incomplete information is, more often than not, worth the risk.
One part of the book discusses how merger arbitrages were lucrative in the 1980’s but lost the ability to make money some time ago. Hedge fund investments that speculate on successful mergers today, he argues, are high risk.
He notes that pre-packaged bankruptcies are better than exchange offers due to the free-riding capabilities of bondholders. That section also talks about the ability of capital-intensive companies to survive a bankruptcy, whereas financial companies that rely on investors and depositors often fail during the process. He believes this is because of capital-intensive businesses’ ability to return to normal once their capital is restored, while financial companies lose their source of investment’s trust.
Klarman’s ability to paint a picture for the average investor is also something that helps the book to stand out. His simple analogies for Wall Street, speculation versus investment, and how the average investor is fooled by promises of profits make difficult concepts simple to understand.
All in all, Klarman views the world of investing in a different light than many who have made billions off of it. His opinions are vastly different than those of billionaires like Warren Buffet, George Soros, or Ronald Perelman. Many believe that his insights are the path to making a fortune off of their investments.
The Financial Definition and Explanation
Edge of wellbeing is a rule of putting resources into which a financial specialist possibly buys protections when their market cost is altogether beneath their inborn esteem. At the end of the day, when the market cost of a security is essentially underneath your estimation of its characteristic esteem, the thing that matters is the edge of wellbeing. Since financial specialists may set an edge of wellbeing as per their very own hazard inclinations, purchasing protections when this distinction is available enables a venture to be made with insignificant drawback chance.
In bookkeeping, the edge of security, or wellbeing edge, alludes to the distinction between real deals and earn back the original investment deals. Supervisors can use the edge of wellbeing to realize how much deals can diminish before the organization or a task ends up unfruitful.
Edge of Safety
Separating Margin of Safety
The edge of security standard was advanced by acclaimed British-brought into the world American financial specialist Benjamin Graham (known as the dad of significant worth contributing) and his supporters, most quite Warren Buffett.
Speculators use both subjective and quantitative elements, including firm administration, administration, industry execution, resources, and profit, to decide a security’s inborn esteem. The market cost is then utilized as the purpose of correlation with ascertaining the edge of wellbeing. Buffett, who is a staunch adherent to the edge of wellbeing and has pronounced it one of his “foundations of contributing,” has been referred to apply as much as a half markdown to the natural estimation of stock as his value target.
Considering an edge of wellbeing when putting gives a pad against blunders in examiner judgment or figuring. It doesn’t, in any case, ensure effective speculation, to a great extent in light of the fact that deciding an organization’s “actual” worth, or inborn esteem, is profoundly emotional. Financial specialists and investigators may have an alternate technique for ascertaining natural esteem, and seldom are they precisely exact and exact. What’s more, it’s famously hard to foresee an organization’s income or income.
Clarifying the Reasoning Behind the Margin of Safety
As insightful as Graham might have been, his rule depended on basic facts. He realized that a stock evaluated at $1 today could similarly as likely be esteemed at 50 pennies or $1.50 later on. He additionally perceived that the present valuation of $1 could be off, which means he would expose himself to a pointless hazard. He inferred that on the off chance that he could purchase a stock at a markdown to its natural esteem, he would restrict his misfortunes considerably. Despite the fact that there was no certification that the stock’s cost would build, the rebate gave the edge of wellbeing he expected to guarantee that his misfortunes would be negligible.
For instance, if he somehow happened to confirm that the inborn estimation of XYZ’s stock is $162, which is well beneath its offer cost of $192, he may apply a markdown of 20% at an objective buy cost of $130. In this precedent, he may feel XYZ has a reasonable incentive at $192 yet he would not consider getting it over its characteristic estimation of $162. So as far as possible his drawback chance, he sets his price tag at $130. Utilizing this model, he probably won’t almost certainly buy XYZ stock whenever within a reasonable time-frame. In any case, if the stock cost declines to $130 for reasons other than a breakdown of XYZ’s income standpoint, he could get it with certainty.
Edge of Safety in Accounting
As a budgetary measurement, the edge of wellbeing is equivalent to the contrast between current or anticipated deals and deals at the earn back the original investment point. The edge of security is once in a while announced as a proportion, in which the previously mentioned equation is isolated by current or gauge deals to yield rate esteem. The figure is utilized in both make back the initial investment investigation and gauging to advise a company’s administration regarding the current pad in genuine deals or planned deals before the firm would cause a misfortune.
How Much Does It Cost?
The book is in incredibly limited supply since Klarman stopped printing production. As you might expect, a book filled with a billionaire’s financial secrets on the rarer side comes at a hefty price.
Currently, you can find the hardcover on Amazon for around $1,000, brand new. Used hardcover copies sell for upwards of $780.
You can save a little money by opting to purchase the paperback, but these are even harder to find. As of this writing, there is only one copy available on Amazon for $694.
Some have chosen to create copies of the book, selling them for as low as $200. Beware when buying these online, though, as many have been scammed into purchasing a false product. You might also find yourself purchasing an illegal copy.
Your best bet to save on the cost of the book is to find a used hardcover copy on a site like eBay. Some users who have already read its contents are selling it for around $500 or less.
Now, if you look hard enough, you can find this book in full online. Posts on Reddit and other sites display the full contents in PDF format for people to read via Adobe or another PDF software. Free certainly beats over $1,000, so it might be worth your time to find one of these digital copies floating around on the internet.
Public Perception (Other Margin of Safety Reviews)
Reviews for Klarman’s Margin of Safety book are through the roof. Nearly everyone rated its contents five or four stars out of five. Those just starting off their investment journey and those well versed in how the stock market works found the author’s insights refreshing and valuable.
Several called it a “must read” book, while others mentioned that it helped to diversify their portfolio while netting them hefty returns. Others mentioned that the unordinary investment opportunities proved to be excellent sources of income, while others were simply enthralled by the way Klarman writes.
Only two negative points came out across the board. The first was the book’s heft price tag, and the second was that it isn’t easy to find a true copy no matter what price you’re paying.
How It Compares
Compared to other books on investing, Klarman’s book is received as well as most others written by billionaire’s who have made their money on stocks, hedge funds, and more. However, very few investor’s books are as highly valued or more coveted than Klarman’s. That alone makes it shine brightly amongst similar reads.
Depending on your investment views, you might value the book the same way many do. Regardless, there’s a lot to be learned in its pages and rigorous method of investing that has made Klarman the insanely rich man he is today.
What We Think
Honestly, the price is outrageous. If the book was guaranteed to make you a billionaire as well, then who wouldn’t fork over the cash? That simply isn’t the case, however, and no book can boast such a claim. That isn’t to say this book isn’t worth the read, though.
The insights into the world of investing from a man who has forged his own path to filthy rich out of college are priceless, sure, but not for upwards of $1,000 for a 249-page book. That’s why we suggest finding it at a lower price.
In this instance, saving cost by purchasing a used copy is the best way to go. Some reviewers even suggesting checking your local library for a copy, which would make the price to read it free. However, the chances are that you’ll need to spend somewhere between $500 and $800 just to read the contents of Klarman’s Margin of Safety.
As for content, the book is filled with incredible lessons, insights, and tips that you can benefit from. People don’t go crazy over finding a copy for nothing, which is why we’re giving this product our stamp of approval. We think you should read it, and you’ll say the same to anyone else once you do.
While having a hard copy would be nice, do your bank account a favor and find one of the free digital copies floating around online. You could even save it to your desktop as a personal copy to read whenever you wish. Either way, this is one book you’ll want to read if you enjoy investing on any front.