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Margin of Safety : Risk-Averse Value Investing Strategies for the Thoughtful Investor

Seth A. Klarman

Buy this book at Amazon.com or try Amazon.co.uk in England, Amazon.ca in Canada, Amazon.de in Germany, Amazon.fr in France, Amazon.it in Italy, Amazon.es in Spain. ASIN=0887305105, Category: Investment, Language: E, cover: HC, pages: ???, year: 1991.

Unfortunately this book is out of print. If you are a Buffetesque value investor, try to buy a used copy or to try to find it in your library.

See also: Notes To The Book "Margin Of Safety", prepared by Ronald R. Redfield

Review © (2007) by IBS :: interesting-books-selector.com

I've read most of the book "Margin of Safety" by Seth Klarman. The ask for a used copy of this book is many times the previous list price. While the book is surely worth the price it sold for initially, I'd doubt it deserves such a high multiple.

Reading the book made me think about risks I've not yet considered so far. Some chapters at the beginning are too basic (a beginner wouldn't want to read this book) and some chapters (e.g., about companies in financially difficult or bankcruptcy situations as well as about arbitrage) are too special and thus out of scope for individual investors. The chapter about thrifts is only of historical interest.

Klarman seems to me much less a buy and hold investor compared to Warren Buffett (or rather what Buffett recommends to the individual investor). Klarman proposes hedging against downside risks, e.g., by selling puts and several times proposes selling a position which was bought at discount once full valuation was reached. Such a sell decision involves market timing which I'd consider even harder than identifying a bargain while searching what to buy. I learned a bid more about bonds; the example in the notes of page 116 is surprisingly right and well explained. Until now I've not yet thought about the positive effect of raising interest rates (and thus falling bond prices) for re-investing the money obtained from interests received [in the same bond]. In this case, in total you get more out at the end, given you hold it until maturity, if the bond you bought initially falls. The effect is small but not insignificant.

The various calculations presented in the examples of the book are sometimes hard to follow even for someone who's talented in mathematics. It requires some understanding about financial statements. Klarman's thoughts about the influence of inflation in investing are surely worth studying. In closing about rights issues, an investor must carefully check what the company's plans are. If he would not increase his share in the company without any rights issue, it is probably prudent to sell the rights and run. If there is no intention to invest more, it might even be prudent to sell the whole position, because why would someone continue to hold a stake in a company if he doesn't plan to ontinually increase his stake with new money? If the investor doesn't convincingly know how to react, he should not be invested in the company - or in any other individual company. Not owning individual stocks means buying an index, which guarantees that your performance will be average, or pay for management or advice, given he's able to find qualified service; most professional money managers don't beat the indices.

Review summary: The impression I took away from reading this book, is, that individuals should better stay away from trying to buy individual stocks because valuation is too tetious work and needs a lot of experience. Klarman proposes the main index funds instead for laymen, although he does not mention the total market index, which Buffett now recommends. In case individual stock holdings are choosen, Klarman proposes a much bigger diversification than Buffett. The book helps to raise the level of consciousness about the risks involved when investing in common stocks (and bonds).

Disclaimer: The above text represents the opinion of the autor and shall not be considered as a recommendation to sell or buy any investment or security. Use at your own risk!