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Margin of Safety : Risk-Averse Value Investing Strategies for the Thoughtful Investor
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.
Rights issues: An individual who makes a few trades per year will usually
rarely be confronted with so-called "rights issues." Klarman clearly
describes that your stake in a company is at stake, because dillution
occurs if you don't exercise your shareholder rights to buy more of
this companies' stock. Facing a rights issue, the investor is suddenly
confronted with the problem to either put more money into the company
at a specific date in the near future, or his previous part of ownership
decreases proportionally with non exercised rights.
So you must pay to stay in the game!
There will be more total shares outstanding, but you'd still own
the same number of shares as before. What Klarman didn't explain is that
such offers usually looks attractive to the naive individual investor,
saying, e.g., you get one new share if you own 10 shares at a specific date
for a certain price which is lower than the current share price.
He didn't clearly explain, that a company may use rights issues to raise money
to recover from losses or missmanagment, or for restructuring, or for expansion.
If they burn the money raised without increasing the intrinsic value of the
company proportionally, you lost the newly invested money - and maybe more!
Klarman didn't point out that the investors can sell their rights as marketable security
until the due date. Since Klarman essentially writes about the american market,
he didn't note, that there are restrictions depending on the country
of the investor's broker and/or the nationality of the investor.
Obviously due to different applicable national legislation, e.g.,
certain share owners can't participate in right issues and will get squeezed out
with a cash refund as compensation. Of course they are free to use
any cash received, plus more money, to buy more shares of the same company
to get back to the previous part of ownership.
But if the refund is taxable, which it might well be in certain countries
because a rights issue is not a dividend (and even dividend payments are usually
taxed twice), share holders who are taxed on cash compensations received,
would be disadvantaged by the right issuing company.
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.
It happens that right issues pay off, but the
coercive fact alone, that a company imposes a rights issue on their
share holders could mean that it is too late to sell -
and maybe even more, the initial investment should never have been made.
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!
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