Source: Excerpted from Margin of Safety.
Seth Karaman, president of Baoyou Fund Company, has a deep research on value investment. His masterpiece, Margin of Safety, sold for 2000 dollars and 1200 dollars on Ebay and Amazon because of shortage. BaupostGroup, managed by BaupostGroup, achieved the miracle of compound annual growth rate of 20% in the past 30 years with only 50% positions.
Karaman always feels gentle and full of scholar temperament, but he is stubborn and never gives up after setting a goal. Value investment is the core of Karaman's investment method, and he likes to buy when the market is hit hard.
Karaman has a wide range of investment fields, including stocks, bad debts, bankruptcy liquidation assets of companies, foreign stocks or bonds, etc.
Karaman's investment philosophy has three pillars:
1, pursue absolute returns, ignore relative performance, find your own advantages and give full play to them.
2. Advocate bottom-up stock selection.
3. Pay attention to risks first, and then pay attention to returns.
The following are 10 important points in Seth Karaman's Margin of Safety:
1. Value investment is not simple.
Value investment requires a lot of energy and effort, extremely strict discipline, and long-term investment vision. Only a few people put in the time and energy needed to be value investors, but even fewer people can establish a suitable investment concept and succeed. In the world of investment, too many things change too fast, so we need to understand the basic principles behind the rules, so as to know why some things will happen and some things will not happen.
Value investment cannot be learned and mastered through long-term study and practice. Either you can learn this investment idea at once, or you will never really understand its essence. Value investors are not wizards who are good at analyzing super-complex data. Nor will they write complicated computer models to discover potential value and seek high-quality investment opportunities. They need strong self-discipline to resist the temptation of investment that is not so good. They need to be patient enough to wait for the really great opportunity, and they can accurately judge whether it is the best time to shoot.
2. Characteristics of value investors
Be self-disciplined until you find a cost-effective investment opportunity and make value investors look like risk averse. Self-discipline is necessary for them, and the biggest challenge they face is how to maintain it. Value investors mean staying away from the crowd forever, challenging conventions and even running counter to popular investment trends. This road is not lonely. In the period of high long-term market valuation, the performance of price investors is sometimes unsatisfactory or even "terrible" compared with other investors or the whole market. But in the long run, value investment is very successful, so you will find that few investors will give up this investment idea.
3. The biggest enemy of investors
If some investors can successfully predict the future direction of the market, they will never be value investors. It is true that when the price of securities rises steadily, price investment itself is a defect; The unpopular securities did not rise as the public liked. Moreover, when the overvalued market is correctly valued, it is no coincidence for price investors, because they will soon need to sell their tickets. Therefore, the best time for price investors is when the market goes down. Those investors who only pay attention to the rising factors are swallowing the bitter fruit of blind optimism. At this time, any risk factors leading to the downward trend will be taken seriously, and price investors can protect them from the huge losses caused by the downward trend of the market because they have invested a certain margin of safety.
4. Everything is related to thinking mode.
Successful investment needs to establish a suitable thinking mode. Investment is serious, not a joke. If you participate in the financial market, it is very important that all your actions should be from the perspective of an investor, not an observer. Make sure you understand the difference between the two. Undoubtedly, investors can tell the difference between Pepsi and Picasso: Pepsi is the investment object, while Picasso's works are the collection object. When you put your hard-earned money and future financial securities in a risky place, it will be very, very expensive not to know the difference between them.
Don't ask Mr. Market for advice.
Some investors-in fact, observers will ask Mr. Market for investment advice-this is not right. When they find that Mr. Market has set a low price for a ticket, they will forget the fact that Mr. Market is irrational, and impulsive investors and observers will inevitably suffer losses. However, investors who are well aware of Mr. Market's intermittent unreasonable behavior can take advantage of this and succeed in long-term investment.
6. Stock price VS business truth
Falling stock price does not necessarily mean that the company's business is not developing well or its value is falling. Therefore, investors must learn to distinguish between stock price fluctuations and potential business truths. If investors find that the overall trend is that everyone is blindly following the trend to buy or sell, then they must resist this trend. Of course, you can't ignore the market, because it contains investment opportunities. Ignoring it means making a mistake, but you must think for yourself and don't let the market lead you by the nose.
7. Stock price and value
Value is linked to price, but not only depends on its price, so pay more attention to your investment decision. The stock price will change for various reasons, and you can't judge what the current stock price reflects, so investors must look at the business value of the enterprise itself through the stock price and constantly compare the two in the investment process.
8. The first rule to avoid loss is not to lose money.
Avoiding losses should be the primary goal of every investor, but this does not mean that investors should not bear the risk of losses at all. "No loss" means that a person's investment portfolio will not lead to a large loss of capital in the next few years. No one wants to bear the loss, and you can't prove it by testing the behavior of most investors and speculators. Most of us have a strong speculative impulse, and the temptation of free lunch is always strong, but despite this, avoiding losses is the most reliable way to ensure that you can make money through stock trading.
9. Waiting for the best time to hit the ball
Warren Buffett once compared investor self-discipline with baseball. A long-term investor is like a batter. When there are no good balls and bad balls in the game, the batter can be indifferent to dozens or even hundreds of hitting opportunities, and many opportunities are likely to swing when others see them. Bidders are competitive learners. Whether they hit or not, they learn from every swing. They will not be influenced by other people's performance, but only pay attention to their own achievements. They have endless patience and are willing to wait for an excellent opportunity to hit the ball-an undervalued investment opportunity. Price investors will not invest in companies they are not sure about, or companies with extremely high risks. Unlike price investors, most institutional investors strongly want to stay in Man Cang.
10. Reasonable and sustainable income >; Amazing but unstable returns
An inevitable result of paying attention to compound interest is that as long as you lose once, it will be difficult to recover. This can ruin a person's successful investment achievements for many years at once. In other words, for investors, it may be better to get a sustained and good return under the condition of limited risk than to get an unstable and sometimes even "considerable" return under the condition of relatively high risk.