Transcription of theThoughtful Investor
1 MARGINOFSAFETYRisk-AverseValueInvestingS trategiesforthe ThoughtfulInvestorSethA. arperBusin essiiiADivisionofHarperColl;l'IsP~bli$hm ContentsAcknowledgmentsIntroductionIWher eMos tInvestorsStumb leixxiii11 SpeculatorsandUns uccessful Investors32 TheNatureof WallStreetWorksAgainstInvestors193 TheInstitutionalPerformance Derby: TheClien tIstheLoser3S4 Delusionsof Value:Th eMythsandMisconceptionso fJunkBondsinthe1980s55 IIAV alue-InvestmentPhilosophy795 DefiningYour Investment Goals816 ValueIn ve stin g.
2 TheImportanceof a Marginof Safety877 At the Root ofaValue-InvestmentPhilosophy1058 TheArtofBusinessValuation118 IIITheValue-InvestmentProcess1499 InvestmentResearch:TheChallengeof FindingAttractiveIn ves tm en ts15110 AreasofOpportunityfor ValueInvestors:Catalysts,MarketInefficie ncies,andInstitutionalConstraints16211 InvestinginThriftConversions18212 InvestinginFinanciallyDistressedandBankr uptSecurities18913 PortfolioManagementandTrading20914 InvestmentAlternativesfortheIndividualIn vestor222 Glossary229 Bibliog raphy241 Index243 AcknowledgmentsWhilealwaysinterestedinth eworkingsof WallStreet,Iwasextremelyfortunatein my first real job tohavetheopportunitytoworkalongsideMicha el Priceandthe late (nowMutualSeriesFund,Inc.)
3 MyunclePaulFriedmanalwaysencouragedmyint erestininvest-ingandhelpedmelandthatjob. years atHarvardBusiness toMax' MBA atHarvard, start-upinvestment-managementfirm inCambridge,Massachusetts,presentedtheop portunitytobeginbuildinganinvestmenttrac k recordearlyin my it wasthatI joinedBillPoorvu,IsaacAuerbach,JordanBar uch,HowardStevenson, ofmycolleagues-Howardinparticular-wentou ton a long,thinlimb to bet on meandmy abilities,notonlytomanagetheirownmoneybu talso that of their familiesandclosefriends.
4 Whichwasperhapsthegreateract of beassociatedwithsuchknowledgeable,energe tic,warm, has alsobeena privilegetoworkalongsidePaulO'Leary,Davi dAbrams,andnowTom Knott, mybrilliantanddedicatedixXACKNOWLEOCMENT S investmentteamandin-housedoublesgame. I amgratefultoeach ofthemfor hismanyinsightsandobservations, anumberofwhichappearinoneform orano ther in the finestclientsa in shallresp ecttheirprivacybynotnamingthem,theirpati ence, interest,andsupporthave havebroughtm eintocontactwithmanyof the finestpeople in theinvestmentbusin ess,on boththebuysideandthe sells id e.
5 I amg rat eful to eachofthemforteachingmesomuchaboutthisbu sinessandfor puttingupw ithmewhenI washaving a are toonumeroustothankin d ivid ually,lowe each ofthema dow ish tothankthepeoplewhohaveb eenespeciallyhelpfulwith collea guesatBaupost-c-Howard,David,Paul,andTom -eachreviewedth emanuscriptas itnearedcompletionasdidfoursp ecial friends, Lou Lowenstein,DavidDarst, HenryEmerson, and Bret Promso n. Anumber ofotherfriendsmade veryhelpfulsugg estionsatearlier stagesofthis project.
6 Jess Ravich, inparticular,offeredmany valuableinsightsinto thejunk-bondan dbankruptcy sections . Finally,JimGrant,p erhapsw itho u t realizin git, i nspiredmeto thankeachofthemfor theirh elp ,andfar moreimportant,I ife, BethKlarman , offered the freshp erspectiveof anon-financial-professionalas she devotedlyreadeverychapterandmadenumerous helpfulrecommendation madeeveryaccommodati ontohelpfreeu p time forme to devote tothisprojectandurgedme topresson to comp letio nth emanytimeswhenprogress thankherfor being a father, HerbKlarman.
7 Was perhapsthe mostcarefulreaderofmultiple draftsof thismanusc is atruecrafts-manof theartofwriting,andhiscommen ts are literallyincor-poratedoneverypageof thisbook . Ithank himforh alsowantto thankmymother, MurielKlarman,forteachingme to ask Imustacknowledgetheextraordinaryefforts of MarkGreenberg, myeditoratHarp erBusiness,andMitchTuchman,my developmentaleditor,inimprovingthismanus criptin somany ways. I thankthemboth for their help in seeing this projectto fruition. I alsoowethanksto Martha Jewett,whomadehelpfulcommentson anearlydraft,andspecialthanksto Virginia Smith,whoproposedthis project out of the Fiorenza, MikeHammond, andSusieSpero were ofenormousassistancewiththe typingandretypingof umerouseditorial suggestions andhelpedtopreparethe glossary.
8 This, full responsibilityforerrorsmust bebornebythe author. I hopethosethat remainareminorandfew fferentapproachesthat offer little or norealprospect oflong-termsuccessandconsiderablechanceo fsub stan tial not coherent in vestmen tprogramsat allbutinsteadresemble speculationoroutrigh tga mbli n g .Inves tors arefrequ en tlyluredbytheprospectofq uickandeasygainandfallvictimto themanyfads of inwritingthis book a retwofold . In the firstsectionIidentifymanyof the pitfallstha t many gowrong, I hope to helpin vestor slearntoavoidtheselosin theremainderof thebookIrecommendonep a r ticula rp a thfor investorsto follow-ava l u e- in vestm ves tin g,thestrategyofinvesting in securi tiestradingatanappreciable discount fromu nd er lyin gvalue,hasa longh is-tory of deliveringexcellent i nvestmen t resultswithverylimiteddow ns id e risk.
9 Thisbookexpl ainsthephilosophyof valuein ves tin gand ,perhapsmor eimportantly, thelogicbehinditinanattempttodemonstrate w hyitsu cceed swhileothera p pro ach es chose ntobeginthisbook,notwitha discussion ofwha tvaluein vestors dorigh t, but with anassessment ofwhereo th er investorsgowrong, formanymoreinvestorsloseth eir\'\Tayalongtheroadtoin vest men t successthanreachth eas yto straybuta con tinu ousefforttoremaindisci-xiiixivINTRODUCTI ON plined. Avoidingwhereothersgowrongis , it ,as severalof myfriendshave ,whyIwouldwriteabookthatcouldencour agemorepeopletobecom e 'tIrunthe risk of encouragingincreasedcompetition, therebyreducingmyowninvestmentreturns?
10 Perhaps,butIdonotbelievethis willhappen. For onething,valueinvestingis notbeingdi scu ssedhere forthe firsttime. WhileI havetriedto buildthecase foritsomewhatdiffer-entlyfrommyp redecessorsandwhilemyprecisephilosophyma yvaryfromthatof othervalu einvestors, anumberof theseviewshavebeenexpressedbefore,notabl ybyBenjaminGrahamandDavidDodd,whomore than fiftyyearsagowroteSecurityAnalysis,regar dedbymany as the bible ofvalueinves t-ing. Thatsingleworkhasilluminatedthewayfor ,alessacademicdescriptionof , the chairmanof BerkshireHathaway,Inc.
