Best Quotes from Margin Of Safety by Seth A. Klarman with Page Numbers

Investing is serious business, not entertainment.

Understanding the difference between investment and speculation is the first step in achieving investment success.

Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses.

Investments throw off cash flow for the benefit of the owners; speculations do not.

The greedy tendency to want to own anything that has recently been rising in price lures many people into purchasing speculations.

Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands.

Value in relation to price, not price alone, must determine your investment decisions.

Investors must look beyond security prices to underlying business value, always comparing the two as part of the investment process.

Emotional investors and speculators inevitably lose money; investors who take advantage of Mr. Market’s periodic irrationality have a good chance of enjoying long-term success.

It is crucial that investors understand the difference between speculating and investing.

Investors need not condemn Wall Street for this as long as they remain aware of it and act with cautious skepticism in any interactions they may have.

Investors must never forget that Wall Street has a strong bullish bias, which coincides with its self-interest.

A significant conflict of interest also arises in securities underwriting.

The point I am making is that investors should be aware of the motivations of the people they transact business with.

The bullish bias of Wall Street manifests itself in many ways.

The problem is that with so much attention being paid to the upside, it is easy to lose sight of the risk.

What appears to be new and improved today may prove to be flawed or even fallacious tomorrow.

If you transact business with Wall Street with these caveats in mind, you can prosper.

There will always be cycles of investment fashion and just as surely investors who are susceptible to them.

Wall Street can be a dangerous place for investors.

The prevalent mentality is consensus, groupthink.

The short-term, relative-performance orientation of many money managers has made 'institutional investor' a contradiction in terms.

Most money managers are compensated, not according to the results they achieve, but as a percentage of the total assets under management.

Attempting to outperform the market in the short run is futile since near-term stock and bond price fluctuations are random.

Money managers who invested their own assets in parallel with clients would quickly abandon their relative-performance orientation.

Investing without understanding the behavior of institutional investors is like driving in a foreign land without a map.

Many large institutional investors separate analytical responsibilities from portfolio-management duties.

Good investment ideas are in short supply.

The business of money management can be highly lucrative. It requires very little capital investment.

If more institutional investors strove to achieve good absolute rather than relative returns, the stock market would be less prone to overvaluation.

The greed and possibly the ignorance of individual investors... allowed a $200 billion market to develop virtually from scratch.

Perhaps most important, junk bonds gave an upward propulsion to business valuation.

This chapter is intended as a cautionary tale, an illustration of how seriously misguided investor thinking can become.

The junk-bond debacle was no great surprise.

What had started as an attempt to generate fees and commissions... took on the characteristics of a moral crusade.

Even bad deals were bailed out by a growing economy and higher business valuations, reinforcing the notion of a low default rate.

Many junk-bond holders did not expect an economic downturn or credit contraction.

Widespread issuance of non-cash-pay securities... served to reduce the reported junk-bond default rate temporarily.

A pile of junk is still junk no matter how you stack it.

Avoiding losses is the most important prerequisite to investment success.

Warren Buffett likes to say that the first rule of investing is 'Don’t lose money,' and the second rule is, 'Never forget the first rule.'

The avoidance of loss is the surest way to ensure a profitable outcome.

If you are one of the vast majority of investors who are risk averse, then loss avoidance must be the cornerstone of your investment philosophy.

An investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes even spectacular gains but with considerable risk of principal.

Choosing to avoid loss is not a complete investment strategy; it says nothing about what to buy and sell, about which risks are acceptable and which are not.

The future is unpredictable. No one knows whether the economy will shrink or grow (or how fast), what the rate of inflation will be, and whether interest rates and share prices will rise or fall.

Investors must be prepared for any eventuality.

Setting a goal, unfortunately, does not make that return achievable.

Investors should target risk, rather than a desired rate of return.

Only one investment approach I know does focus on loss avoidance: value investing.

Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized.

The element of a bargain is the key to the process. In the language of value investors, this is referred to as buying a dollar for fifty cents.

The disciplined pursuit of bargains makes value investing very much a risk-averse approach.

Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds.

Value investors are students of the game; they learn from every pitch, those at which they swing and those they let pass by.

A pitch must not only be in the strike zone, it must be in his 'sweet spot.'

If you cannot tell whether or when you will realize underlying value, you may not want to get involved at all.

The margin of safety is always dependent on the price paid.

Investing is as much an art as a science, investors need a margin of safety.

Value investing is simple to understand but difficult to implement.

"Value investing is a bottom-up strategy entailing the identification of specific undervalued investment opportunities."

"In investing it is never wrong to change your mind. It is only wrong to change your mind and do nothing about it."

"Good absolute performance is obtained by purchasing undervalued securities while selling holdings that become more fully valued."

"The primary goal of value investors is to avoid losing money."

"A bottom-up approach, searching for low-risk bargains one at a time through fundamental analysis, is the surest way I know to avoid losing money."

"Risk and return must instead be assessed independently for every investment."

"In inefficient markets it is possible to find investments offering high returns with low risk."

"Investors must learn to assess value in order to know a bargain when they see one."

"A relative-performance-oriented investor is generally unwilling or unable to tolerate long periods of underperformance and therefore invests in whatever is currently popular."

"If you expect a business to grow 10 percent a year based on your top-down forecast and buy its stock betting on that growth, you could lose money if the market price reflects investor expectations of 15 percent growth."

Many investors insist on affixing exact values to their investments, seeking precision in an imprecise world, but business value cannot be precisely determined.

Anyone with a simple, hand-held calculator can perform net present value (NPV) and internal rate of return (IRR) calculations.

It is easy to confuse the capability to make precise forecasts with the ability to make accurate ones.

Investors must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal.

Security analysis does not seek to determine exactly what is the intrinsic value of a given security.

An indefinite and approximate measure of the intrinsic value may be sufficient.

The discrepancy between the buyer’s and the seller’s perceptions of value can result from such factors as differences in assumptions regarding the future.

To be a value investor, you must buy at a discount from underlying value.

To perform present-value analysis, you must predict the future, yet the future is not reliably predictable.

Investors are well advised to make only conservative projections and then invest only at a substantial discount from the valuations derived therefrom.

Good investment ideas are rare and valuable things, which must be ferreted out assiduously.

Investors cannot assume that good ideas will come effortlessly from scanning the recommendations of Wall Street analysts.

Value investing encompasses a number of specialized investment niches that can be divided into three categories.

A bargain should be inspected and re-inspected for possible flaws.

If the management of a company were compensated based on revenues, total assets, or even net income, it might ignore share price while focusing on those indicators of corporate performance.

Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty.

When the herd is selling a security, the market price may fall well beyond reason.

Value investing by its very nature is contrarian.

When widely held opinions have no influence on the issue at hand, nothing is gained by swimming against the tide.

Investment research is the process of reducing large piles of information to manageable ones, distilling the investment wheat from the chaff.

Ordinarily, however, the simpler the analysis and steeper the discount, the more obvious the bargain becomes to other investors.

Investors are always on the lookout for catalysts.

The presence of a catalyst serves to reduce risk.

Owning securities with catalysts for value realization is therefore an important way for investors to reduce the risk within their portfolios.

The greater the undervaluation, the greater the margin of safety to investors.

Investing in liquidations may be particularly attractive opportunities for value investors.

Investing in rights offerings can create an opportunity for alert value investors.

The complexity of the required analysis limits the number of capable participants, which helps the few who persevere.

Attractive opportunities to purchase undervalued investments arise with some frequency in a number of areas.

These opportunities can be identified and exploited by value investors.

"Investors in a thrift conversion are buying their own money and getting the preexisting capital in the thrift for free."

"The twin attractions of buying on equal terms with insiders and the favorable arithmetic of a thrift conversion make for a compelling investment opportunity."

"If you don’t quickly comprehend what a company is doing, then management probably doesn’t either."

"Conservatism is even more important in the case of highly leveraged financial institutions where operating risks are magnified by the capital structure."

"Quality of earnings is extremely important since earnings derived from the recurring spread between interest earned on loans and interest paid on deposits are far more valuable than nonrecurring gains."

"Investors must analyze each potential thrift conversion investment not as an instance of an often attractive market niche but individually on its merits."

"The economics of a thrift conversion are such that even with obvious merits, shares can sometimes be offered at substantial discounts to book value due to market conditions."

"The opportunity to investors of owning a thrift that is financially capable of and willing to repurchase its shares cheaply is compelling."

"Thrift conversions illustrate the way the herd mentality of investors can cause all companies in an out-of-favor industry to be tarred with the same brush."

"Investors should adjust book value upward to reflect understated assets and downward to reflect balance sheet intangibles."

"Identifying attractive opportunities requires painstaking analysis; investors may evaluate dozens of situations to uncover a single worthwhile opportunity."

"Financially distressed and bankrupt securities can provide attractive value-investment opportunities."

"While Chapter 11 is not a panacea, bankruptcy can provide a sheltered opportunity for some troubled businesses to return to financial health."

"Investing in financially distressed and bankrupt securities requires patience to wait for the right situation and the right security at the right price."

"When properly implemented, troubled-company investing may entail less risk than traditional investing, yet offer significantly higher returns."

"An undervalued stock may remain cheap forever...but a bankrupt company will typically reorganize within two or three years of filing under Chapter 11."

"Each situation offers its own analytical challenges, risks, and opportunities."

"The rate of return is highly dependent on timing."

"Investors must distinguish the individual securities of a company from the company as a whole."

"An extensive search for opportunities combined with insightful analysis can uncover attractive investment opportunities in all kinds of interesting places."

The importance of liquidity in managing an investment portfolio.

While individual investment decisions should take risk into account, portfolio management is a further means of risk reduction for investors.

The challenge of successfully managing an investment portfolio goes beyond making a series of good individual investment decisions.

Diversification for its own sake is not sensible.

The best investment opportunities arise when other investors act unwisely thereby creating rewards for those who act intelligently.

When others panic and sell at prices far below underlying business value, they create buying opportunities for value investors.

Investors must learn to resist fear, the tendency to panic when prices are falling, and greed, the tendency to become overly enthusiastic when prices are rising.

If you haven’t bought based upon underlying value, how do you decide when to sell?

All investments are for sale at the right price.

You want a broker with sufficient clout within his or her firm to provide you with access to analysts and traders.

Investing, it should be clear by now, is a full-time job.

It is not necessary, or even desirable, to be a professional investor, but a significant, ongoing commitment of time is a prerequisite.

The ultimate challenge in selecting a stockbroker or money manager is understanding precisely what they do.

Selecting someone to handle your money with prudence and fiduciary responsibility is never easy.

There is no better place to begin one’s investigation than with personal ethics.

Do they 'eat home cooking'-managing their own money in parallel with their clients'?

Does the broker or money manager have an intelligent strategy that is likely to result in long-term investment success?

Returns must always be examined in the context of risk.

It is the task of those evaluating a money manager to ascertain how much of their past success is due to luck and how much to skill.

Your financial well-being is definitely not something to trifle with.