Published On: Mon, Aug 10th, 2015

Is There a Secret Formula for Investing? Seth Klarman Answers

SX00164_9 Seth Klarman  president of The Baupost Group BLOOMBERG 1


While reading Margin of Safety, I ran into one of Klarman’s statements that turns out to be very real and defines the implicit difficulty of being an investor:

“Many investors greedily persist in the investment world’s version of a search for the Holy Grail: the attempt to find a successful investment formula. It is human nature to seek simple solutions to problems, however complex. Given the complexities of the investment process, it is perhaps natural for people to feel that only a formula could lead to investment success.

“One simplistic, backward-looking formula employed by some investors is to buy stocks with low P/E ratios. The idea is that by paying a low multiple of earnings, an investor is buying an out-of-favor bargain. In reality, investors who follow such a formula are essentially driving by looking only at the rear-view mirror. Stocks with a low P/E ratio are often depressed because the market price has already discounted the prospect of a sharp fall in earnings. Investors who buy such stocks may soon find tha the P/E ratio has risen because earnings have declined.

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GuruFocus by brian flores


Seth Klarman

Seth Klarman

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SX00164_9 Seth Klarman  president of The Baupost Group BLOOMBERG 1

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SX00164_9 Seth Klarman  president of The Baupost Group BLOOMBERG 1

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