Posted By: Rupert HargreavesPosted date: September 15, 2015 03:47:42 PMIn: Top StoriesNo Comments This is part nine of a ten-part series on some of the most important and educational literature for investors with a focus on value. Across this ten-part series, I’m taking a look at ten academic studies and research papers from some of the world’s most prominent value investors and fund managers. All of the material can be found under the ‘Timeless Reading’ tab on the menu bar at the top of this page. And if you don’t know where to start, we’ve put together a ‘Value Investors Must Read List’ of resources, which once again can be found under the Timeless Reading tab. Parts one to seven of this series can be found at the links below. Timeless Reading -- Part I -- Warren Buffett On Gold Timeless Reading -- Part Two: What Has Worked In Investing Timeless Reading -- Part Three: Behavioral Investing Timeless Reading -- Part Four: Value Vs. Glamor Stock Returns Timeless Reading -- Part Five: Financial Academics On Value Timeless Reading -- Part Six: Value Versus Growth, The International Evidence Timeless Reading -- Part Seven: Untangling Skill And Luck Timeless Reading — Part Eight: The High Dividend Yield Advantage Timeless Reading -- Part nine: Seth Klarman’s Margin of Safety A series on the best resources for value investors wouldn’t be complete without an article devoted to one of the many legendary value investing books on the market. And there are many to choose from, too many to list, but there’s one that stands out from the rest. Get The Full Seth Klarman Series in PDF Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues. Seth Klarman’s out of print book, Margin of Safety is essential reading for all serious value investors. A print copy of the book is almost impossible to get hold of and second-hand copies have been known to appear on Amazon.com, Inc. (NASDAQ:AMZN) for in excess of $1,000. So, this part of the timeless reading series is dedicated to some of the most valuable nuggets of information contained within Margin of Safety. Seth Klarman on the greatest challenge “...The greatest challenge for value investors is maintaining the required discipline. Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking…” -- Seth Klarman, Margin of Safety Over the short-term, there may be periods where the value approach seems outdated and ill-conceived. However, over the long-term, the devoted advocates of the strategy are rewarded and the value approach works so successfully that few, if any, advocates of the philosophy ever abandon it. The message here is stick to your principles, don’t over trade and believe in the value discipline. Value investors have to keep the discipline, no matter how bad things many seem. Seth Klarman notes that many investors are often pressured into investing prematurely; the cheapest security in an overvalued market may still be overvalued. It is often the case that another opportunity to buy will come along soon, offering a better return for your money. Nevertheless, value alone is not sufficient; investors must choose only the best absolute values among those that are currently available. Oddly, this is where Seth Klarman advocates increased trading or rebalancing. “... Value investors continually compare potential new investments with their current holdings in order to ensure that they own only the most undervalued opportunities available. Investors should never be afraid to reexamine current holdings as new opportunities appear, even if that means realizing losses on the sale of current holdings…” Seth Klarman on reducing portfolio risk “...Portfolio management requires paying attention to the portfolio as a whole, taking into account diversification, possible hedging strategies, and the management of portfolio cash flow. In effect, while individual investment decisions should take risk into account, portfolio management is a further means of risk reduction for investors…” How many stocks should you hold to be suitably diversified? In Klarman’s view, ten to 15 is suitable. The reason for such a small portfolio size: “...My view is that an investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings. One's very best ideas are likely to generate higher returns for a given level of risk than one's hundredth or thousandth best idea…” Seth Klarman on leaving room to average down As Seth Klarman explains: “...The single most crucial factor in trading is developing the appropriate reaction to price fluctuations...One half of trading involves learning how to buy. In my view, investors should usually refrain from purchasing a "full position" (the maximum dollar commitment they intend to make) in a given security all at once...Buying a partial position leaves reserves that permit investors to "average down," lowering their average cost per share, if prices decline...If the security you are considering is truly a good investment, not a speculation, you would certainly want to own more at lower prices. If, prior to purchase, you realize that you are unwilling to average down, then you probably should not make the purchase in the first place…” Seth Klarman on the art of business valuation Of course, achieving an appropriate margin of safety is entirely dependent upon the ability of the investor to be able to place a suitable value on the underlying business. In a warning to potential investors, Seth Klarman states that: “...Reported book value, earnings, and cash flow are, after all, only the best guesses of accountants...Projected results are less precise still...You cannot appraise the value of your home to the nearest thousand dollars. Why would it be any easier to place a value on vast and complex businesses?...if expert analysts with extensive information cannot gauge the value of high-profile, well-regarded businesses with more certainty than this, investors should not fool themselves into believing they are capable of greater precision when buying marketable securities based only on limited, publicly available information…” This is clearly a warning to all those who invest based on book values and reported financial figures alone. It’s also the basis of Like this article? Sign up for our free newsletter to get articles delivered to your inbox Rupert may hold positions in one or more of the companies mentioned in this article. You can find a full list of Rupert's positions on his blog. This should not be interpreted as investment advice, or a recommendation to buy or sell securities. You should make your own decisions and seek independent professional advice before doing so. 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