IN THIS EPISODE, YOU’LL LEARN:

• Why most investors speculate rather than invest—and how to tell the difference
• Why fund managers have structural weaknesses that require them to prioritize the wrong things
• Why EBITDA can mislead—and how it hides a business’s actual condition
• Why value investors focus more on downside protection than upside potential
• How to think about margin of safety when constructing a portfolio
• The three temperamental traits most critical to successful value investing
• Why value investors hold cash and how they use it as a strategic weapon
• A detailed breakdown of how Klarman values businesses
• The major types of value opportunities—and where to find them
• Klarman’s perspective on diversification and intelligent position sizing
• And so much more!

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:02] Kyle Grieve: Since 1982, Seth Klarman has soundly defeated the S&P 500 by a wide margin. His fund, the Baupost Group, has achieved annualized returns of 15% during that period compared to just 11% for the S&P 500. Now, what is Klarman’s Secret? A risk averse, value driven philosophy, which follows the timeless principles of Benjamin Graham’s central tenant, the margin of safety. [00:00:25] Kyle Grieve: In 1991, Klarman published a book Margin of Safety, which quickly became a cult classic in the investing world. The book reveals not only how to succeed, but also how to fail. We’ll cover why most investors speculate instead of invest and how that’s a dangerous game to play. We’ll examine why chasing returns rather than avoiding losses can lead to lower compounder rates of return and the risk of never even reaching the finish line. [00:00:49] Kyle Grieve: And we’ll discuss why investors who focus on relative performance tend to achieve such poor absolute performance results. Now, this book is over 30 years old now, but many of its lessons remain just as important now as they were then. And I believe many aspects of the book will remain just as relevant in another 30 plus years. [00:01:07] Kyle Grieve: This includes having a strategy that emphasizes capital preservation, why investors shouldn’t be afraid to build up cash positions, how to avoid the pitfalls of ebitda, and how to construct a resilient portfolio that can survive and thrive in both bull and bear markets. We’ll also explore some of Klarman’s insightful perspectives on Wall Street, his views on index funds, and his approach to valuing specific businesses. [00:01:30] Kyle Grieve: If you’ve ever been burned by buying overpriced stock, wanna understand more about the discipline required to succeed as an investor and want more safety in your investments. This episode is right up your alley. Now let’s get into this week’s episode on the book, Margin of Safety. [00:01:48] Intro: Since 2014 and through more than 180 million downloads, we’ve studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve. [00:02:13] Kyle Grieve: Welcome to The Investor’s Podcast. I’m your host, Kyle Grieve, and I’m thrilled to discuss a very, very interesting book today with you. So one of the bedrocks of investing is to buy assets that offer both downside protection and an acceptable return. Benjamin Graham was the first person to develop this framework for this concept, which he referred to as the margin of safety. [00:02:34] Kyle Grieve: It’s been a primary principle of Warren Buffett and it’s just scores of other legendary valley investors over the last century. Since this idea is so powerful, there’s been many other very intelligent people who have entered the arena to continue discussing the benefits of this concept. One such person is Seth Klarman.

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