With another day of Market Carnage unfolding, a useful anodyne: Mr. Seth Klarman, a successful practitioner of some hard discipline:

"When Benjamin Graham first developed the principles of value investing in the 1920’s, he could not have imagined the changes the investment world would undergo over the next eighty years: the wondrous technological advances, the vast accumulation of wealth, the institutionalization of investing, the new financial instruments. Because so much is so very different, I’m sure he would be especially pleased to find that value investing is, in many ways, the leading investment discipline being practiced today. Yes, there are other approaches—growth, momentum, black box computer programs. But there is only one approach—one discipline—that is simple enough for anyone to follow, logical and commonsensical to anyone who pays attention and incontrovertibly proven to work.

Value investing involves the purchases of bargains, the proverbial dollars for fifty cents. Unlike speculators, who think of securities as pieces of paper that you trade, value investors evaluate securities as fractional ownership of, or debt claims on, real businesses. They are evaluated as one would evaluate the purchase of an interest in a business or of the entire business. Buying such bargains confers on the investor a margin of safety, room for imprecision, error, bad luck, or the vicissitudes of economic and business forces. Value investing is a long-term orientated investment approach—never to be confused with short-term speculation—that requires considered patience, discipline and rigor.

Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment. Price, of course, is determined in the financial markets, varying with the vicissitudes of supply and demand for a given security. It is crucial for investors to understand not only what value investing is, and that it works, but why it is a successful investment philosophy. At the very core of its success is the recurrent mispricing of securities in the marketplace. Value investing is, in effect, predicated on the proposition that the efficient-market hypothesis is frequently wrong. If, on the one hand, securities can become undervalued or overvalued, which I believe to be incontrovertibly true, value investors will thrive."
- posted by cjb @ 2:36 PM