Price versus value, in a bearish market

Seth Klarman: “In a bull market, anyone, with any investment strategy or none at all, can do well, often better than value investor. It is only in a bear market that the value investing discipline becomes especially important because value investing, virtually alone among strategies, gives you exposure to the upside with limited downside risk. In a stormy market, the value investing discipline becomes crucial, because it helps you find your bearings when reassuring landmarks are no longer visible. In a market downturn, momentum investor cannot find momentum, growth investor worry about a slowdown, and technical analysts don’t like their charts. But the value investing discipline tells you exactly what to analyze, price versus value, and then what to do, buy at a considerable discount and sell near full value. And, because you cannot tell what the market is going to do, a value investment discipline is important because it is the only approach that produces consistency good investment results over a complete market cycle.” – from Baupost letter to shareholder December 22, 1997.

Klar-panin-man

Lagi rajin nata kamar ceritanya eh baru sadar ternyata pernah print laporan semesteran kinerja investasi Baupost Group oleh Seth Klarman. Saya jilid bahkan biar awet. Nemu kalimat ini di laporannya per tanggal 24 Juni 1999 soal intrinsik value sebuah perusahaan.

Students of financial history can point to history levels of valuation to suggest that we are in a bubble. But students of psychology may be needed to complete the picture. For one thing, the financial markets have been so strong for so long that fear of market risk has mostly evaporated. People who used to hold bank certificates of deposit now maintain a portfolio of growth stocks. It is not really within human nature to comprehend that you may not know everything you think you know, and, further, that what you believe in could change on a dime. When your investments are back-stopped by reasonably-priced tangible assets, the prospect of a change in sentiment is not very costly. If a building is no longer needed as a furniture retailer, maybe it would make a good warehouse. If you can’t make money as a distributor, you can recover most of your capital by reselling your inventory.

Yang dibicarakan adalah value investing. Pikiran saya melayang ke saham-saham di Grup Panin.

Investing: discipline and patience

Continuing my reading on Seth Klarman.

Baupost has employed a value approach to investing because it is, above all, risk averse, and focused on preserving capital over the long run. This approach demands both discipline and patience. Discipline is required to buy only bargains and sell fully-priced holdings, never becoming swept up in the enthusiasm of the herd. Patience is required to wait for just the right opportunities, avoiding the pressure to make investments that don’t meet the most stringent criteria of quality and under-valuation, and then to hold on, allowing an investment sufficient time to come to fruition.

Seth Klarman letter to Baupost shareholders, December 17, 1999.

Update: This is actually more from him.

Our search for investment opportunity is always guided by fundamental analysis and valuation. We employ no rigid formulas, believing that the flexible pursuit of opportunity improves one’s prospects for good return with limited risk. We strive to be intellectually honest at all times, maintaining a willingness to change our minds when we are wrong. Given the competitiveness of the investment business, we believe it is important in every investment to have an edge, an advantage over the herd. This edge could be willingness to take a long-term perspective in a short-term-oriented market, a tolerance of complexity when others crave simplicity, or the absense of constraints which either impede the ability of others to act or force them to act in uneconomic ways. For many of our holdings today, we believe the market has become increasingly inefficient, as investors have simply decided not even to look at small capitalization stocks outside of high technology industries.

[ …. ]

We have no mandate other than the risk averse investment of the capital under our direction. We need not be fully invested, and frequently hold significant cash balances, waiting for truly great opportunities to come along. As part of our risk management, we have never leveraged our portfolios. We do not bet the ranch on any single investment; few positions have exceeded 5% of assets in recent years. We do not generally engage in the shor sale of overvalued securities, believing that short-selling could effectively increase, not decrease, portfolio risk in certain kinds of markets.

With so many investors choosing not to think about their investing (indexing), failing to analyse the fundamentals of their holdings (momentum investors), and having an extremely short-term time horizon (almost everyone else), this is a wonderful time to be a long-term value investor. It is important to keep in mind that stocks are perpetuities, with no maturity date. While we frequently invest in stocks with catalyst for value realization in order to create a portfolio of limited duration, we nevertheless buy only when we are prepared to hold for the long-term. Very few investors would choose to hold their current portfolios if they thought the stock market might be closed for trading for the next five years; since we are investing and not speculating, we would be comfortable with our portfolio under such conditions.

I have to say many thanks to him.

Seth Klarman: “..don’t take advice from Mr. Markets, who again and again is wonderful creator of opportunities but whose advice never, ever be followed”

The main underlying principle of value investing is that you should invest in undervalued securities because they alone offer a margin of safety. Over time, by again and again avoiding loss, you have taken the first step toward achieving healthy gains. Value investors should buy assets at a discount, not because a business trading below its obvious liquidation value will actually be liquidated, but because if you have limited downside risk from your purchase price, you have what is effectively a free option on the recovery of that business and/or the restoration of that stock to investor favor. If an undervalued stock drops after you buy it and you are confident in your analysis, you simply buy more. All of these points apply equally well regardless of the market on which a stock trades or where a company does business.

Value investing in the U.S. is driven by fundamental analysis, a rigorous assesment of underlying value based on an understanding of a particular business or asset. The same principles that apply here, such as not paying up for growth, or buying business you can understand that are not subject to rapid technological change or obsolescence, apply internationally as well.

[ … ]

In investing, nothing is certain. The best investments we have ever made, that in retrospect seem like free money, seemed not all that way when we made them. When the markets are dropping hard (as they are right now in Asia) and an investment you believe is attractive, even compelling, keeps falling in price, you aren’t human if you aren’t scared that you have made a gigantic mistake. The challenge is to perform the fundamental analysis, understand the downside as well as the upside, remain rational when others become emotional, and don’t take advice from Mr. Markets, who again and again is wonderful creator of opportunities but whose advice never, ever be followed.

Seth Klarman in Baupost letter to shareholders, 22 December 1997.

Belajar value investing, belum ketemu tapi

We will not stray from our rigid value investment discipline. We buy absolute bargains when they become available, and sell when they are no longer bargains. We hold cash when there is nothing better do, and we hedge against the risk of a dramatic and sustained downturn in the market. Our hedging over the last several years has been expensive and, with perfect hindsight, unnecessary. Yet we are convinced that hedging against catastrophe has been the right thing to do, and it thus remains an integral part of our overall investment posture.

Despite our discomfort with the level of speculative activity in the U.S. market, we remain optimistic regarding our prospects for the future. Because of our fundamental, research-driven, absolute value orientation, we own undervalued securities that we believe will do well regardless of the overall financial environment. In the even of a major market reversal, we believe our market hedges should cushion any serious decline within the portfolio.

Ini dari laporan keuangan Baupost yang ditulis pada 21 Juni 1996 oleh Seth Klarman. Saya sedang mempelajari value investing sebulan ini, dan belum ketemu ‘klik’-nya. Masih jauh panggang dari api. Masih sering termakan rayuan broker yang memberi rekomendasi saham apa untuk ‘trading hari ini’.

Blog ini dibuka kembali. Saya kira, sharing is caring. Semoga mengambil manfaat, ya. Setidaknya, jika belum berinvestasi, berinvestasilah sesegera mungkin. Ini saran dari saya, yang mengambil seluruh tabungan reksadana dan menaruhnya di saham.