Using These 10 Rules for Investing Success by Seth Klarman Will Significantly Improve Your Investing Decisions

I have always seen investing as a long term game and I have always been fascinated by how great long term investors manage to achieve very high returns, in the order of 15–20% or even more per year, and keep that performance for decades.

In this article, we are going to see Seth Klarman’s view on the investing approach than an investor should have by analyzing 10 of his investment rules.

For those of you who don’t know Seth Klarman, he is the founder of The Baupost Group and one of the most successful hedge fund manager of the last 30 years with an average return of 20% per year.
This kind of performance make you one of the best investors in the world and when people like him speak, we truly want to pay close attention.

He is a value investor and also the author of the famous book Margin Of Safety, printed only in 1000 copies.

Seth Klarman

What surprises me is how powerful those techniques are and how simple they are. While you should not expect to copy Seth Klarman’s portfolio, you can understand the rationale behind its investing decisions and improve your investing decision making process.

Investing doesn’t have to be rocket science, embracing this philosophy allows you to achieve amazing long term returns and, if you are willing to put in the work, it is feasible also for part-time investors.

There is a lot to learn from Seth Klarman and the following 10 rules of investing share a wisdom that is directly applicable in your investment decisions in order to lower your risk and achieve higher returns.

Let’s dig into it.

10 Rules for Investing Success by Seth Klarman

1. Invest. Don’t speculate

The difference between an investor and a speculator is huge. 

Investors look for businesses, when they buy a stock they buy a portion of a business, they don’t simply own a ticker in their portfolio. They are interested in the earnings because they know that long term returns will be correlated with the earnings of the business in relation to the price paid for the stock.
(The higher the price you pay in relation to the earnings, the lower the return and vice versa).

Speculators don’t necessarily look at fundamentals, they mainly care about what the market is telling about a particular stock. 
What the stock price will do?
While the short term returns might be higher in comparison with investors, the risks are also higher and over the long run there are very few successful speculators. 

Are you an investor or a speculator?



2. Avoid Paying Fees To Wall Street

This second rule is fundamental for your long term investing success! Its importance is as high as much as investors forget to apply it.

What are Wall Street interests and where banks and fund managers make their money? The first answer is commissions and management fees and the second is from you!

The point is that fees are one of the major destroyer of wealth for investors and most of the times they are completely overlooked.

If you pay 1% of fee every years, taking into account compounding interests, over 20 years is 20–30% of your portfolio that goes away.

What do you pay the fee for? Do you really need funds?
If you are willing to put in a bit of work you can figure out what are the best investments for you, and you know yourself better than anyone else.

The aim of Wall Street is to generate money from commissions, not to generate money to you.

Where Are The Customers’ Yachts?



3. A Value Investing Strategy Is The Best

If a stock is a part of the business, the business must have some value.

The value investing strategy is considered the best from Seth Klarman because it is aimed to find value in companies and buy it at a reasonable price 

This allows for great long term returns with a margin of safety in order to avoid a permanent capital loss.

The margin of safety is chief here because it is the component that protects you if something goes wrong and minimizes your chances of losing your capital.

Look for value and buy it with a margin of safety



4. Don’t Just Invest In Value, Try to Find It At A Bargain Price

Finding value is not enough, that is only one part of the return equation. The value must be bought at a price that is as low as possible.

One simple check is to compare market capitalization with the book value, that is one of the measures of the value of the tangible assets of the company.

What is the price in relation to the intrinsic value of the company?



5. Be Patient. Opportunities Will Come To Those Who Look For Them

Patience is one of the characters of the characteristics of the successful investor. 

Value investing in particular “should be boring” because you look at a lot of companies, dig deep into their analysis, say no to most of them and wait a long time for the prices to fall in your buying range when there is a bargain and a positive asymmetrical risk reward opportunity.

By being patience, so sooner or later you will get into extremely attractive investing opportunities, taking advantage of crisis and market crashes

We are now into an phase of economic expansion expansion that is going on for 10 years, I would not be surprised to see a recession in the next few years. That could be a period of maximum opportunities for smart investors.

Be patient and wait for opportunities



6. The Market Is Inefficient

Although many strategies and academic studies are based on the efficient market hypothesis, the empirical evidence suggest that the opposite is true.

The efficient market hypothesis states that the price of an asset reflects all the available information. If that was true, beating the market would be impossible.

We all know that there are fund managers and investors that consistently beat the market and situations in which prices are deceptive, like during a bubble or the current market.

Sometimes prices are overvalued and sometimes they are undervalued.

Markets are not efficient, in some situations participants are willing to pay any price when euphoric and sell at any price, even extremely low, when they are in panic, that’s when a value investor wants to buy.

Prices DON’T reflect all the information available



7. Always Have Sufficient Liquidity

Whatever happens on the markets, you need to have enough cash so that you don’t have to sell your stocks.

While the yield of cash equivalents is significantly lower than stock investments, having a significant cash position is a key because it allows you to:

  • Keep your portfolio positions and carry on with your strategy
  • Take advantage of buying opportunities that arise during panics

At the end of the day, having a cash cushion allows you to carry on with your investment strategy that overall will largely compensate the lower yield on your cash position. This is also an integral part of Warren Buffett’s invesing strategy, that allows Berkshire Hathaway to work like a “compounding machine”.

If you are a small investor, it is important that your lifestyle does not depend on your investments, otherwise you can’t make rational decisions and you are bound to sell exactly at the worst time possible.
Klarman states that as long as you aren’t betting your lifestyle on the stock market, you’ll be fine.

Always have cash to take advantage of the opportunities



8. Don’t Be Afraid To Average Down

Everyday Mr. Market offers a new price for stocks and often times they are way too positive of way too negative.

If you found a business that offers you solid returns, with strong fundamentals and good future perspectives and you start buying it because the price falls in your buying range, sometimes it might happen that the price goes even lower.

Klarman’s advice is to not be afraid to average down because because if you are sure of the business, you are presented with a buying opportunity.

When the stock price falls and the business is good, you simply buy more at a lower price. 

When prices fall, you have the opportunity to buy more. Don’t be afraid to do that



9. Trade And Rebalance Your Portfolio

As when the prices go down you can increase your exposure, when prices go up you have the opportunity to sell a part of your position in a particular stock and lower your exposure.

From a value investing perspective, price is a component of risk because one component of the risk of permanent capital loss is the purchasing price. The lower the price you paid, the lower the risk of permanent capital loss.

You want to look for and own the best bargains out there and to do that you can trade the stocks that appreciated and aren’t such a bargain anymore for better ones.

Rebalance your portfolio in order to have the best bargains that the market offers



10. Know What You’re Doing

You can’t expect to be a successful investor if you don’t take time to study and learn, investing is a lifelong learning process and in order to be successful at it you really have to know what you are doing.

You should know a lot on how to analyze a company, how the markets work, what is the macroeconomics and do a lot of research in order to find value.

If you want to be successful, you also have to gain experience. For this last point, time, persistence and action are the only way.

Fortunately we live in the era of internet and there is so much knowledge out there! You can really take advantage of that and leverage on the techniques used by the most successful long term investors.

Know what you are doing and do a lot of research

Take advantage of all the information out there




Wrapping Up

The value investing approach proved to be extremely successful in many cases and Seth Klarman track record speaks by itself. 

Investing is a long term game, by having this kind of view you allow yourself to consider a broader perspective on market, prices, business and risk reward opportunities.

The importance of focusing on the business cannot be underestimated. 

This kind of analysis is the key to finding value and doing a lot of research is a must because it allows you to find the best opportunities and lower your risks. This combination is the ingredient that ensures your long term investing success.

The more you know, the better you will do.


Finding value is the first part, once you found value you have to buy it at a reasonable price. This must ensure you a margin of safety in order to get a protection from permanent capital loss.

The price is nothing but today’s offering by Mr. Market, in a month it could change dramatically. 
Markets are not efficient and you have to be patient to wait for the price to fall in your buying range, when prices fall, it is an opportunity to buy even more. In order to do that you must have a cash cushion that allows you to keep your positions and buy when the opportunities arise.

There is a lot of knowledge out there and if you are a small investor it can work for you too. Provided that you are willing to put in the work and gain investing experience, you can learn end embrace this philosophy and go for the long term investing success.


This article is for informational purposes only, it should not be considered financial advice. You can read the full disclaimer here.


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