Invest Significantly at the Maximum Point of Pessimism 175and Dodd, promoted by the success of Warren Buffett and several
others, came to be known as value investing. Today, value investing
is simply the process of buying assets for signifi cantly less than what
they are worth. The process of investing in bargain securities pro-
vides the margin of safety. The margin of safety provides room for
error, imprecise estimates, bad luck, and shelter from the surprises
or shocks of the economy and stock market. More important, value
investing emphasizes the process fi rst and the outcome second.
According to value investor Seth Klarman, who has been pro-
ducing market - beating returns for nearly three decades, the req-
uisites for value investing may be beyond one ’ s control: “ While it
might seem that anyone can be a value investor, the essential char-
acteristics of this type of investor — patience, discipline, and risk
aversion — may well be genetically determined. ”^1
What Klarman is suggesting is that when you fi rst learn of the
value investing approach, it either takes hold of you or it doesn ’ t.
You ’ re either disciplined and patient or you ’ re not. You either view
the stock market as a long - term wealth - creating mechanism or you
don ’ t. Many can learn and recite the value rhetoric with the greatest
of ease. Tell people that your investment approach entails buying
50 - cent dollars and investing with a high margin of safety... and
presto, you ’ re a value investor. Unfortunately, merely saying some-
thing doesn ’ t actually mean you are doing it. However, I will add
that if you really are committed to investing intelligently, the fi rst
course of action is to have a true understanding of the value invest-
ing philosophy.
Second, you must have a good search strategy. There are tens of
thousands of publicly traded securities all over the world at investors ’
disposal. Knowing where and how to look are of crucial importance
in order for investors to maximize their time. Ultimately, the more
securities you look at, the greater your opportunity for fi nding a bar-
gain investment. Understand that, ultimately, if you desire to pursue
security investing as a profession, there is no short cut with regardCH009.indd 175CH009.indd 175 9/2/09 11:49:56 AM9/2/09 11:49:56 AM