A Real Margin Of Safety

Students of financial history can point to historic 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 backstopped 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.

Not so for dreams. With more and more of the market value of U.S. equities represented by lofty (in some cases infinite) multiples of current results, a change in sentiment could wipe out a large percentage of investor net worth. Sentiment, existing only in the minds of investors, is subject to change quickly and without notice. Perhaps today’s dreams will become realities for some of the current Internet and technology favorites; and perhaps not. For many, the dream will be replaced by a nightmare. Then, the escalating bill for betting on dreams rather than on realities will have to be paid up.

Real value, of bricks and mortar, finished goods inventories, accounts receivable, operating factories and businesses, and even brand names, is hard, although far from impossible, to destroy. If you don’t overpay for it, your downside is protected. If you purchase it at a discount, you have a real margin of safety.

– Seth Klarman, June 1999

Above and Below The Waterline

I really have two jobs: The first job is, I have to worry about everything below the waterline; anything that can sink the ship. Beyond that…I have to focus on two to three areas that I’m deeply passionate about—that aren’t below the waterline but that I focus on because I can add unique value, I’m truly passionate about them, and they can truly transform the company if they go well…And with the others I really try to empower leaders and get involved only when there are holes below the waterline.

– Brian Chesky

Clever and Lazy

I divide my officers into four groups. There are clever, diligent, stupid, and lazy officers. Usually two characteristics are combined. Some are clever and diligent – their place is the General Staff. The next lot are stupid and lazy – they make up 90 percent of every army and are suited to routine duties. Anyone who is both clever and lazy is qualified for the highest leadership duties, because he possesses the intellectual clarity and the composure necessary for difficult decisions. One must beware of anyone who is stupid and diligent – he must not be entrusted with any responsibility because he will always cause only mischief.

– General Kurt von Hammerstein-Equord