Seth Klarman: “You Need to Balance Arrogance and Humility”
Seth Klarman was recently interviewed by Charlie Rose as part of the Facing History and Ourselves Annual Benefit Dinner. During the interview, Klarman spoke about a number of the factors that he believes underlie his investment success. Interestingly, the art of valuing companies was not one of them. In fact, he referred to fundamental analysis as the “easy part” of investing. For Klarman, the psychological aspect is much harder than the mathematical or economic aspects. Even more interesting is that he believes having the right psychology is something you need to be born with. He does concede that psychology can be improved with experience, but only when you have the right psychological make-up in the first place. Other success factors he mentioned were patience, discipline, and avoiding greed.
We are not quite sure if Klarman was being tongue-in-cheek, but he stated that Warren Buffett was a better investor than him. The reasoning he gave was illuminating: Buffett has been able to find and buy great businesses, something Klarman admits he hasn’t always been able to do. Reading between the lines and, again, assuming that Klarman’s wasn’t being funny, he may see buying high-quality businesses as a better way to compound capital than his particular brand of cigar butt/special situation investing.
While we highly recommend watching the whole interview, some of the pertinent quotes are below:
“I actually think there is a gene for this stuff. Whether it is a value investing gene or a contrarian gene, I think that everybody appreciates a bargain, but when the market is going down most people overreact and get scared…for me it’s natural, but for a lot of people it’s fighting human nature. “
“I think that the analysis [valuation] is actually the easy part. When I speak to business school students, I tell them investing is the intersection between economics and psychology. Economics, the valuation of a business, is not that hard. The psychology – how much do you buy? Do you buy it at this price? Do you wait for a lower price? What do you do when it looks like the world might end? Those things are harder and knowing whether you stand there and buy more or something legitimately has gone wrong and you need to sell, those are harder things and that you learn with experience and you learn by having the right psychological make-up in the first place.”
“Value investors have to be patient and disciplined, but what I really think is you need not to be greedy. If you are greedy and you leverage you blow up. Almost every financial blow-up is because of leverage.”
“You need to balance arrogance and humility…when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay an 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything”
“I think Buffett is a better investor than me because he has a better eye towards what makes a great business. When I find a great business, I am happy to buy it and hold it. [But] most businesses don’t look so great to me.”