Wednesday, September 7, 2016

Seth Klarman on Graham and Dodd, the sourcing of opportunity, and the chances of cheap stocks reverting to the mean

From Klarman's 2010 conversation with Jason Zweig:
The work of Graham and Dodd has really helped us think about the sourcing of opportunity as a major part of what we do—identifying where we are likely to find bargains. Time is scarce. We can’t look at everything.  
...The world is different now than it was in the era of Graham and Dodd. In their time, business was probably less competitive. Consultants and “experts” weren’t driving all businesses to focus on their business models and to maximize performance. The business climate is more volatile now. The chance that you buy very cheap and that it will revert to the mean, as Graham and Dodd might have expected, is probably lower today than in the past. 

I like going back and reading things like this as I tend to get a new sense of clarity on the investment process as I progress along my own journey of learning. In this case, the importance of recognizing that time is scare and that one can't look at everything stood out to me. Using good filters, and using solid principles like those of Graham and Dodd to help guide one's attention is something I think can give one a big advantage that can compound over time as one refines the skill. It also reminds me of another quote:
"As to methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble." -Ralph Waldo Emerson