“The Value of Value”

“Once you adopt a Value investing philosophy, any other investment behavior starts to seem like gambling.”

Seth A. Klarman, “Margin of Safety”

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It took me a few days to finish a letter written to fellow investors by Mark Yusko, Morgan Creek Capital Management, a money manager with $3B AUM. As part of the 66 pages long “Q2 2016 Market Reveiw and Outlook” of the company, this letter is 30 pages long, with the title of “The Value of Value”.

The reason I love this letter is the timing of it. In the past few months, I was struggling with which path of investment I should choose for the rest of my life. I was indulged in day trading for some times. I read some books about value investing, but the whole concept is still vague for me. Just a few days ago, a friend who is a beliver of value investing, had a chat with me and strongly suggested me to go the value investing way. Then I noticed this letter on Twitter (link).

Mark Yusko is the founder, CEO and CIO of Morgan Creek Capital Management. It was very interesting that the source I know him was from a podcast of NPR Money about crude oil (link). He is the only one who admitted to the public that he is a “speculator of oil”, according to the interviewers. When his name appears on Twitter, it drew my attention immediately.

Mark’s letter has a through review of Seth A. Klarman’s value investing philosophy. Some depicts are from Klarman’s famous book “Margin of Safety” , some are from Klarman’s letters to his fellow investors at Baupost. Mark’s letter systematically reviewed Klarman’s thoughts from 6 aspects: (1) philosophy; (2) mindset; (3) process; (4) team; (5) client; (6) culture. If someone wants to know Klarman’s value investing philosphy, this lettter is absolutely a piece of article worthy to be read back and forth.

There are many good examples and stories in the letter. One of them I love very much is about cash as an investment. The letter wrote (on page 29), a concerned client called Klarman to express his displesure that the Fund was so heavily invested in cash and asked “why I am paying you 2% and 20% for you to hold cash?” In a very calm manner, Klarman replied something along the lines of, “if you think you are paying me those fees to hold cash, you should redeem immediately. You are paying us 2% and 20% to know when to hold cash and when to invest, when to take risk and when to retreat to the sidelines. You are paying us those fees to know when is the best time to press the best possible risk/reward. But since you fee this way, I will waive the usual lock-up restrictions and wire your cash to you in the morning.” What a wise explanation of the value of holding cash and the value of professional expertise!

Klarman’s book is out of circulation since its first print of 5000 copies. Now it is sold on Amazon with a price tag of over $1,000, kind of like a collectible. But the content could be found on internet due to its popularity. It is on my reading list for this week.

 

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