Another great read for any Buffet “disciples” who are interested in value investing and security analysis.
Other than graham’s own books, it’s difficult to say that it was a quintessential read, but it packed a lot provided how short it was. Reiterating concepts of fundamental analysis including key ratios and discount cash flow, this book delivered the basics of value investing in a very concise manner. Aside from reviewing basic principles, and hearing the opinion of another experienced investor on this manner, there were two factors I that I appreciated in Klarman’s book: emphasis on net working and liquid capital, and his lack of disdain towards taking advantage of arbitrage opportunities.
Buffet often speaks of only investing for the very long term in companies that have a very strong long-term track record. Companies are evaluated based on stability, consistency, growth and expectations from a product and financial perspective. However, two complicated questions are deciding when to buy and when to sell. When is a company undervalued? When is it not? How much should it be undervalued? By analyzing junk bonds, fallen angels, companies filing or on the verge of bankruptcy, it becomes very clear if a company is indeed undervalued if its assets were liquidized and when a buy is “obvious”. Klarman’s discussion of net working capital reminded me to always look at the most recent balance sheet and cash flow statement to see what the state of the company is, and what exactly I’m paying for.
Klarman’s second point, though may potentially be indirect, is taking advantage of arbitrage opportunities. If a company is on the brink of bankruptcy, and is bound to shut down in a matter of years, it will most likely attempt to return as much cash as it can to its shareholders. Such opportunities may not be feasible long-term investments, but can produce very favorable short-term returns, and are definitely worth investigating.
All in all, I think this is an amazing book that’s backed by a lot of experience. There is a lot to take away given how short it is, and I personally know that it made me a more disciplined and vigilant investor. Definitely a must read for any investor.