10 Quotes From One of the Greatest Investment Books of All Time

In a world of thousands of investing books, I'd say a dozen, tops, are truly first-rate. You probably know the names: The Intelligent Investor by Ben Graham, One Up on Wall Street by Peter Lynch, and Common Stocks and Uncommon Profits by Philip Fisher.

Margin of Safety by value investing legend Seth Klarman belongs in the same category, but you may have never heard of it and won't find it in any bookstore. It's one of the greatest investing books ever written, yet it's been out of print for well over a decade. Per the Online Computer Library Center, only 262 libraries worldwide report having a copy (and many won't let you check it out). A copy will occasionally show up on eBay for $700-$2,500 -- and sells quickly. One guy even rented it out for $75 a week. It's a seriously sought-after book.

I'm lucky enough to own a copy (and I ain't selling!) What stands out is how simple this book is. There are no formulas. There are no tables. There are no Greek symbols. It's just 250 pages of straightforward common sense that anyone with an basic understanding of accounting and investing can gain from.

Here are 10 standout quotes I culled from its pages, with some comments from me in parentheses.

1. "The disciplined pursuit of bargains makes value investing very much a risk-averse approach. The greatest challenge for value investors is maintaining the required discipline. Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking. A value investor may experience poor, even horrendous, performance compared with that of other investors or the market as a whole during prolonged periods of market overvaluation. Yet over the long run the value approach works so successfully that few, if any, advocates of the philosophy ever abandon it."

2. "To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don't when they don't.

Investors should pay attention not only to whether but also to why current holdings are undervalued. It is critical to know why you have made an investment and to sell when the reason for owning it no longer applies. Look for investments with catalysts that may assist directly in the realization of underlying value. Give reference to companies having good managements with a personal financial stake in the business. Finally, diversify your holdings and hedge when it is financially attractive to do so."

(This perfectly sums up the theory of value traps. If something looks cheap but you can't figure out why it's cheap, odds are it's you, not the market, that's missing something.)

3. "The future is unpredictable. No one knows whether the economy will shrink or grow (or how fast), what the rate of inflation will be, and whether interest rates and share prices will rise or fall. Investors intent on avoiding loss consequently must position themselves to survey and even prosper under any circumstances. Bad luck can befall you; mistakes happen. The river may overflow its banks only once or twice in a century, but you still buy flood insurance on your house each year. Similarly we may only have one or two economic depressions or financial panics in a century and hyperinflation may never ruin the U.S. economy, but the prudent, farsighted investor manages his of her portfolio with the knowledge that financial catastrophes can and do occur. Investors must be willing to forego some near-term return, if necessary, as an insurance premium against unexpected and unpredictable adversity."

4. "To value investors the concept of indexing is at best silly and at worst quite hazardous. Warren Buffett has observed that "in any sort of a contest -- financial, mental or physical -- it's an enormous advantage to have opponents who have been taught that it's useless to even try." I believe that over time value investors will outperform the market and that choosing to match it is both lazy and shortsighted."

(I somewhat disagree with this. I think indexing is appropriate for most investors. What works for Warren Buffett, and what has worked for Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , might not work for everyone else. He can do things most people can't. That's why he's a billionaire and you're not.)

5. "Warren Buffett likes to say that the first rule of investing is "Don't lose money," and the second rule is, "Never forget the first rule." I too believe that avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather "don't lose money" means that over several years an investment portfolio should not be exposed to appreciable loss of principal.

While no one wishes to incur losses, you couldn't prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest "hot" initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome."

6. "It would be a serious mistake to think that all the facts that describe a particular investment are or could be known. Not only may questions remain unanswered; all the right questions may not even have been asked. Even if the present could somehow be perfectly understood, most investments are dependent on outcomes that cannot be accurately foreseen. Even if everything could be known about an investment, the complicating reality is that business values are not carved in stone. Investing would be much simpler if business values did remain constant while stock prices revolved predictably around them like the planets around the sun. If you cannot be certain of value, after all, then how can you be certain that are you buying at a discount? The truth is you cannot."

7. "Frequent comparative ranking can only reinforce a short-term investment perspective. It is understandably difficult to maintain a long-term view when, faced with the penalties for poor short-term performance, the long-term view may well be from the unemployment line ... Relative-performance-oriented investors really act as speculators. Rather than making sensible judgments about the attractiveness of specific stocks and bonds, they try to guess what others are going to do and then do it first."

8. "Value investing is simple to understand but difficult to implement. Value investors are not supersophisticated analytical wizards who create and apply intricate computer models to find attractive opportunities or assess underlying value. The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing."

9. "Wall Street can be a dangerous place for investors. You have no choice but to do business there, but you must always be on your guard. The standard behavior of Wall Streeters is to pursue maximization of self-interest; the orientation is usually short term. This must be acknowledged, accepted, and dealt with. If you transact business with Wall Street with these caveats in mind, you can prosper. If you depend on Wall Street to help you, investment success may remain elusive."

(This book was written 20 years ago, yet this comment is perfectly suitable today. Some things never change.)

10. "Avoiding where others go wrong is an important step in achieving investment success. In fact, it almost assures it."

Thoughts? Comments? Share 'em in the comment section below.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Berkshire Hathaway and eBay are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Berkshire Hathaway, and has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2010, at 12:22 PM, ashish08902 wrote:

    Thanks for sharing the additional books I need to add to my repository!

  • Report this Comment On May 18, 2010, at 12:30 PM, neskolf2 wrote:

    Thanks for sharing, Morgan. Great for the neophyte investor and worthy of remembering and reinforcing by the more experienced.

  • Report this Comment On May 18, 2010, at 9:44 PM, goalie37 wrote:

    Good article.

  • Report this Comment On May 19, 2010, at 2:47 PM, ChrisBern wrote:

    I found a PDF of this book as well last year, and read it. It's a good book, but to me it was pretty basic/fundamental. Nothing jumped off the page at me as novel or terribly unique. I'm not saying that's a bad thing--it just depends on what you've read/studied in the past. If you've read several of the core value investing books out there, this one will mostly just reinforce what you've read elsewhere. This would be a great book to start out with, no doubt--and there are a few advanced topics, but mostly just value investing basics.

  • Report this Comment On May 21, 2010, at 10:03 AM, daveandrae wrote:

    I started investing in June 1998, when the s&p 500 was trading at 1133. Almost 12 years later, this very same index closed yesterday at 1071, and is headed down even further today.

    Remarkable when you consider the sum of the five year average earnings (2005-2009) equate to $74.35 and the 70+ year average p/e ratio of the market is 14.5

    (74.35 x's 14.5 = 1078)

    Thus, in my opinion, point five should be taken with a very, serious, grain of salt. It is misleading, at best.

    For not only are quantitative margin of safety principals demonstrably high at current market levels, in fact, selling good common stocks at these price levels, just because market quotations are now below your current cost basis, now flies in the face of logic, history, and arithmetic, which is to buy LOW.

    In spite of the fact that the 1998 generation investor is probably sitting on a prolonged period of principal loss, the hardest thing to do, in periods such as these, is to in fact, add to your positions.

    Thomas Edmonds

  • Report this Comment On August 12, 2011, at 7:27 PM, joaquingrech wrote:

    daveandrae ... how's point 5 related to your comment about earnings, stock price and p/e ? I'm failing to see the connection.

  • Report this Comment On August 12, 2011, at 7:43 PM, wolfman225 wrote:

    After a ridiculously quick search, I found a .pdf of the book. I be sure to give it a read. Thanks for the reference.

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