When asked to compare himself to Warren Buffett in an interview with Charlie Rose, Klarman said:
“Warren evolved through three stages. He went from buying cigar-butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great businesses at so-so prices. And maybe even this new area of buying weird securities from crappy businesses at better than market prices—like B of A [Bank of America] preferred or whatever. I’m still in phase one. We’re still buying cigar butts, there’s a good business there in buying them and it’s a lot of fun.”
On this site, the priority is #2, #3, and #1. Yeah, if we can get an excellent business like McCormick at $30 per share, or Brown Forman at under $50, party on and buy. A top-quality business at an excellent price is the fertile soil sprinkled with holy water as far as long-term investing goes. There is nothing better a long-term investor can do than find a margin of safety both in terms of stock price and business quality.
But those moments are rare. Other than the early 1970s, the late part of the 2000s, and a short window of time at the start of the 1990s and right after 9/11, there aren’t a whole lot of opportunities to get both of those conditions met simultaneously. Heck, even during the low point of the 2009 crisis, Coca-Cola still only came down to 15-16x earnings. Is the patience required, in addition to the years of foregone dividends, really worth it to get Coke at 16x earnings rather than 20x earnings? Two or three years of profit growth and dividends can wipe out that differential.
That’s why I think it’s worthwhile to add some realism to the picture and recognize that, for most of the time, the dilemma before is this: Do we want to buy an excellent company at a fair price or slight premium, or a second-tier company at a discount? Buffett’s big pictures of late lean towards the first camp, Klarman’s strategy tilts toward the second.
If you have fifteen minutes, the Klarman video above is worth checking out. He talks about the high price of his book “Margin of Safety” which regularly goes for $1,000+ on Ebay, he talks about why mutual fund investors receive lower returns than you’d expect, and he explains the temperament and psychology necessary to be a successful investor.