If you regularly follow Berkshire Hathaway message boards, you may be aware that Seth Klarman has repeatedly been the dark horse candidate to replace Warren Buffett at Berkshire Hathaway when the time comes. He has a very unique style: he holds lots of cash, invests very conservatively (his brand of conservatism is not necessarily in buying the highest quality companies around, but buying companies that are so cheap that you can’t help but turn a profit). He has done things like post 22% returns while holding almost half of the portfolio in cash.

To read about that, click here: http://www.nytimes.com/2007/05/13/business/yourmoney/13klar.html?scp=1&sq=seth+klarman&st=nyt&_r=0

He does not speak publicly all that much, although thanks to the wonders of Youtube, you can watch an excellent speech he gave at Harvard in 2006 here:

http://www.youtube.com/watch?v=TBiUm0ojcOA

Anyway, I wanted to talk about the only book he has ever written—which is called Margin of Safety  and was published in 1991. You can read the PDF here: http://friedmaninvestmentgroup.com/wp-content/uploads/2011/12/margin-of-safety1.pdf

At the time Klarman wrote it in 1991, he was a relatively unknown fund manager (heck, he is still pretty unknown today to the average person you come across on the street). When he wrote “Margin of Safety”, he only put 5,000 copies into existence. They did not sell well, and Klarman declined to republish the book as he has climbed in popularity and the favorable reviews of his book began to spread.

When you have a book that becomes popular with the investment masses combined with the fact that only 5,000 copies exist, interesting things start to happen to the supply and demand dynamics:

If you visit half.com, a subsidiary of eBay, you will see that the cheapest copy of the book sells for $1,199.99 for a book classified as “Good” condition. For a brand new copy, the most expensive one on the site is going for $3,526.23.

To view that listing, you can click here: http://product.half.ebay.com/_W0QQprZ1419464

The product is also for sale on Amazon. The cheapest copy goes for $999.33 used, and the most expensive new copy goes for $2,497.00.

You can view that listing by clicking here: http://www.amazon.com/gp/offer-listing/0887305105/ref=sr_1_1_olp?ie=UTF8&qid=1375907216&sr=8-1&keywords=Seth+Klarman&condition=new

Klarman, on why he wrote the book: “There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate, and invest with a margin of safety. It is precisely because we do not and cannot know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.”

I’ve read the PDF version a couple times and regularly reference it, and Klarman has a great way of explaining the differences between speculating and investing. Most importantly, he points out the types of easy traps that can lead someone into speculating when they believe themselves to be value investing. Klarman has a very talented ability to define hard behavior, explain why the folly of it, and then provide an alternative. Along with the limited supply, it is the combination of those three things that are responsible for why this has become the Holy Grail of collectible investment books. When you reach the point in your life when you have tens of thousands of dollars coming in each month in dividend checks, buying the coveted hardcover copy of Klarman’s book becomes something worth checking off your investor’s bucket list.

Originally posted 2013-08-07 15:32:11.

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