STREET DOGS

From Baupost’s January 1990 letter written by Seth Klarman:

Security prices can change for any number of reasons and because it is impossible to know what expectations are reflected in any given price level, investors must look beyond security prices to underlying business value, always comparing the two as part of the process.

There are times when the financial markets provide great investment opportunities and other times when the pickings are slim. Unfortunately, neither of those times are identifiable ahead of time. It is crucial to fight the tendency many investors have of letting stock prices guide their investment emotions.

We try to keep a level head regardless of the direction of the market and do not let stock price fluctuations guide our emotions. We believe the only sensible strategy is to ignore the market as a whole and seek individual opportunities that represent good value with low risk.

We have always cautioned against a relative performance orientation, and while it is at times uncomfortable to stand apart from the crowd, we would rather be uncomfortable than poorer.

While we are not interested in relative investment performance, we are extremely interested in relative investment value. We always want to own the best values, the most undervalued securities. If that means that we have to sell something we bought a month ago to buy something better, we will. If that means taking a loss on something we expect will recover in order to buy something even cheaper, we will.

Buying the best relative value accomplishes two things. It ensures that you will earn the highest possible return over time by continuously purchasing the best bargains. More importantly, this maximises one’s margin of safety, thereby minimising risk for the portfolio.