In an interview with Harvard Business School in June, Seth Karaman talked about the declining market and advised investors to take a balanced approach.

"you have to make room for mistakes, misjudgments and bad luck, because things change and something happens in an investment," he says. In case of mistakes, misjudgments and misfortunes, because all kinds of things happen in the world we live in, and all kinds of things happen in the field of investment. "

Seth Karaman is known as the "Boston Prophet". He emphasizes the margin of safety and is known as "half the world", but this has not affected his outstanding performance in the past.

In 1982, 25-year-old Karaman co-founded Baupost Group, a Boston hedge fund. In the past few years, Baupost has experienced only three years of negative growth (1998, 2008 and 2015).

Baupost Group has suffered a setback so far this year, with Baupost Group losing 39.99 per cent in the year to August.

In 1991, Klarman's masterpiece, the margin of Safety, was published. After it was out of print, it sold for 22000 yuan on eBay.

The New York Times once described him as "probably the most successful but influential investor you've ever heard of." "

Where on earth is Klarman's margin of safety? How can we get a definite margin of safety?

Youth investment genius: at the age of 10, he bought Johnson & Johnson's first stock and lost money for only 3 years in his 37-year career.

Think about what you were doing when you were 10 years old.

The 11-year-old Buffett bought his first stock and started a small business early.

Ten-year-old Rogers began to do money management, making money to save, reluctant to buy a candy.

Many top investment masters, do investment, are the result of hobbies, adhere to bring excellence.

Klarman's excellence lies in tapping his investment talent and making unremitting efforts.

Nowadays, many people lose their lives, not to mention working hard for their dreams, they may not be able to figure out what dreams they have.

In 1967, 10-year-old Karaman used the pocket money he received on his birthday to buy his first stock, Johnson & Johnson.

Thirty years later, Johnson & Johnson ranks among the top 10 most enviable companies in the United States.

Speaking of the reasons for choosing Johnson & Johnson, Karaman said it was only because he used a lot of Johnson & Johnson's band-aids when he was a child.

By the age of 10, Klarman had learned the core of investing: the essence of investing in stocks is to invest in companies.

Knowing exactly what he wants to do, Klarman also laid the groundwork for investment when he was growing up.

At the age of 21, Klarman worked as an intern at the Mutual Series Fund fund company of Michael Price, the famous king of restructuring stocks.

22, with a bachelor's degree in economics from Cornell University

25 years old, studied at Harvard Business School with an MBA degree.

In the same year, after graduating from Harvard, Karaman, together with his professor William Pulver and others, co-founded the now famous Baupost Group.

Since its inception in 1982, Baupost has experienced only three years of negative growth (1998, 2008 and 2015), with a decline of no more than 10 per cent.

Baupost is also one of the five most successful funds in terms of lifetime returns, achieving a miracle of 20 per cent CAGR over the past 30 years.

You invested $10, 000 in Klarman 30 years ago, and today he will pay you back $2.4 million.

What are you doing at the age of 25, 35 and 45?

Second, the humble and low-key "Prophet of Boston": the prediction before the 2008 financial crisis-- the death knell for US stocks has sounded.

At this point, you may wonder why such a legendary investment guru has not heard of it before.

He is obviously not as famous as Buffett, who is called "the Prophet of Omaha".

But in 2012, the Economist called Karaman "the Prophet of Boston" (Boston is the headquarters of Kalaman's Baupost Group).

Klarman is used to keeping a lot of cash on hand, is good at seeing the essence, and strikes when the market is chaotic and badly hit.

In October 2007, before the global financial crisis broke out in 2008, Klarman warned in a public speech at the MIT Sloan School of Management."the death knell for US stocks may have sounded."。

He believes that the proportion of leveraged financing at that time was well above the historical average, while the US was in the early stages of credit contraction, and despite the Fed's intervention, it did not fundamentally solve the problem.

In response, Klarman's advice is, "when the market falls and bad news fills the headlines, it is often too late for investors to act. It is important to develop a strategy before the problem arises. Because no one can accurately predict the future direction of the stock market or the economy. "

III. 2008 Financial crisis: a resounding victory in the purchase of auto bonds

'i 'm greedy when others are scared, and I'm scared when others are greedy, 'Mr. Buffett said.

In 2008, when the financial crisis broke out and Lehman Brothers collapsed, the market was full of panicked sellers.

When everyone else was in a panic, Klarman repeatedly asked himself, "what else can you buy in a depression?" "

Although the market was full of panicked sellers, he found that buyers were limited and that it was a good time to invest.

Klarman's famous saying is"it is very advantageous to have the ability to take over the assets owned by anxious sellers. "

Take out the silk and peel the cocoon, rational analysis. Klarman eventually chose auto consumer finance bonds-Ford, Chrysler and GMAC.

Crucially, even if he defaulted on 40 per cent of his bond portfolio, the buying price at the time provided a sufficient margin of safety.

In 2008, Klarman invested $1.8 billion in these bonds and earned more than $1.2 billion.

It turns out that although many people first think of a car loan crisis when they see a mortgage problem, even in 2008, there was no serious problem in the car loan market in the United States.

In 2008, Baupost was one of the few companies with enough money to buy large amounts of assets from troubled sellers.

In a speech in 2008, Klarman rarely talked about his company's performance in public.

"for 25 years, my company has been trying not to lose money-- in 24 of those 25 years-- the original dollar is now more than $94, with a compound annual net return of 20%. "

Klarman's excellence is that he still keeps a low profile after his outstanding investment results.

The Economist commented, "he is probably the most successful long-term investor in the hedge fund industry, and he has successfully avoided the spotlight. "

IV. Unreserved sharing of spiritual wealth: risk aversion must be the cornerstone of investment philosophy.

Klarman's master demeanor is not only self-humble but also altruistic.

Buffett saidThe best ability is to "make the people around you better."It has nothing to do with IQ, but with values and outlook on life.

Unlike the naked material sharing of Buffett, Zuckerberg and Bill Gates, Klarman shared his spiritual wealth without reservation.

Klarman's margin of Safety was published in 1991 and is now out of print.

In 2015, a new copy of "margin of Safety" sold for $3325 on eBay, equivalent to about 22000 yuan.

The popularity of this must-read book on Wall Street is evident in this figure alone.

What makes "margin of Safety" so valuable is that it allows ordinary readers to understand technical terms. "my purpose in writing this book is to make it accessible to laymen and professionals," Klarman said. "

In every investment, he adheres to the "margin of safety" to avoid being affected by unforeseen events or miscalculations.

Where on earth is Klarman's margin of safety? How can we get a definite margin of safety?

1. Investors should know the extent to which they are willing to take losses.

Klarman is a typical risk averse and never uses leverage; Klarman also has few short positions in his investments and usually holds positions for years rather than days or months.

This extremely tests the patience and confidence of investors, as well as the desire to speculate in human nature.

two。 Avoiding risk is the Cornerstone of Investment philosophy

Long-term stable rate of return is the most important factor to achieve compound growth of assets.

Even if there was only one huge loss, it would destroy the huge returns made in previous years.

For example, Klarman said that the river overflowing the bank may occur only once or twice a century, but residents still buy flood prevention insurance for their houses every year.

Similarly, the Great Depression or financial panic may occur only once or twice a century, and hyperinflation may never damage the US economy, but it is possible that there will be a financial disaster.

Sound, visionary investors will prepare strategies to manage their portfolios.

3. Has been buying at a discount that is substantially lower than its potential value

Although the margin of safety is closely related to the ability of investors to withstand losses, the secret to achieving a relatively certain margin of safety is:

Has been buying at a discount that is substantially lower than its potential value

And pay more attention to tangible assets rather than intangible assets

Replace your current holdings with the latest and better bargains.

More importantly, bargain ≠ can be bought every bargain. Investors should not only focus on whether the current investment is undervalued, but also on why it is undervalued.

Just as Karaman bought low-priced auto bonds during the collapse of Lehman Brothers, he focused not only on undervaluation, but also on the reasons for undervaluation.

It was only when Karaman saw the particularity of auto bonds during the economic crisis that he determined the existence of the margin of safety.

4. Only bottom-up investment has a margin of safety.

In the bottom-up investment law, investors analyze the fundamentals of a single investment opportunity at a time and do not predict the trend of the market and macroeconomic trends.

This strategy can be accurately described as "buy bargains and wait".

An important but not obvious difference between bottom-up and top-down strategies is that you sometimes need to hold a lot of cash.

Only when diversified portfolios with attractive investment opportunities can be formed, investors who adopt the bottom-up approach will be fully invested.

5. Value investors are more concerned about absolute performance.

What value investors seek is absolute return. All they care about is whether they have achieved their investment goals.

Investors who focus on absolute performance are willing to hold cash when bargains are not available.

In addition, priority should be given to enterprises with excellent management and managers who have relevant interests in the enterprise, and diversified shareholding should be adopted.

In short, adhere to the margin of safety, to understand their own risk appetite, there is no unified standard.

As Klarman said, "the most important measure is not the return achieved, but the return relative to the risk taken." "