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Seth Klarman: How To Achieve A 20% Return Per Year (10 Investing Rules)
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Seath Klarman is one of the most
underrated investors of all time in over
the past 30 years with his investing
fund he has achieved an average return
of 20% some people think he's a younger
Warren Buffett's and he's actually
ridden one of the most famous investing
books of all time a book called margin
of safety which sells for $3,000 a pop
on Amazon now the question then becomes
how does this great investor achieve
such a high return for such a long
period of time how did he grow his
investing fund 227 billion dollars and
dominate the investing game well
essentially that's what we're gonna
answer in this video I'm gonna go over
10 very important rules used by Seth
Klarman to achieve such a high return
[Music]
okay this is a mistake that a lot of
investors make especially beginner
investors and those are working on Wall
Street you see in a way there are two
types of investors out there you have
those that look at a stock and think of
it as a ticker symbol on the stock
market sometimes going up and sometimes
going down and then you have those who
view a stock as a business the group on
the left are always worried about the
day to day prices of a stock and they're
very emotional when a stock goes up and
when a stock goes down the group on the
right know that they own a business and
if their business does well it does not
really matter too much what the price of
the stock is as long as the fundamentals
look good at the end of the day when you
buy a stock you own a business this is
why it's so important to determine is
this actually a good business that you
want to own in the long term are they
gonna keep generating money and grow
into the future looking at stocks as
businesses instead of ticker symbols is
one principle that has ensured a great
return for Seth Klarman
moving on though
[Music]
so I just wanted to take you to this
graph over here which essentially shows
you how fees destroy your long term
returns even menial amounts or fees that
you pay can really eat into the amounts
of money you can expect to make in the
stock market okay so essentially you
have three lines here all three lines
achieve the same return which is a 5%
annual return and all three lines start
off with an initial investments of
100,000 euros the blue line represents a
fee of 1.5% the red dotted line
represents a fee of 3 percent and
finally the green dotted line has a fee
of 5% so fast forward 20 years and the
blue line has grown to almost double at
196 thousand euros the red line has a
returned that is almost half of the blue
line at 145 thousand euros and the fees
for the green line are so high that is
that it has actually ensured it has
gotten a negative return now worth less
than the initial 100,000 pounds so rule
2 is that fees can destroy your long
term returns so keep them as low as
possible and this is one reason why
picking individual stocks is so good
because you don't have to pay an annual
fee to own them all you have to pay is a
brokerage fee to buy them and a
brokerage feed to sell them rule to
avoid paying fees
[Music]
so this is sift climene's opinion and he
believes that value investing is the
best form of investing I'm gonna use an
example of Seth Klarman talking about
the goat investor Warren Buffett and
when he bought Washington Post Klarman
says this he said it is helpful to note
their Buffett did not consider whether
Washington Post was a components of a
stock market and it indexed or about to
be editor one he did not weigh the
market capitalization of the company or
its daily trading volume in his purchase
decision he didn't worry about whether
the stock was about two splits or pay or
omits a dividend he most certainly did
not evaluate the stocks bata or use the
capital asset pricing model or consider
whether its purchase would move his
portfolio to the efficient frontier
he simply valued the business and bought
a piece of it at a sizable discounts a
lot of people overcomplicate investing
but if you can find a good business and
pay a reasonable price compared to the
value of it you can't really go wrong
and this is why in most of my stocks I
go over the expected return in the
intrinsic value of a stock before buying
which obviously I teach in my fall
investing course and the link to that is
in the description
[Music]
and the thing about buying a stock and
this is an obvious thing about buying a
stock yet so little people behave this
way is try to buy the stock at a bargain
price you see okay what most investors
do when they see the stock's price going
down getting cheaper is they look to
sell the stock because they panic and
they realize they don't know the true
value of the stock and because most
investors panic and sell this normally
drags the stock's price down even
further what you really should be doing
is buying more of a stock when it gets
cheaper
generally speaking especially if the
fundamentals of the business haven't
changed and it's just short term news
and emotions of 15 the stock's price
safe Clemmons fourth rule to investing
is buy a stock at a bargain price and
basically what you do is buy stocks with
a price below their intrinsic value and
have high expected returns all of this
is obviously taught in the course
[Music]
at the moments warren buffett's has a
lot of cash in his portfolio and he's
not buying that many stocks he's only
bought five stocks this year but
everyday you know he's still going into
his office he's still skipping to work
as he says and looking for opportunities
out there in the stock market but he's
biding his time because he's only gonna
buy a stock when he can find it at a
bargain price
so he's been patience and at the end of
the day opportunity comes to those who
wait and also have the right mentality
there buy low sell high mentality
[Music]
so I don't know if you guys have ever
heard of this theory but some professors
at university had this theory that the
market was efficient and a lot of people
buy into this basically what this theory
means was there every stock's price
represented the true value of that stock
because all of the information is out on
a stock in that it is impossible to beat
the stock markets I'll give you a recent
example in these many examples out there
which prove the stock market is not
efficient and let's just look at the
price of Facebook over the past year so
it started midway through 2018 with a
price of about 215 dollars then people
started getting worried about privacy
issues and users leaving Facebook and
what do most investors do they react
with their emotions the price of the
stock fell almost 50% in less than half
a year and do you really think the
actual value of the business can fall
there quickly by 50% of course not and
this was around the period you know
where I was saying there's a lot of
opportunity with Facebook stock and you
know there are a plenty of examples like
this which prove the stock market is not
efficient Facebook was just the first
one that came to mind and because of
this people like Warren Buffett's can
beat the stock market over the long term
you know Warren Buffett he's beat the
stock market over the long term by 11%
which really adds up
[Music]
it was about 11 years ago when the stock
market crashed it was late 2007 to early
March when the stock market crashed over
50 percent during that crash and the
periods after that crash was the best
time to buy into the stock markets I
mean obviously speaking you want to buy
things as low as possible and sell as
high as possible but in order to buy as
low as possible you need something
called liquidity something called cash
or cash equivalents which you can use to
buy stocks when they are cheap this is
why it's always important to have a
certain percentage of your portfolio
allocated towards cash equivalents so
that you can snap up opportunities when
they come let's look at that stock
market crash one more time see the thing
about this period here is no one exactly
knows we're the bottom errs people will
always get at it but no one knows for
sure which is why you focus on what you
can control and that is average down on
your positions keep buying stocks when
they get cheaper you know even if you
average down around here you would have
still gotten a hundred percent return on
your total investments over just ten
years remember that cheaper the stocks
are the better
[Music]
a good investor should always be
prepared for all market conditions they
should look at having portfolio hedges
like gold or cash diversified through
sectors and even countries but often if
one position is doing really well it can
put your portfolio out of balance and
this is why it's always important to
look at a portfolio and try rebalance it
maybe every couple of months investing
is a skill it's a process that takes
time to learn at the end of the day
generally speaking those that know more
have a clear strategy and stick to that
strategy will win the investing game in
the long run and that is why it's so
important to keep watching youtube
videos that teach you about investing
that teach you about different stocks
there keep looking at what the experts
like Warren Buffett are doing I mean it
doesn't have to be YouTube it can be
reading them vesting books or articles
or watching TV or CNBC or listening to
podcasts but try to learn as much as you
can about investing because the more you
know the more your investments will grow
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