As investors, we want to ensure we’ve done all we can to profit from our hard work and due diligence. We read annual reports, scroll through slide deck presentations and read earnings transcripts.
We’re business owners. Investing in actual businesses, not blips on a Bloomberg. In doing so, we try to understand the business as best we can. We study tailwinds, headwinds and competition.
Some might think we do all these things to figure out how much money we can make from an investment. After all, we spent hours, days, even weeks studying this business. Shouldn’t we be rewarded for our efforts?
Yet what if I told you the world’s greatest investors don’t focus on the upside of a business’ valuation?
It’s The Downside That Matters
The greatest investors focused on how much they can lose. Not how much they’ll make. Let’s look at three of the most-famous value investors as examples.
Seth Klarman wrote the book on Margin of Safety. The idea is simple. An investor should pay a cheap enough price to account for volatility, bad luck and human error.
Klarman used a variety of methods to find margin of safety. Net asset value, net cash value and net current asset value were some of his favorites. He would then invest in companies in which their stock prices were lower than the asset value.
Greenblatt ran Gotham Asset Management from 1985 to 2006. During that time, Greenblatt compounded capital at a mind-numbing 40%.
He generated those returns by focusing on the downside and let the upside take care of itself. Like Klarman, Greenblatt wanted a large margin of safety. He (like us) wanted to buy dollars for pennies.
Greenblatt focused on cash flows, on earnings yields. It’s this distinction that differentiates him from Klarman. Greenblatt wanted to buy stocks today for less than what their cash would be worth in the future. The wider that gap, the more margin of safety.
This quote from Greenblatt sums up his strategy:
“My biggest position isn’t in the stock that I think will go up the highest. It’s in the stock where I don’t think I’ll lose any money.”
Michael Burry did things different from the others. His approach helped him achieve outsized returns at Scion Asset Management. His approach is simple, powerful and prevents him from losing his shirt in times of panic.
Get Paid For Your Diligence — Follow The Greats
In next month’s Value Ventures, I’m laying out Burry’s entire investment process — the process that gives him his edge. We use this same process with every new investment idea pitched in our monthly Value Ventures report.
Burry’s process keeps us in winners longer while cutting our losses quickly. All while investing in super cheap companies. The holy grail of successful investing.
If you want to go deep on Burry’s process make sure to sign up for Value Ventures before the latest issue releases on Thursday, November 7th! After this date prices will rise going into the holiday season.
Every purchase comes with a 30-day refund window so there’s absolutely no risk to check out the report. We’ll refund you no questions asked. In other words, there’s built in margin of safety with your purchase!
Student of value investing for over 13 years spending his time in small to micro-cap companies, spin-offs, SPACs and deep value liquidation situations.