As David Ricardo, a successful speculator who, in his early retirement, became one of the finest economists of the early nineteenth century, explained in 1817:
It has been my endeavor carefully to distinguish between a low value of money and a high value of corn, or any other commodity with which money may be compared. These have been generally considered as meaning the same thing; but it is evident that when corn rises from five to ten shillings a bushel, it may be owing either to a fall in the value of money or to a rise in the value of corn…..
The effects resulting from a high price of corn when produced by the rise in the value of corn, and when cause by a fall in the value of money, are totally different.
GEICO CASE STUDY
You can never read enough about a great business and the importance of HOLDING ON to reap the benefits of growth. If you can combine patience with the knowledge of understanding the moat of a great business, then you will have an outstanding investment career.
Klarman’s Speech (Thanks to a reader)
His latest speech also includes a distinct tone of regret over where the current state of affairs is taking the U.S. He sounds positively saddened by how things are run in his country. In Klarman’s words:
“Like all of you, I am worried about our future, I am concerned about the prospect for upcoming generations to have the same opportunities that ours did, and I’m saddened that our generation was handed something unique, the stewardship of the greatest country in the history of the world– and we are far down the path of making it less great.”
Klarman Slams Myth Of Efficient Markets
Klarman said that the idea that financial markets are efficient is foolish, and he goes on to describe how that will always remain the case. Markets are governed by human emotions and they do not follow laws of physics—prices will unpredictably overshoot, therefore the academic concept of market efficiency is highly incorrect.
“Academics are deliberately blind to the fifty plus year track record of Warren Buffett as well as those of other accomplished investors, for if markets are efficient, how can Warren Buffett’s astonishing success possibly explained?”
In his speech Klarman mentioned value-investor Ben Graham’s explanation of markets, where he says that Mr. Market is to be perceived as an eccentric counter-party which should be taken advantage of, but one should not follow its emotional advice. He also agrees with Ben Graham’s idea that assets should be bought at a significant discount to keep your margin of safety.
“As when you build a bridge that can hold 30 trucks but only drive 10 trucks across it, you would never want your investment fortunes to be dependent upon everything going perfectly, every assumption proving accurate, every break going your way.”
Klarman said that the current economy is being built like a house of cards that will implode. Huge deficits, empty government promises, pretty pictures painted to ease voters and reliance on external markets to keep your currency afloat, have all disrupted the margin of safety in U.S. economy.
Klarman Encourages Going Against The Grain
He says that investors have become increasingly speculative and subject themselves to frenetic trading, even the holding period of 30-yr treasuries has fallen down to a mere couple of months. Investors increasingly rely on technology to judge their performance not merely on a monthly or quarterly basis—it has now become an hourly practice.
“The performance pressure drives investors to into an absurdly short-term orientation…. If your track record is going to be considered by investment committees every quarter, if you are going to lose clients and possibly your job because of poor short term performance, then the long term becomes almost completely irrelevant.”