Transcription
[Music] Investing is knowing how to value a business. Research and timing are psychological endeavors. Investing without knowing what you're looking for is like running through a dynamite factory with a burning match. There's a very, very dangerous jungle out there. How do I successfully cross the jungle? There are thousands of different approaches to investing. There's no formula anybody can give you. It's not like the current secret recipe. If you're a self-starter and you work really hard, you can make a difference.
[Music] There are people who say value investing is a lonely undertaking. I think in some respects it can be. You tend to be going against the grain, going against the consensus of the crowd. That's not hard for me. That's natural for me. I tend to be a skeptic. I tend to be a contrarian thinker. I tend to ask, at least as much, what can go wrong as what can go right. So, while broadly investors like plain vanilla, they like a stock that's growing nicely quarter after quarter, value investors, I think, maybe like rocky road. So, value investing isn't like a treasure map that you just follow, and if you get to X, you've figured out how to make money. Some people say that value investing is a thing of the past. What do you have to say to those people? Clean version? No.
Oh, off I'm Seth Claman. I'm CEO and portfolio manager of Baupost Group, which is a Boston-based investment partnership managing about $25 billion, and we've been in business about four decades. I got interested in the stock market when I was a kid, maybe six or seven. I was very mathematically inclined. I was interested in the, uh, baseball statistics. Every morning, our family got the Baltimore Sun papers, and I would open the papers straight to the sports section, the, uh, baseball statistics, the batting average leaders, and all of that were in there. And I, at some point, turned past the sports section and noticed that there were a bunch of other numbers a few pages later, and those numbers turned out to be the stock exchange listings. I didn't know what they were, so I asked my dad. He explained that they were stocks and they trade. And so it just fueled an interest and, and eventually a passion.
When I was 10, I thought it was time to take a plunge into the market, and I bought my first share of stock. A kindly stockbroker, Max Silverman, was willing to handle a very small account, and I bought a share of Johnson & Johnson because I knew what the product was, because I use Band-Aids. On notes to me at the time I bought it, the company had already announced a stock split, so a couple of days later, I had three shares for my one share. So that was my, uh, my entree into investing. When I bought my first stock, stocks were kind of pieces of paper that traded. They were blips on the ticker tape that moved up and down, and there was a rhythm to it. But I didn't understand why, why it worked or how you would, um, professionally invest to, to reliably make money for your clients. And value investing was like being let in on a secret.
[Music] When I was, uh, junior in college, my uncle was on the board of something called Mutual Shares, which was a no-load mutual fund, and he helped me get an internship for the summer. I didn't know about value investing until I worked at Mutual Shares, and then I became quite absorbed and, and pretty quickly addicted to it. The idea of value investing is that stocks become mispriced, and they become mispriced essentially because of human nature. Human beings, with their emotions, with their greed and fear, will make errors in judgment. They'll overpay sometimes, and other times they'll sell something at a bargain price. And that a value investor, by being discerning, um, by doing deep fundamental analysis, by being patient and waiting for bargains, will have a real edge.
Michael Lewis's Moneyball is an incredible example of that. Moneyball talked about Billy Bean, the general manager of the Oakland A's. The nature of his approach was to realize that that people sometimes overemphasize what a player looks like, literally. That's a very, um, impressive athletic build that that player has. But you can actually look at the statistics and say that player is not as good, based on the numbers, as this other player who maybe is a little pudgy, but they're able to walk a lot and get on base a lot, or hit for power more than somebody else. People over-focusing on one type of athlete, one type of stock, one type of bond might mean that others are neglected, overlooked, and therefore undervalued, and therefore better available to you. I think that every investor wants to think about a differentiated perspective. Doing what everybody else does exactly the same way is going to end up with a market kind of result. But standing apart from the crowd, sometimes being a contrarian, other times simply having a different, unique perspective, um, has a chance to really outperform. And so, at the end of the day, you're not trying to build a team of how good people look. You're trying to build a team of how good people play.
Value investing has two main advantages over other forms of investing. One benefit will be that you're buying something at an immediate bargain. You may make more money than, than just recovering from the bargain to full price, because the company over time might grow. And that raises the, I think, the really legitimate question of how you know something's at a discount. And of course, how do you know what something's worth? A lot of people bandy about the, the phrase intrinsic value, as though a company has an exact value that, um, you can ascertain. And I don't actually believe that's possible. I believe in the concept of a range of values. When you think about a business, it has value so many different ways. It has value as a stock, but it has a different value, or sometimes a different value, to an acquirer. It might have a different value if their capital structure were mostly debt or mostly equity. And so I think that it makes sense to use multiple metrics to kind of triangulate into value. So you have to be versatile in your thinking. You can use comparables. You can say, um, other stocks like this company traded 15 times earnings, and which caused you to say, well, is this one a bargain at 11 times? I would always then go further. I don't just want to know that something is cheap, that something is a bargain, but I want to know why. That's part of the analytical process is to dig, not just to say, uh, can I trust those cash flows? What about the business makes that particularly safe or particularly risky? But you can also say, well, I think that stock is mispriced from something that went wrong a few years ago, or the management doesn't have the best reputation because of the following. And that lends itself to analysis. So you have a lot of ways of coming at value, and that helps you kind of calibrate, am I sure I'm getting a bargain?
Another really important facet of value investing is having a margin of safety. I think we all understand in some way that when you have a certain amount of money, doubling that amount of money may not make all that much difference to your lifestyle, but losing all that money would make a devastating difference. The idea of a margin of safety is that you have comfort because by buying at a discount, things can go wrong. Um, you can have bad luck, you can have imprecision, um, you can have just the vicissitudes of the business cycle, and those things can go against you, and you still may not lose anything. And if you buy it at a big enough discount, the margin of safety means things won't go terribly wrong because you've already baked some room for things going wrong into your price. I think Buffett likes to say that when you build a bridge, you build it so it can drive 30,000lb trucks across it, but you don't actually drive those trucks. You drive 10,000lb trucks. And so that's a similar margin of safety. And I think that approach works, obviously, in investing, but it actually is a sensible approach for other things in our lives. So I think the idea of a margin of safety protects you, and in a way, it also is it fuels future gains because by not losing an unimagined amount in a bad period, you're actually able to play offense in that bad period when other people maybe are are, um, having to sell or unable to buy.
[Music] Speculation is the opposite of value investing. A speculation, I think of as something that doesn't have an intrinsic value, does not throw off cash flow, does not have a reliable exit value the way a bond has a maturity. So a rare coin, piece of art, um, uh, NFT has is a speculation, and it's because its value is totally determined by what somebody will pay for it in the future. Whereas an investment has an intrinsic value that is related to how much dividend does it pay, or how much interest does it pay, or what are the underlying earnings that will build value and be potentially distributable back to shareholders. An investor, therefore, is somebody who puts capital to work to earn a return. Implicitly, they take a longer-term time horizon. They're not trying to make money quickly. And, and, and a speculator, I think, is somebody who's willing to buy whatever, with the idea that they're going to make money fast.
I think we all know that people maybe at a cocktail party will talk about that great new investment that they made that they're very excited about. The goal is not your personal excitement. The goal is to make money safely and predictably over a period of time. The strategy of going after the hot new thing has some serious disadvantages. First of all, the hot new thing, because everybody can see it's the hot new thing, tends to be priced a little bit for perfection. That people have already built lofty expectations into it. So sometimes even the slightest disappointment will cause a rather severe loss. The place that the difference between investing and speculation becomes clear is when you think about downside. That speculations tend to be focused all on upside. How much can I make? But investment is focused both on upside and on downside. And so the challenge that if you look to the market as a source of advice, you're getting drawn into short-term thinking. But if you look to the market as a source of opportunity, you're on the track to being a value investor. And that's, that's my mindset. That the market, uh, um, it gyrates a lot, and sometimes it gyrates for good reason. But because you can apply, um, discipline and analysis and, um, logic, you might be able to find times when the market has irrationally reacted, and that creates opportunity, but only if you're willing to go outside the box and against the grain.
[Music] When I was at Harvard Business School in the middle of my second year, one of my professors surprised me and said, some friends and I are in the process of building the equivalent of a family investment office to manage our money. Um, I'm in the middle of selling a valuable asset. I'm going to have $9 or $10 million, and my friends each have a similar amount, and we're going to form something, and you could be part of that. I kind of could look out 10 years or 15 years into the future and say, I'm going to every day come in and have a puzzle to solve that I don't know what the answer will be, and I will always be stretched and expanding my knowledge into new industries, into new securities, into new geographies. And while it was their money, and they were much older than I was, I was, you know, 25 or so, and they were probably 50, it was a chance to be part of building something which would come to be known as Baupost.
There are people who've asked me over time, was that a big risk? And for a risk-averse guy, why would you take that risk? When I look back, I wonder what they were thinking. Taking a bet on a kid. And in some ways, I wonder what I was thinking. So here I was, 25 years old, my whole life ahead of me, and considering the biggest decision I'd ever faced. I had job offers to go to New York and be an investment banker, to be an investor, uh, to go back to Mutual Shares. But the opportunity to manage money for Baupost, as it was being formed, excited me the most. It was the chance to get it on the ground floor. It was a chance to guide the direction from the beginning. And I was 25, obviously, that's an age where you don't have a ton of experience. On day one, I was just getting a salary and a promise that if we did well, I'd participate in the upside. But I trusted that. And then the real test. Baupost has evolved in parallel with one person's evolution and journey, which is me. I work closely with the four founders, including Howard Stevenson, whose initials were the S.T. of Baupost, Baupost being an acronym of four last names. And Howard oversaw the operations, and he and I were talking through investments and putting things in the portfolio. Over time, I gradually took on more and more responsibility and took over control of the firm in the early '90s. It was to me to decide an investment philosophy and then implement and execute on it. I, um, thought a value investing strategy was the right one. And I thought it was the right one because it's risk-averse, and the principles were, uh, gentlemen in their 50s and had made a lot of money and didn't know if they'd make another fortune. It also was convenient because that's the strategy I knew how to do from for my time at Mutual Shares. And a value investment approach turned out to be the key to four decades of investment success.
To generate attractive returns over time, every investor needs to identify areas of edge. These are any combination of their approach, their firm structure, or their expertise that make it possible to outperform the market. If you asked me about, um, what Baupost's edges are, I would tell you there are two that particularly stand out. One is a flexible mandate. A flexible investment mandate is the idea that you can invest in just about anything. Many investors are siloed. They're forced to invest in a particularly narrow area, uh, maybe companies only in a certain industry or with a certain market capitalization. And I think about investing as as something that offers up opportunities that move around. If you are constrained and you can only own it one way, it means you can't be upsizing into the very best opportunities. Our other main edge is a long-term orientation. A long-term orientation basically means that you're not looking quarter by quarter. You're not looking for something that's going to work out right away. You're able to hold a stock through a valley until you get back to the, to the other side of the slope, and you go in with the idea that you're willing to hold it several years, but then it reaches your price target sooner, and you sell. You don't care where it trades in the short run.
We had begun working on a stock called eBay, which everybody knows is the, uh, purchasing platform. We had first looked at eBay when it had been separated from a parent company or, or a different subsidiary, PayPal, and those two became separately traded entities. When PayPal was in the same company, eBay was bound to use PayPal for financing. PayPal would be the way that they were able to have customers pay. After the split up, um, both stocks traded publicly. We didn't think they were all that interesting. But then we did some more work and realized that in their original spin-off agreement, I think it was five years in, they would no longer be bound to work with PayPal. They could go and cut their own deal with anybody. So in the short term, we were prepared for the stock price to stay the same or even decline. But our analysis of the long term led us to a pretty exciting thesis that the possibility of a new purchasing platform, which was still years down the road, could create immense value. While this definitely wasn't the only factor that contributed to the success of the investment, our long-term view played a role. And the math of that was, we believe that the earnings would immediately grow by 50 cents a share on a $27 stock, earning around $2.50. That was very material. Over the last five years, the earnings have gone from around $2.50, as I said, to well over $4 a share, and the stock has gone from $27, where we bought it, um, to $40, then to $50, $60, and briefly hit $70 and $80. But that was a, I think, our biggest dollar profit ever on an investment. And it was simply a straightforward company that by good sleuthing, by due diligence, you were able to find the opportunity that hidden value could be realized and earnings per share could increase meaningfully with little change in customer behavior or sales trends. eBay, when we bought it, was not a small-cap stock. Um, it was well-known, a lot of firms covered it, but people weren't willing to look past, um, short-term, uh, uh, mundane performance to a future where they had some built-in increases coming, but they were a little bit down the road, and you had to imagine that they would come and when they would come. And that led to a very successful investment where the thesis largely played out, and we, we did very well.
[Music] On any given investment, even with the best strategy, your thesis may not always pan out. And so every investment we make, whether we've held it for a month or a year, we're always reflecting, is that still our thesis? Does our thesis make sense? If our thesis starts to change, um, which is human, that you, you know, you have some kind of news that wasn't what you expected, we just evaluate that news and say, if we didn't own it, would we still like it? Would we like it more? Would we like it less? Do we like it at the same price? And we forget about what we paid, and we forget about what the old thesis was. Even when investment seems like it's performing reasonably well, when the story has changed, when the thesis no longer applies, sometimes it's time to move on.
We had a chance to buy land in New York City. It was a former substation of an electric utility, a large piece of land in a residential area, and we thought that clearly would be developed, um, for residential use. We saw a chance to build a very large complex in a, in a submarket of New York that didn't have enough supply, very close to a hospital, clearly needed more housing. We designed and executed and built within budget, um, a beautiful apartment complex. They were fully occupied, um, and that was going great. Then a new law passed, and the new law limited one's ability to sell such an asset. There are always things that happen in, in the market, some of which are always beneficial, and others of which aren't, um, whether it's rent control or, um, uh, permitting delays or whatever. But in this particular case, while the asset was right for sale, it was fully developed and, and occupied, and rents were fine, it, it seemed as though the value was not obviously never going to come back to what we had expected. And we asked ourselves, as we always do, whether we should hang on or whether something had fundamentally changed. So we ended up saying, we think we can take whatever capital we have in that and redeploy it elsewhere more fruitfully, without, without this, um, this obstacle to a, a better exit. And so we sold it. We lost a material amount, but it felt better than just sitting there. That's part of the flexibility that investors needs to have. And our judgment was that we got a decent price, um, but it was a price that was less than we put in, and it was because the facts had changed.
[Music] Every investor needs a flow of promising investment ideas and a way to filter through them. Every investor has two constraints: capital and time. And time is really hard because you can wonder, if you spend your time looking at fully priced companies all day, you will have nothing to show for it. And so we believe that your best finding opportunity, one investment at a time, bottom-up, based on its valuation in the market compared to the underlying value you ascribe to it. Our search sometimes will focus on things that are getting killed. So we'll literally focus on the new low list, what's down a lot, um, who just disappointed investors a great deal. But we all also look for categories of things, maybe organized by the reason they're mispriced. So of companies who do spin-offs, companies who take a division, put it into a separate subsidiary, and hand shares to shareholders, it might have a small market cap, it might not currently be profitable, but might have future value, um, or might have a private market value. Spin-offs are one category of potential opportunity that we track. There are numerous others: bankrupt bonds, stocks delisted from an exchange. Those are just a couple of examples. I want my inbox filled with the most off-the-beaten-path, idiosyncratic, privately negotiated stocks, bonds, whatever. And I want them being sold for a reason that isn't, everybody looks at and everybody hates it. That might mean they're wrong, but what I really like is this person has to sell by Friday because they have to get it off the books by quarter-end, or this person's dumping this because they're not able to foreclose, and the foreclosure is going to go through over the weekend, or whatever it might be. And so by finding categories of assets that are likely to be mispriced, we fill our inbox the most fruitful way possible.
In the early days of Baupost, um, it was already clear to me how much markets had evolved over time. There were a handful of hedge funds. Baupost was even at, even at $25 or $50 million under management, was one of the larger. And in a short number of years, there were billion-dollar funds all over the place. Americans had greater wealth, more savings, and money piled into investing. The hedge fund industry eventually expanded into thousands of funds. Hedge funds were no longer idiosyncratic participants in the markets. They sometimes moved the markets, and some had become huge, trading frenetically and using large amounts of leverage. This made those funds vulnerable to the unexpected. Every stock down, even the biggest winners are down. This is obviously something that people could have foreseen, and it was foreseen. And the thing is that the patient had cancer for many years, and nobody was doing anything about it.
[Music] I wish I could tell you that we saw something other people didn't. I wish I could tell you that Baupost knew the market was going to collapse in 2008, and the truth is, we didn't. But what we did do is we stuck to our knitting. We stuck to our discipline. And our discipline said, markets are very, very expensive. Valuations were were high. Companies were performing exceptionally well, maybe better than they ever historically. And that caused us to reduce our invested, caused us to hold some cash. And once the crash hit, it caught investors by surprise, and many sold their shares amidst the sudden panic. But we held on. That's one of the earliest lessons in the value investing playbook. That day saw the Wall Street Crash.
The idea of value investing was first written about by a guy named Benjamin Graham. Graham taught at Columbia, and in 1934, he teamed up with another professor, David Dodd, and they wrote a book called Security Analysis. Now, remember, 1934 is five years into the Great Depression. It's five years after the stock market crash in 1929, and they wrote Security Analysis, I think, with the bold idea that they were going to write about something not based on that moment in time, but based on what strategies might one follow all the time. I think that's one of the hardest things in investing is to stay focused that the moment you're in isn't the moment you'll always be in. And so the challenge is for investors to understand not just their own investments, but also the bigger picture. It's why history is so important. It's why you have to think about where you might be in a cycle.
In 2007, you could see that there were cracks already in the foundation. That the housing market had really started to stumble. Housing had become a major fuel in the economy. People were building an enormous number of homes, probably more than we really needed. Financing was very expensive and available. People didn't need to show an ability to pay the interest and principal at all. People would put in to buy a condo before it was built, not with the expectation of living there, but with the expectation that they'd sell it for a gain. And so when housing started to go down, it seemed pretty clear that one of the foundations of the boom maybe was leaving. And yet the market didn't teeter. People say, well, if it's grown well for three or four years, why won't that continue? Um, almost just naively looking past the historical precedent that things don't grow forever. While we knew there was a growing mania in financial assets, and even in home prices, we stayed disciplined, willing to miss out on some possible upside to avoid the reckoning that seemed likely to come.
One of the ways you get a margin of safety is not just investment by investment, but it's also how you behave, how you run the whole portfolio. You know, one of the ironies of Benjamin Graham's career is that even though he was a, you know, incredible value investor and taught the world about the subject, occasionally he got impatient. And I think he leveraged up twice in his life and almost went broke. I have too much of an aversion to that, so I set guardrails for myself and my firm. One guardrail that we have is a portfolio diversification. That you might have an exceptionally attractive investment, but human can be wrong, and you always have to have the knowledge you could be wrong. So we're always balancing the pull to own more of great ideas with the risk of owning too concentrated a portfolio. Um, and, and not only is concentration name by name, but it's sector by sector. If bottom-up, you find that financials are extremely compelling, you probably still don't want a third or half of your money in bank stocks because they're too concentrated. When things happen to the sector, they all tend to move somewhat in tandem, and that would be a source of introducing risk into the portfolio. We navigated through the financial crisis of 2008 without major losses because we went into it with a diversified portfolio that included stocks, bonds, private investments, and cash, and we were able to play offense as prices fell and fell.
Another guardrail is not using recourse leverage on the portfolio. That is, uh, whether an investor would ever use borrowed money. An investor that takes out margin loans that in effect are leveraging the portfolio, that that investor will have the benefit of leverage. You'll make more if you're right because that's what leverage does, but leverage also magnifies the downside if you're wrong. And so one way to lose your margin of safety is to get greedy. It's like, um, you can still drown in a pond that on average is 1 foot deep because you might step off the wrong point. And the leverage gets you just at the wrong moment, just when the market is terrible, when something unexpected has happened in the world. And if you're forced to sell things that are down a lot at a terrible time, at a minimum, you might, you might go broke. But even if you don't, you're giving up great opportunities at bargain prices. The key in investing, I think, is to always be in a position when things are really attractive in the market that you have an ability to buy into that and take advantage of even more egregious mispricings than than might be there most of the time. Because we'd remain disciplined during the boom, we're able to safely navigate the crash, and we could deploy capital at great prices going into what became extreme selling and extreme bargain levels for some securities in the worst of 2008, 2009.
[Music] Human tendency is people tend to project based on lived experience. If you're the turkey, and you're two years and eleven months old, you don't realize that Thanksgiving is next month. Anybody that came into investing in the last 12 years has never really seen stocks go down. We've had these extreme bull market conditions. The Federal Reserve lowered interest rates to virtually zero and kept them there really since 2009 all the way through 2021. They've never been that low for that long. And anybody that came into investing in the last 12 years didn't understand that that was not normal, that rates someday would normalize. And there are deep fundamental reasons why interest rates can't be at 0% forever.
In the current cycle, you have a sudden emergence of inflation after a really long period, several decades without much inflation. Why? I think you can make the case that rates were just held too low, and that led to an incredible amount of speculative activity. And then with mailed out money to people after the pandemic, you fueled an economic boom, and the low rates furthered that boom. Um, but that, in this case, triggered a really significant upsurge in inflation. And the way to deal with that was to raise rates pretty abruptly. And doing that ended the bull market of 2021. And if you're an investor that's never seen anything bad, you may not understand it. You can read about it in books, and if you have a good imagination, you can at least start to ask, wow, I wonder if we're in a period like the lead-up to 1929 or the lead-up to other bubbly eras, and whether we might be in for a bit of a reckoning. What might happen if things simply normalize? And what might happen if things actually don't just normalize, but overshoot, which is the tendency? And so I think understanding financial history and us and world history have been absolutely fundamental to my growth as an investor and my ability to navigate differing conditions. But history won't give you all the answers. Sometimes you need to take a step back and look inward.
Some people have asked me, do you ever think you've got investing all figured out? I don't think that's possible. That I never think I have investing figured out. That I feel lucky if I figure out one thing at a time. If you ever start thinking you, you've got it solved, you know, you know it all, um, you're really asking for trouble. The way I think about investing, and especially because I see it as significantly a psychological endeavor, there are a lot of dualities that come into play. So one is the duality between confidence and doubt. To buy anything, you need to develop a degree of confidence that you're going to be right. And you need to temper that with the requisite doubt that, but I still know I might be wrong. What would make me wrong? Why might I be wrong? Um, how's it going to feel if I'm wrong? How much am I going to lose if I'm wrong? And I think similar with arrogance and humility. Investing, as I see it, is an arrogant act. You're saying, I know more than the other participants in the market at this moment. They're all trying to make money. They're all applying computer models and financial models and, and work and discipline. They're, they're all smart. They're all hardworking. That's table stakes in investing. And so it's arrogant to say I figured something out that no one else really has seen. I can't tell you how many times over the years, over many years, people have said to me, you know, Seth, we're convinced that this company or this country are about to, to become, you know, insolvent. They're about to file for bankruptcy. And I can't tell you how many times, which is nearly all of them, when that didn't happen. People have a way of muddling through. Circumstances have a way of changing. Um, managements have a lot of levers at their control. Maybe they, it looks like they're going to file for bankruptcy, but then they get an injection of private capital, or they're able to convince the bondholders to extend the maturity, and all of a sudden, there is no bankruptcy. And so the humility is the ability to keep asking yourself the question, but what don't I see? What do they see that I don't see? What might I be missing? How might it be wrong? So I think one of the challenges of an investor, um, all the time, is to avoid the conceit that you know things that can't be known, or you know more than you know.
[Music] Technological disruption was an idea by Harvard Business School Professor Clay Christensen. And the idea was simply, once a change was possible, once a new technology existed, you might as well implement it, even if it meant cannibalizing your existing business, because if you didn't do it, someone else would. The technology itself caused an existing business model to no longer make sense. When I think about Benjamin Graham writing in the 1930s, he was talking largely about economies that had reversion to the mean, that you went through cyclical forces. The depression, obviously, was an extreme downward movement, but when he was writing, he talked about the confidence he had that that was temporary, and that you'd once again have a, a growing economy. And that makes sense. But Benjamin Graham was writing at a time of steam railroads crisscrossing the landscape, delivering goods and crops. And today, today you have a much different idea of people sitting at their desks exchanging information. Business is, in some ways, um, much more complicated now. It's become global. Whatever principles you wrote down in the 1930s obviously don't fully apply. And so, um, a big part of investing is, is I think finding a way for value investing to be a living organism. And in this era, as of technological disruption, a lot of companies are under tremendous pressure, are obsoleting faster than before. Um, I, I like to say melting ice cubes are melting faster than they used to, kind of like a financial climate change. And that means that the economy is no longer just about cyclical change. Ben Graham wrote, knowing that that that there was no single thing that would produce great results, but rather a way of thinking. So the key is to always be bottom-up, evaluating companies, understanding their business models, but also the pressures on them from external forces like competition and like the technological change. The way I think about it, a company either produces technology, it uses technology, or it is vulnerable to the technology that someone else will adopt that will eat its lunch. They need to be thinking about what is going on that is going to make your business either stronger and has a might have a deeper moat that you can build, or or might be more vulnerable than ever. And you want to be really careful whether to be involved at all.
I'm convinced that if machines took over, and if all you had was computer-programmed trading and AI dominating the markets, I still think an individual applying value principles might be able to work their way around all of that and actually find possibly even greater mispricings. Maybe that will prove to be wrong, but that's my perspective. Is that because it's evolving, because it's responsive to changes in the ecosystem, that I think value investing will always have a place.
In 1991, I published a book about investing called Margin of Safety. I'd spent a couple of years in spare time, nights and weekends, writing what I already was employing as my philosophy, and sold some copies. Although it pretty quickly went out of print, and it somehow lingers with a bit of a cult following. I'm kind of proud of that because I try to write a book that would be timeless, kind of like Benjamin Graham, that you wouldn't always be in an era where what you're doing that moment made sense, but your general principles make sense.
If I were to rewrite Margin of Safety or expand on it, there'd be a number of things I'd want to cover. I was 10 years into my career then. I'm 40 years into my career now, so hopefully I know a lot more, and markets have changed a lot. I would focus on global investing and not just on investing in the US. I'd have, um, more extensive information, which I think isn't really covered at all, on private investments, on real estate, on private equity. But I think possibly a crucial addition would be the importance of keeping your composure at the worst moments, which essentially means behaving a certain way all the time so that you know that if the world suddenly got a little bit unmoored, that it wouldn't throw you off keel, and you'd be able to take advantage. Think about the baseball relief pitcher who comes into the game, and the team is up, and they give up the game-winning home run, and their team loses. If you're that, um, pitcher, how do you go about pitching tomorrow? Obviously, you think about, is there anything different you could do executing, but you need to put that out of your head. If you're still thinking about that when you're on the mound tomorrow in another game-winning situation, and it's getting to you, you're going to screw up again. You're going to let the past mistake affect your future, and therefore make you maybe make more mistakes. And that's humbling. And it's a great experience that life is humbling, that inevitably you make investments, and they go down a lot the day after you buy them. But the key to adversity is picking yourself back up and knowing that your knowledge and expertise has gotten deeper, and your discipline and hard work will pay off.