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Strategies & Market Trends : Graham/Klarman Value Investing
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To: Jurgis Bekepuris who wrote (17)8/18/2014 3:37:39 PM
From: paulelgin  Read Replies (1) of 27
 
I wondered the same thing for a long time - where the heck is the margin of safety in some of these small bets Klarman makes? I found a suitable answer several years ago when looking through Fortune magazine's archive. Here's a 1987 interview with Klarman (when he was often interviewed, before his self-imposed complete media silence) in which he elucidates:



"His thinking is innovative. Klarman invests roughly 10% of a partnership's capital in a diversified portfolio of securities he feels have value only in the probabilistic sense. That is, he may buy a $1 stock that he believes has a 50% chance of rising to $5 and a 50% chance of falling to zero. Over the past three years he bought 3.5 million shares of Telefonos de Mexico, the Mexican national telephone company, at an average cost of 10 cents. Says Klarman: ''We acknowledged that we could not fully evaluate all the risks in Mexico, but we also saw the chance for a big gain and rather less risk of losing our investment.'' He sold recently at 50 cents a share. "


This reminds me of Jim Cramer's "invest 10 % of your portfolio in speculative securities" as well as Nassim Taleb's "invest 10-15% of your portfolio in speculations like biotechs."


There's really not "value" in the traditional sense - only "probabilistic value" as Klarman explains above.
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