Attention to Detail – November 2018

                                                                                                                

Seth Klarman’s 3 Pillars of Investing (GuruFocus)

Investment risk is not the same as volatility. This is a particularly topical axiom given the two market corrections we’ve experienced so far in 2018, and it’s one that’s highlighted by this month’s article (link) which shares the three-pillar investment strategy of Seth Klarman, a prominent hedge fund investor. All three pillars shared by the author are important tenants of a value investment approach, but the first one, to maintain a “keen focus on risk”, is the most important of the three (according to Klarman himself). But Klarman doesn’t define risk as the mere fluctuation of a stock’s price; by that definition, virtually every stock from Wal Mart to Microsoft is currently “high risk.” Instead, Klarman defines risk as the probability of permanent capital impairment. Understanding this key distinction is paramount to the value investor; it not only helps shift attention from short-term noise to long-term fundamentals, but on a more behavioural level it can help us to better weather future downturns. In understanding the longevity and tenacity of your holdings, it becomes a lot easier to ignore the noise of the markets; after all, it takes a lot more than a few sell-offs to bring down a truly high-quality business.

In the attention to details series, we lift the lid on what WDS does behind the scenes to invest well by sharing what we are reading. These are pieces that often articulate different aspects of our philosophy and ultimately our process. Check back regularly for a new article that is worth the read.