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Investing and the Power of Uncertainty

With the possible exception of Warren Buffett, no investor today commands more respect than Baupost Group’s Seth Klarman.

Since founding his investment partnership in 1983, Klarman has not only produced unrivaled returns (in excess of 20% per year), but he has also from time to time offered wise and timeless commentary on markets and the craft of investing.

He is the author of Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which became a value investing classic ever since it was first published in 1991.

Here is an excerpt from Klarman’s letter to his shareholders in February 2009, which contains some timeless ideas on investing – including the power that smart investors can derive from uncertainty.

In this letter, titled “The Value of Not Being Sure”, Klarman describes the biggest challenge in investing today, how he’s responding to the market’s turmoil and why he considers fear of the unknown such a great motivator.

Here is an amazing piece from this letter…

Time horizons have shortened even more than usual, to the point where the market’s 4:00 p.m. close seems to many like a long-term commitment. To maintain a truly long-term view, investors must be willing to experience significant short-term losses; without the possibility of near-term pain, there can be no long term gain.

In defense of ‘uncertainty’, Klarman writes…

Uncertainty breeds doubt, which can be paralyzing. But uncertainty also motivates diligence, as one pursues the unattainable goal of eliminating all doubt. Unlike premature or false certainty, which induces flawed analysis and failed judgments, a healthy uncertainty drives the quest for justifiable conviction.

Click here to download this 2-page letter, and read it from start to end.

I’m sure you’ll find the reading worth your time, given the priceless investing wisdom you will receive here.

Over the years, I’ve come to believe the relevance of the word “value” in value investing – because we are always trying to learn valuable lessons that traders and speculators never consider.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. very apt. its a long road and I am just trying to start, thanks to you.

  2. Excellent article Vishal. Everyone, in the world of investing, talks about Buffett and Lynch. This gives a fresh look at another gentlemen who has worked charm in this industry. Do we have any similar personality in the Indian market? I have read a lot about Prashant Jain being able to beat the market for quite sometime. What’s your take and do you know any better fund manager with excellent track record?

    • Hi Mansoor,

      Thanks for your feedback! Yes, there are some well-performing investors in the Indian market – like Prashant Jain of HDFC and K.N. Siva Subramanian of Franklin Templeton – but there’s not much investment literature that these men have produced for other investors to learn from.

      Regards,
      Vishal

  3. The sooner investors realize that long term is not measured in months, but in years, the lesser would be ‘uncertainty’ in their so called long term investments.

    • sir , over the years people have waited & even now i see many of the mutual funds / stocks people entered over the 5 -7 yr period are in negative.
      whereas people who had invested in property over the same years have yielded great returns.
      what should small investors like us do in these times

Trackbacks

  1. […] Buffett: Hey Seth, what a great timing for your entry. You have written that masterpiece called “The Value of Not Being Sure“. […]

  2. […] is what the legendary Seth Klarman wrote in his shareholder letter in […]

  3. […] Times when things look bleak is a good time to strengthen your skills. Tough situations are actually an opportunity in that sense. As Vishal Khandelwal mentions in this post on Investing and the power of uncertainty, […]

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