Stock markets, by nature, are supposed to be efficient. Investors have enough information about a company to generally predict the future earnings for the next 3 months to withing a couple percentage points. They can factor in such variables as interest rates and utility prices and come up with what should be a fairly precise price for any given security. So how can anybody make money if everybody knows what’s going to happen next?

The fact is, the markets are not even close to efficient. The great investors and investment philosophers - men like Warren Buffett, Benjamin Graham, and of course Seth Klarman, recognize that no matter how advanced our markets become and no matter how fast information travels, irrational decisions made by some investors will always open up investment opportunities for those who can recognize the inefficiencies.

Perhaps a major cause of inefficiencies is the herd mentality of stock markets. A stock will start to fall and investors will get in line to sell that stock. While an efficient market might have called for a small downward correction in that stock, the reality of the herd mentality might cause it to crash hard. The company behind that stock hasn’t changed, but the value given to it by investors has fallen dramatically. That’s where the mavericks like Buffett and Klarman jump in to “take care” of the inefficiency, buying up depressed shares that never should have been depressed in the first place.

Some of best advice that Klarman has given to investors - and his advice comes rarely these days - is to avoid the herd mentality and to always value companies relative to their competitors and the market at large. One formula cannot determine the price of two very different companies. Some companies have little growth but constant returns, while others have little-to-no revenue but very high potential growth margins. Keep things in perspective, and let the alarm bells sound if you find yourself in the “sell line” with everyone else.