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.

This is an odd move for Klarman, because it seems highly speculative. Some people have claimed he’s hoping to use the property for slant oil drilling and also selling it off as individual lots. I’m inclined to believe the latter, because the former is much more difficult than it sounds, especially with local laws that aren’t exactly favorable towards oil drilling.

Technorati Tags: klarman, seth, baupost, group, investing

Preferred shares of Quanta (QNTAP) will be paid off before common stockholders, so it stands to reason that they are in better health than the common stock. One investor, who is mentioned in the story I’ve linked to, is buying the preferred stock while shorting the common stock.

Seth Klarman’s Baupost Group hedge fund owned 6.6 million shares of Quanta common stock (QNTA) as of June 30. He obviously believes that Quanta will have more than enough money to pay off both preferred and common shareholders. Because the common stock is already priced for the risk that it will not get paid off after the run-off, this position would make Baupost Group a lot of money if Klarman’s right, but if he’s wrong the hedge fund will likely lose nearly all the value it holds Quanta at this time.

It’ll be interesting to see if this strategy works out for Klarman and Baupost.

Technorati Tags: seth klarman, investing, quanta

Walter Industries does a variety of things, including manufacturing water infrastructure and transmission products, production of coal and natural gas, and home building and financing. Obviously, two of those sectors have been hammered in the past few months, which is why WLT currently sits near its 52-week low. It’s current value is about 60% of its 52-week high, which shows how volatile this thing can be over the long run.

If WLT was a good value pick when it was much higher than its current price of 44.32, it must be a good value pick now, even with the changes in the industries it deals with. Company revenues should not change significantly enough to cause such a dramatic downturn in the stock, which is why I think its current position is at the bottom of a deep valley. I would not be surprised to see a relatively steady but staggered rise back towards the top (near its 52-week high around 70) in the next 6 months.

Full disclosure: I do not own any interest in WLT. You should carefully research any potential investments or consult a qualified expert before buying stocks.

Technorati Tags: seth klarman, walter industries, stock, picks

One key to take away from Klarman’s tips is the value of information. Part of his job is understanding things like financial statements and balance sheets, but another important part is finding the information that isn’t available in the daily newspaper or even on the online stock site. He isn’t trading on inside information, because the information he gathers is available to the public, it’s just not readily available.

Klarman’s number one goal is to avoid losing money. That would seem to contradict huge returns like those his hedge fund has achieved. That’s where Klarman’s mind comes into play. He’s found that it is possible to find stocks that are so undervalued that even in a volatile market they are highly likely to go up, with little chance of much downward movement.

Think of Klarman’s investing strategy this way: each stock has a price which it is supposed to be at. This is the true value, based on the actual value of a company and factoring in expected growth/value. If the price of a stock is well below what Klarman has determined this true price to be, the market will bring the price of the stock up towards that level over time. That makes a good investment. Now go find them!

Technorati Tags: seth klarman, investing, warren buffett

The recent hype surrounding Klarman has not been fueled by the man himself. Klarman manages The Baupost Group, a hedge fund that’s been so successful it is no longer open to new investors. With the popularity of the book he wrote 15 years ago, you would think he might want to cash in on his new popularity and allow a reprint. Not so. Klarman will not authorize a reprint of the book, and the publisher supports his decision. The book has become so rare that only a fraction of libraries carry it.

So what’s in this amazing book? Well, it’s basically the value investing strategies of Benjamin Graham adjusted for modern times. Want more details? Well, through this site, I will be dishing out all the key points from this book that prominent investors know but want to keep secret. There is no magical formula, but there are a lot of strategies that are as close to a sure thing you can find this side of a US treasury bond (with much higher average returns, of course).