Klarman's Perseverance

perseverance 

–noun

1.

steady persistence in a course of action, a purpose, a state,etc., esp. in spite of difficulties, obstacles, or discouragement.

Normally people know Seth Klarman as the genius who averaged over 20% per annum since 1983 while S&P 500 over the same period averaged only 7%. The difference between those two returns is that if you invested 1000$ with Seth Klarman in 1983 it would have become $137000 today while the same amount would be $6200 today if invested in S&P 500.

But one quality of Seth Klarman that gets under emphasized is his perseverance. Lets look at the following table

During the tech bubble of late 90's tech stocks valuations were sky high. Due to the lack of finding good values Klarman kept around 25% in cash, 30% in special situations, 10% in bond and only 35% in stocks. He also hedge the stock market exposure by buying PUT options. Every year from 1995 to 2000 he underperformed the index and also lost money on the PUT options that would expire worthless at end of the year. But consistently he held onto the cash as well as kept buying PUT options every year. 

As we all know well S&P 500 index fell 43% after 2000 and 10 years later is still 30% lower than its peak set in 2000.

He wrote this to his investors in 1999 

"We underperformed in 1999 not because we abandoned our strict investment criteria but because we adhered to them, not because we ignored fundamental analysis but because we practiced it, not because we shunned value but because we sought it, and not because we speculated but because we refused to do so. In sum,and very ironically, we got hurt not speculating in the U.S. stock market."

 Thus for long term success in investing you need not just the right technique but the right temperament.

In Buffett's words

"Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."