Klarman Warns of Risks to Investors

Risk is the most important consideration when investing, and investors are being too trusting. This according to a recent Business Insider article reporting on a client letter from hedge fund manager Seth Klarman.

The hedge fund manager (who oversees approximately $30 billion) shares his view that, when share prices are low (as they were in 2008 and early 2009), risk is “usually quite muted while perception of risk is high.” By contrast, however, he argues that “when securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.”

According to the article, Klarman has a “huge following” on Wall Street. A used copy of his book Margin of Safety, it says, sells on Amazon for more than $900.

Amidst what appears to be a government stall on tax and healthcare reform as well as decreased regulations and increased infrastructure spending, the article says, “the markets don’t seem to care.” In his letter, Klarman outlines three forces that could be causing the indifference:

  • Greed and fear, which “pressure investors to do the wrong thing at every turn.”
  • Aggressive brokers, investment bankers, and traders who routinely promise more than they can deliver.”
  • Investors focusing on the “short term and trend following.”