Some years ago Seth Klarman gave a fantastic speech at the MIT Sloan Investment Management Club. During his speech Klarman suggested that the mainstream approach to investing has is backwards saying:
“Right at the core, the mainstream has it backwards. Warren Buffett often quips that the first rule of investing is to not lose money, and the second rule is to not forget the first rule. Yet few investors approach the world with such a strict standard of risk avoidance. For 25 years, my firm has strived to not lose money—successfully for 24 of those 25 years—and, by investing cautiously and not losing, ample returns have been generated. Had we strived to generate high returns, I am certain that we would have allowed excessive risk into the portfolio—and with risk comes losses.”
He went on to discuss how you can successfully exploit opportunities by remaining calm, cautious and focused in the manic world of investing. Here is an excerpt from that speech:
As the father of value investing, Benjamin Graham, advised in 1934, smart investors look to the market not as a guide for what to do but as a creator of opportunity. The excessive exuberance and panic of others generate mispricings that can be exploited by those who are able to keep their wits about them.