Seth Klarman: Recent financial market events, including subprime loan losses, hedge fund and quant fund woes, and the bailout or takeover of numerous financial institutions and structured vehicles,that are suddenly strapped for cash, highlight the extreme risk taking and leverage that have lately permeated our financial system. The current distress will likely create opportunities for patient investors, but while proper investing requires a disciplined and long-term perspective,few market participants are able to ignore short-term phenomena. The daily blips of the market are, in fact, noise—noise that is very difficult for most investors to tune out. Investors unfortunately face enormous pressure—both real pressure from their anxious clients and their consultants and imagined pressure emanating from their own adrenaline, ego and fear—to deliver strong near-term results. Even though this pressure greatly distracts investors from a long-term orientation and may, in fact, be anathema to good long-term performance, there is no easy way to reduce it. Human nature involves the extremes of investor emotion—both greed and fear—in the moment; it is hard for most people to overcome and act in opposition to their emotions. Also, most investors tend to project near-term trends—both favorable and adverse—indefinitely into the future. Ironically, it is this very short-term pressure to produce—this [...]
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