Seth Klarman, chairman of the Baupost Group, and one of the most successful value investors on Wall Street, has long been an unwavering disciple of Graham & Dodd, whose insights he calls “timeless.”
Klarman, who applies the principles of value investing, regardless of ever-evolving market environments, offers us a glimpse of his views on the inherent limitations of valuing the future growth of a company in the Preface to the Sixth Edition of Security Analysis.
Graham & Dodd repeatedly stressed the importance of humility and prudence when attempting to predict the future earnings of a company, regardless of the valuation methodology employed or the trend of earnings — a measure that far too many analysts today obsess over, particularly with regards to the FAANG group of tech stocks. In the Preface to the First Edition, p.xliii, Graham & Dodd, while acknowledging the “vital significance’ of determining future growth, nonetheless, explicitly state that their book will not dwell, nor discuss in any detail the determination of the future prospects of a company, “because little of definite value can be said on the subject.”
Klarman’s view on the difficulty or sheer folly, of trying to ascertain with precision, the earnings growth of a company, to a large degree, mirrors the admonition contained in the pages of Security Analysis. Klarman does not dismiss