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Seth Klarman On The Pitfalls Of Predicting Future Growth

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

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