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Lindley Estes is a business writer for The Free Lance-Star and This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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This week’s (3/21) investing column

INVESTORS HAVE learned the wrong lessons from the financial crisis of 2008, Seth Klarman wrote in this year’s annual letter to shareholders of his Boston-based Baupost Group partnership.

Klarman is regarded as one of the best investment managers in the country. He’s a value investor whose investment philosophies evoke those of Warren Buffett. His rare book, “Margin of Safety,” routinely sells for more than $1,000 on the Web.

In his latest letter, parts of which have circulated on the Internet, Klarman says that many investors seem to have quickly forgotten the “near-death experience” of 2008 and have returned to “shockingly speculative behavior.”

That’s in sharp contrast to the generation who lived through the Great Depression, which “colored their behavior for more than a generation, leading to limited risk taking and a sustainable base for healthy growth.”

Among the “false lessons” that investors have taken away from this crisis, Klarman writes, is that declines are quickly reversed, that low-quality investments that have fallen the farthest make for the best buys and that the government can rescue the markets.

Instead, Klarman offers 20 lessons that investors should have learned from the 2008 crisis. Among them:

  • Things that have never happened before will occur in markets, so investors need to “always be prepared for the unexpected.”
  • Lax lending and other such excesses that persist for long periods create a false sense of security that can lead to more problems.
  • Investors shouldn’t try to make “every last dollar of potential profit” if it means losing sight of risk management.
  • Do not trust computer-generated risk models. “Reality is always too complex to be accurately modeled,” Klarman writes. “Attention to risk must be a 24/7/365 obsession.”
  • Don’t sacrifice the safety of short-term funds for a few extra basis points.
  • Be willing to consider all types of investments when markets are in crisis.
  • Have the courage to buy securities as they fall in price. “It is almost always better to be too early than too late,” he writes.
  • Be wary of financial innovations, which are done when times are good.
  • Don’t trust the work of ratings agencies.
  • All other factors being equal, public investments are better than private ones because they are more liquid.
  • Avoid leverage.
  • Financial stocks are risky.
  • For money managers, seek out clients with a long-term orientation who will hold on when times get tough. This will avoid the need for forced selling.
  • Don’t pay attention if a government official says a problem has been contained.
  • The government can’t stand short-term pain and is likely to react with bailouts and rescues–”especially if the expenses can be conveniently deferred to the future.”
  • Few will accept responsibility for his or her role in creating the crisis.

Some wise words from a top-notch investor.