Monday, November 5, 2012

Seth Klarman On Value Investing

Most investors have never heard of Seth Klarman, but if you are in the investment business you almost certainly have.

Mr. Klarman's hedge fund (named "Baupost Group") manages $27 billion, making it the ninth largest hedge fund in the world.  He is a classic value investor, looking for companies that are selling well below what he and his colleagues think they are worth.  Once he makes an investment, he typically will hold onto a position for years.

Here's what the Economist wrote about Klarman in July 2012:

HEDGE-FUND bosses rarely double as cult authors. But an out-of-print book by Seth Klarman, the boss of the Baupost Group, sells for as much as $2,499 on Amazon. A scanned version of “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor” has been circulating around trading floors. One hedgie likens Mr Klarman's book to the movie “Casablanca”: it has become a classic.

Why are Wall Street traders such avid readers of Mr Klarman? Baupost, which manages $25 billion, is the ninth-largest hedge fund in the world. Since 2007 its assets have more than tripled, as other funds have wobbled. Baupost has had only two negative years (in 1998 and 2008) since it launched in 1982, and is among the five most successful funds in terms of lifetime returns (see chart), a particularly striking record given its risk aversion. Long closed to new investors, Baupost counts elite endowments like those of Yale, Harvard and Stanford among its clients. 

Klarman rarely gives interviews, but he did an appearance with Charlie Rose last fall that is worth a look.

While I think the whole interview was interesting, I was particularly struck by how much emotional discipline seems to play in his work.  Once he makes an investment, he professes to be unconcerned about its subsequent price movements.  In fact, Klarman says, he does not even have a Bloomberg terminal on his desk.

Klarman quotes one of Warren Buffett's famous quips. Stocks are one of the few things in the world that people want to buy but then get upset when the prices move lower.  To people like Klarman and Buffett, lower prices present an opportunity for investors with the discipline to not allow the market to dictate their behavior.

Klarman also notes that investor timing is too often determined by their mood.  The average investor rarely achieves the same results as the funds in which they invest because they tend to buy when times are good, and sell when the outlook turns sour. This, Klarman says, is the direct opposite of how investors should behave.

In a period that seems fraught with uncertainty and worries - fiscal cliff, Euro worries, economic weakness - Klarman's advice certainly resonates.