PROFILE
Baupost was established in 1982 and has been run since inception by Seth Klarman. Klarman is a legendary value investor who has produced annual returns of 20% since inception with just one down year. Klarman makes investments with large “margins of safety” and is comfortable holding cash if opportunities are absent. He also relishes his team’s ability to research hard to understand situations and find unique opportunities.
Klarman begin his career under value investors Max Heine and Michael Price as an intern during high school and for two years after graduation from undergrad at Mutual Shares Corporation. After graduating from Harvard Business School in 1982, Klarman helped form Baupost, which was seeded with $27M from wealthy families in the Boston area. His experience at Mutual Shares and the mandate to manage money for wealthy families formed his views on risk and investing as well as leading to the development of his two rules of investing. First, don’t lose money. Second, don’t forget rule number one.
Klarman’s book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor details many of his thoughts on investing and his methods. One of his sources of investment ideas is a firm currently valued below liquidation value. As he details in his book, liquidation value is a worst case, rock bottom value “in which only tangible assets are considered and intangibles, such as going-concern value, are not.” As an example, according to his 2006 speech at Columbia, Baupost had one analyst exclusively analyze Enron for four years which comprised lots of cash but complex liabilities intertwined among more than 1,000 subsidiearies and shell companies. While the debt traded at 15 cents, Klarman thought he would get 30-40 cents and in the end received over 50.
According to Klarman, “if only one word is to be used to describe what Baupost does, that word should be: ‘Mispricing’. We look for mispricing due to over-reaction.” Some of his favorite mispricing situations that arise from forced selling and complexity are spin-offs, forced selling by index funds, forced selling by institutions, bankruptcy, and accounting frauds. His ability to analyze these situations enables him to extract huge returns. In repeat situations like thrift conversions and real estate purchased from the Resolution Trust Corporations, Klarman was able to extract significant returns several times over until others were able to see the value, bid up the assets, and decrease the premiums. When the opportunities were no longer available, Klarman would move on.
Legendary value investors are typically known for investing almost exclusively in equities. Klarman will invest anywhere he finds opportunities. In a 2006 speech to the Columbia Business School Klarman indicated his portfolio was 45% cash, 20% equities, around 17% distressed debt, 11% real estate, 7% private investments (distressed debt, small LBO’s, financial restructurings), 6% in South Korean equities and a small % in hedges. His cash holdings have been between 40% and 50% over the last few years, demonstrating his willingness and patience to wait for great opportunities.
SHAREHOLDER LETTERS
Excerpt from Baupost 2007 Year End Letter- Financial Market Cycles
Excerpt from Baupost 2004 Shareholder Letter – A Paucity of Worry
Baupost Shareholder Letters 1995 – 2001 (One document)
MEDIA
The Value of Seth Klarman ( Absolute Return) – June 2010
Interview with Seth Klarman (II Magazine – June 25, 2009) (PDF)
Why Most Investment Managers Have It Backwards by Seth Klarman (AP – June 16, 2009) (PDF format)
Interview (OID, May 2009)
Interview with Seth Klarman (Harvard Business Review - December 2008)
Notes From Seth Klarman’s HBS Talk (HBS – December 2, 2008) Page1 & Page 2
Channeling Graham and Dodd: A Conversation with Seth Klarman (SA – October 29, 2008)
Valuing a Business – Seth Klarman’s 3 Methods (Gurufocus – October 15, 2008)
Seth Klarman Lecture Notes (CIMA Conference – October 2, 2008) (More)
Interview at Endowment Management Seminar (TIFF – July 2008)
Seth Klarman Interview (Alpha Magazine – June 25, 2008)
Seth Klarman Comments on Money Management and Baupost’s Approach (SA – June 12, 2008)
Seth Klarman: Second Coming of Benjamin Graham? (SA – June 5, 2008)
MIT Speech & Remarks (MIT – October 20, 2007) (html)
A scaredy-cat approach pays off for hedge fund (SMH – May 19, 2007)
Manager Frets Over the Market, but Still Outdoes It (NYT – May 13, 2007)
Seth Klarman on the Art of Complex Deep Value Investing (GuruFocus – September 27, 2006)
3 Lessons from Seth Klarman’s “Margin of Safety” (IU – August 8, 2006)
The $700 Used Book: Why all the buzz about Seth Klarman’s out-of-print investing classic? (BW – August 7, 2006)
Trade Like Seth Klarman (Real Money – April 19, 2006)
Seth Klarman Speech at Columbia Business School (CBS – April 20, 2006)
Psychology of Leadership – Guest Lecture at Harvard’s Psychology of Leadership Course (Harvard – May 1, 2006)
Searching for Rational Investors In a Perfect Storm (April 1, 2005) (Link 2)
Seth Klarman’s guide to finding value (Wharton J – May 12, 2005)
Portfolio Talk – A bottom-fisher reveals his catch (Fortune – June 18, 1990)
Are these New Warren Buffetts? – The dozen young investment managers you’ll meet here are brainy, ethical, and good at making money grow consistently. (Fortune – October 30, 1989)
VIDEOS
“Psychology of Leadership ” Guest Lecturer (Harvard’s “Psychology of Leadership” course – May 2006)
Interview with Seth Klarman, MBA (HBS – 1982)
Interview with Seth Klarman (Ivey School of Business)
QUOTES
“So if the entire country became security analysts, memorized Benjamin Graham’s Intelligent Investor and regularly attended Warren Buffett’s annual shareholder meetings, most people would, nevertheless, find themselves irresistibly drawn to hot initial public offerings, momentum strategies and investment fads. People would still find it tempting to day trade and perform technical analysis on stocks. A country of security analysts would still overreact. In short, even the best trained investors would make the same mistakes investors have been making forever, and for the same immutable reason – that they cannot help it.”
“In capital markets, price is set by the most panicked seller at the end of a trading day. Value, which is determined by cash flows and assets, is not. In this environment, the chaos is so extreme, the panic selling so urgent, that there is almost no possibility that sellers are acting on superior information. Indeed, in situation after situation, it seems clear that fundamentals do not factor into their decision making at all.”
“Baupost build numerous new positions as the markets fell in 2008. While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up, and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.”
“Most institutional investors feel compelled to swing at almost every pitch and forego batting selectivity for frequency.”
