We have posted some notes from the presentation, but we thought readers would enjoy some further notes we just found, check it out below!

Seth Klarman – Baupost Group: “Seth Klarman in conversation with Jim Grant” Grant’s Interest Rate Observer Fall 2013 Conference? October 22, 2013


? How do you reconcile your bottom up investing strategy and your macro concerns? o It’s difficult


o  Will always invest bottom up but worries top down


o   Macro worries are like sports talk radio. Everyone has a good opinion which probably means that none of them are good.


?          Value investors feel that they need to be fully invested at all times


?          He is returning cash to his investors


o   50% of his assets are in cash, currently $14 billion, already has to invest the other $16 billion


o   His firm has already grown so much in size that he is risking a deteriorating culture? currently has 200 employees


o   Can’t continue producing great returns if he gets any bigger


?          Invest in corporate distressed debt and corporate liquidations


o   No corporate distress opportunities right now


?          Structured Products


o   In 2008?2009 you could buy a top tranche of a CDO and recreate real estate at 20?30 cents on the dollar


?          Corporate Equity


o   Used to do thrift conversions


o  Currently 15?20% of total assets


o   Micron Technologies worked out well for them


  • Complicated


  • Great acquisition that was misunderstood


?          Real Estate


o   Dream scenario would be a big office building where a tenant just left and the loan is about to default so they can buy at distressed prices

?          Two basic edges


o   Long?term orientation


o  Flexibility, can invest in any category of investment


?          No one knows the level of stocks or bonds without QE o The question is how to protect yourself cheaply o Gold is really the only place to be

  • Owns long?dated out of the money options on gold prices


  • Sees inflation as a definite possibility


  • Gold hedges are about 1.5% of his assets and will rise 5, 10, or even 20 times if gold price rise dramatically to $5000 or $10000 an ounce.

?          Doesn’t hedge things that are cheap in an absolute sense


o   Wouldn’t pair trade a stock with a P/E of 4 against stocks with P/Es of 5


o   Risk management at Baupost is just people sitting around a table thinking


?          Looked at Russia in the mid?90s when there was no fundamental analysis going on.


o   Never sold some of those holdings and has selectively added to a couple of them this year


o   Russian equities are still cheap but you can’t back the truck up because Russia does not have rule of law


  • This risk has to be managed with position size


?          Has made 1 of every kind of investment mistake


o   Not understanding the product, etc.


?          He is still the final yes on every investment


o   Had a difficult time coming up with a succession plan


  • Promoted Wagner and then talked with him about being around for 8?10 more years. Wagner decided that’s not what he wanted


?          Klarman knows less than everyone else about the things he decides


o   Only brings experience and a certain mindset


?          Everyone knows that what the Fed is doing is crazy


o   This is the first time the next generation will be worse off and we should be




o   The Fed handing the reigns to someone else with no experience to continue the experiment is insane


?          Big funds should be putting money in big blue chips


o   They’re not really mispriced but they’re comparatively cheap


?          With the exception of the unions and the auto industry, America still has rule of law


?          Everything that can be financed today has been


o   Even if yields go up but there’s no crisis, there will probably be a melt?down in the high yield market


?          Klarman’s annual letters have been key to building a great shareholder base


o   The letters articulate his philosophy and hammer on the same points frequently


Seth Klarman Valuation Matters 1