Barron’s Interviews: “The Value Hunter – Seth Klarman Searches For Bargains In A Sky-High Market”

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4th November 1991

Seth Klarman is a diehard member of that vanishing breed known as value investors. He believes, in the classic definition of value investing, in buying a dollar's worth of assets for 50 cents. Although somewhat tender in years, Seth is wise in the ways of the business world and the financial markets and his investment vehicle, the Baupost Group in Cambridge, Mass., boasts a sterling track record. While he professes to ignore both the economy and the stock market in his hunt for superior returns, he concedes that the abundance -- or absence -- of inviting investments often reflect whether share prices generally are too high. Although he's heavily in cash, as he has been all year, Seth still has a few special situations that he considers attractive buys now. What his thoughts are on the current investment scene and how he approaches prospective commitments are laid out in his clear and cerebral fashion in the Q&A that follows.

BARRON'S: Seth, why don't we start with the usual boiler plate: What attracted you to the investment
business?

Seth Klarman: I've always been interested in the market.

Q: The first words out of your infant mouth were: "Buy at the market."

A: I noticed a column of numbers in the papers, and I was always mathematically inclined. So I was interested. I traded my first stock when I was 10.

Q: What was the stock?

A: Johnson & Johnson.

Q: You should have held it.

A: I did pretty well. I bought one share. Completely as a surprise, it split 3-for-1 the next day.

Q: Don't tell us. You had inside information.

A: My first real education in investing came when I took a summer job in my junior year at college with Max Heine and Mike Price at Mutual Shares. They invited me back to join them in January of '79. I worked there about 20 months until I left for business school. Just before graduation, I was offered the opportunity to join with several individuals who had decided to pool their assets and helped to form the Baupost Group to steward those assets. That was 9 1/2 years ago.

Q: Are your partners still around?

A: These people are all still involved. They were never active day to day.

Q: The best kind.

A: They are wonderful partners.

Q: Daily inactives is the way we refer to them.

A: They are on the board of the company. They are partial owners of the company. And each of them has all of his liquid investable assets here, as do all the principals, all the people who run the money.

Q: How much money do you manage?

A: A little bit over $400 million.

Q: And how much did you start with 10 years ago?

A: $27 million.

Q: Do you call yourself a hedge fund?

A: No. We do not. We are compensated somewhat like hedge funds but do not hedge in the sense of always being long and short. We tend to be long investors. We are rarely on the short side.

Q: Is this institutional money you're managing?

A: All individual money.

Q: It's really unusual to have that much individual money -- or, come to think of it, for individuals to have that much money!

A: That's a pleasant problem for them. We set out at the beginning to be somewhat unconventional, with our clients acting as board members and as part owners. The incentive really was to do whatever it took to maximize the return on their money, not necessarily to grow a profitable business. Along the way, some decisions were made, including one to turn down most of the people who tried to become clients. We actually closed for new clients about five years ago. And we have grown from compounding ever since.

Q: So basically, you're saying, a group of people got together, most of whom are not active managers, pooled a certain amount of money, and you're managing it. Is that right?

A: That's right. And over the years we have grown through word of mouth. In the earlier years, we grew beyond the initial three families, for a couple of reasons. One was that they had some friends who liked the idea of what we were trying to do and wanted to come in. They are the kind of people who say yes to friends. And also partly because we didn't want to be overly dependent on any one person for the success of our business going forward.

Q: Seth Klarman, is this a royal, editorial -- or what kind of -- "we"?

A: It's "we" the five of us. There were the three families and I had a partner who was a part-time person who focused primarily on administrative matters.

Q: Essentially, you're the portfolio manager.

A: Yes, since we started.

Q: That is a heavy burden.

A: Some days heavier than others.

Q: How have you done?

A: The compound return to investors after our profit-sharing arrangement has been 20%-25% in the limited partnerships.

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