Value Investing

Seth Klarman Presentation At Grant’s Conference

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