Perhaps the most well-publicized aspect of the The Baupost Group 2016 investment letter, which was passed around inside Wall Street media circles like hummas dip at an immigration party, was the impact that unpredictability coming from the Trump administration might have on stocks. It is not pretty analysis and involves the new administration questioning the core underpinnings of a liberal democracy. But it is in calmly considering issues on both sides and looking forward where Seth Klarman’s value shows – and it is why people pay as much as $3,500 for a copy of his now out of print book, “Margin of Safety: Risk-Averse Value Investing Strategies For the Thoughtful Investor.” Unlike many value strategies, Klarman has a risk management approach built into his overall plan.

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Seth Klarman of Baupost Group The Baupost Group
Seth Klarman of Baupost Group [CC BY 3.0], via Wikimedia Commons

Investors need to watch "actions that weaken or undermine the very system that has made our country the leader of the free world"

The most popular reported aspect of the The Baupost Group 2016 investment letter, the Trump administration potentially ushering in market uncertainty and perhaps the crumbling of democratic institutions, is an odd value environment in which to be a value investor.

Working on the premise that a liberal democracy and proper investing requires truth to prevail, The Baupost Group notes that many of the norms of elite ruling decorum, such as self-restraint and fair play, seem to have gone out the window. The US Senate, for the most part, had a history of confirming a President’s US Supreme Court picks, a trend that ended in the last year of Obama’s tenure. The Senate filibuster, once used as a weapon of last resort, is now increasingly being used as part of a nuclear strategy as common respect seems to be moving to the wayside. Klarman noted that foundational aspects that lead to trust in the system, critical to its success, are being eroded.

What investors must be alert to are “actions that weaken or undermine the very system that has made our country the leader of the free world as well as the democratic, free-enterprise engine that drives the global economy.”

With such concerns at the forefront, what is Baupost’s investing approach?

The Baupost Group - Klarman's legendary value investing formula is rare in that it has a well thought out risk management regime

While many value-focused firms don't focus on macro risk management, perhaps one interesting if little-discussed aspects of Klarman's overall value investing approach is how it naturally reduces portfolio exposure as market values become untenable.


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