Business

Seth Klarman Speaks Time To Listen

Whitney Tilson’s email to investors discussing Seth Klarman’s letter; P&G overvalued; Sears & Eddie Lampert; Unconventional Mortgages.

 

1) Following up on my last email about Seth Klarman’s widely discussed 2018 annual letter. you can read extensive excerpts in Doug Kass’s missive, The Oracle of Boston Speaks…and We Should Listen Closely (more at the end of this post), as well as these articles:

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

 

Q4 hedge fund letters, conference, scoops etc

Baupost Q2 Letter

2) A spot-on Heard on the Street column in today’s WSJ: P&G Shares Not Worth their Premium. Excerpt:

The concern for P&G and its competitors has been that they are losing pricing power as e-commerce and private-label brands are making the household goods sector more competitive.

P&G is a great company and a cash cow, but it has a $236B market cap ($259B enterprise value) and the stock trades at 3.9x trailing revenues, 14.7x EBITDA and 23.1x earnings. It would be one thing valuing a company at such lofty multiples if it had strong growth prospects, but P&G, in a benign, fairly healthy U.S. and global economy, is struggling to even tread water! Longer term, this may be a melting ice cube.

For these multiples, you can own Alphabet, which is drowning in cash and is growing revenues and earnings 20%+ annually, has massive worldwide growth prospects, and huge embedded optionality (the three biggest being YouTube, charging for Android and Waymo).

Look at the shares of ABInBev, down 31% in the past 10 months, to see what can happen to investors who fall in love with great companies and forget to think sensibly about growth prospects and valuation. (Rick Abeyta nailed it as a short near its peak at our shorting conference last May 3 – you can watch the 15-minute video of it here and see his slides here.)

4) Gee, what could possibly go wrong here? No Pay Stub? No Problem. Unconventional Mortgages Make a Comeback. Excerpt:

Lenders issued $34 billion of these unconventional mortgages in the first three quarters of 2018, a 24% increase from the same period a year earlier, according to Inside Mortgage Finance, an industry research group. While that makes up less than 3% of the $1.3 trillion of mortgage originations over that period, the growth is notable because it came as traditional home loans declined. Those originations fell 1.2% over the same period and were on track for a second down year in 2018.


The Oracle of Boston Speaks... and We Should Listen Closely

Jan 24, 2019 | 08:38 AM EST

DOUG KASS

"You may find a buyer at a higher price-a greater fool-or you may not, in which case you yourself are the greater fool." - Seth Klarman

I have admired The Oracle of Boston, Seth Klarman, for decades. To me, he is one of the top five investors in modern investment history - in the class of Warren Buffett and Stanley Druckenmiller.

Klarman wrote one of the best books on investing - Margin of Safety. The book is so valuable and rare that a new one sells for almost $1,500 today and used copies for about $1,000.

.................

"There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, "You don't understand. These are not eating sardines, they are trading sardines."'

By contrast, value investors pay attention to financial and fundamental reality in making their investment decisions - speculators have no such tether.

Seth Klarman's January, 2019 Letter to Investors

Seth Klarman's letter to his Limited Partners has received a lot of chatter in Davos and over the business news airwaves this week.

I found many of his concerns similar to the ones that I have outlined in my Diary over the last 12 months.

What follows are Klarman's 15 major areas of investment concern - I promise that you will find many of them familiar:

1. The Bull Market in Complacency

2. Enter the New Regime of Volatility 

Waves of selling swamped equity markets in the fourth quarter, as volatility surged. While in 2017 the U.S. equity market did not experience a single daily fluctuation up or down of as much as 3%, in 2018 there were 15 such days, 10 in the fourth quarter alone."

3. The Changing Market Structure Poses Sizable Risks

The next major selloff, especially after virtually an entire decade with low volatility. We simply cannot know how those algorithms might respond to new and unexpected conditions.

More here