Seth Klarman: It Hurts So Good

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Seth Klarman needs no introduction, the billionaire founder of The Baupost Group hedge fund – running north of $28 billion via AUM. Also, the famed writer of Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. The out-of-print book can be found on eBay and for a night out at Scores.

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Even more “conservative” and quiet than Warren Buffett, Klarman is no stranger to holding 50% cash. He's also a crackerjack at structuring trades with complex derivatives. Most look at Klarman's portfolio as the holy grail, but it's a small part of a collection of AUM that spans debt, real estate, various hedges, and of course cash.

It's still fun to watch what Klarman does with his public equity portfolio, running an extremely concentrated fund - some 50% of his portfolio in the top 5 holdings.

Yet, Seth Klarman is feeling the pain of late in his equity portfolio, with the energy sector being the big culprit. His portfolio was down 1.4% last quarter per his recent letter [I mean Greenlight and others are showing losses too].

He added a new Pioneer Natural Resources position last quarter and his largest holding is Cheniere Energy. But Klarman's portfolio really is a beautifully eclectic mix of biopharma, tech and energy.

Now, Klarman did have bypass surgery somewhat recently, where he turned over the whip to Jim Mooney to run things. Mooney has to take some blame here.

Some key pain points for Klarman over the last quarter:

No. 1 holding Cheniere Energy off 12% over the last 3 months

No. 4 Micron Tech off 32% last 3-mths.

No. 5 (new 2Q position) Pioneer Natural Resources off 23% last 3-mths.

No. 6 Antero Resources (added 19% to position in 2Q) off 40% last 3-mths.

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tl;dr - here' the key - Klarman says (I imagine) of his recent pain - “it hurts so good,” where he's no stranger to long periods of underperformance, only to rake in big gains from massive bets as his themes paly out. His bargains in the energy sector will take some time to play out and he's shy and rarely does interviews, so you won't hear him out there talking his book (cc'ing Carl Icahn).

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