A review of Seth Klarman's portfolio and his value investing approach.
Klarman's Margin of Safety
Seth Klarman is the CEO & President of the Boston based Baupost Group, one of the largest and most successful hedge fund groups in the world. His firm managed $30 billion as of December 2016. In the process, he has built a personal fortune of over $1.5 billion.
Klarman, along with Warren Buffett, is regarded as one of the most successful value investors in the world. Apart from his success as a value investor, his other claim to fame is his book ‘Margin of Safety’, which he wrote in 1991. Despite the book developing a cult like following, only 5,000 copies were ever published. The result is that copies now sell on eBay and Amazon for around $750, and some copies have apparently sold for $15,000.
Seth Klarman joined the newly formed Baupost Group straight out of business school in 1982. The firm’s funds invest in equities as well as distressed debt and structured products.
Klarman has made several very shrewd moves during his career. One of these came in 2008 when he noticed hedge funds liquidating large positions. He thought that was a sign of a great buying opportunity and went out and raised $4 billion in new capital. While many funds were closing down, he was putting new money to work at what tuned out to be the start of a new bull market.
Like many successful investors, Klarman is a philanthropist – his foundation currently holds $540 million in assets. He donates to science, music and to Israeli causes. He also owns the English language Israeli news site, Time of Israel.
The True Benjamin Graham Disciple
Benjamin Graham is known as the father of value investing and Warren Buffett is probably the most well-known follower of his philosophy. However, Seth Klarman may be a closer follower of the Ben Graham philosophy. One could say that Buffett is more of a business manager than a true value investor, while Klarman is solely focussed on the value investing philosophy.
In 2009 Klarman gave a speech to the Ben Graham Centre for Value Investing in Ontario. During that speech, he shared the following points on investing.
He said you should look at the probability and magnitude of a potential loss before focussing on the potential gain of an investment.
He also suggested focusing on absolute performance rather than relative performance. By doing so investors will be more aware of the possibility that they will lose money. While those focussed on relative returns are striving to lose less than others, those focusing on absolute returns are focussed on making money and protecting capital.
He suggested that investors focus on individual investments rather than top-down, macro investing. Macro investing is very difficult as it involves forecasting economic performance, interest rates, inflation and currency movements – all of which are very difficult to do.
Klarman has also spoken about his philosophy on exiting a position. He likes to buy assets at a discount and then sell them when they appreciate, but before they reach their fair value. In other words, he would rather sell too soon, than risk price weakness just to make the last few percent. Selling early also allows him to buy in again if the price falls.
He does not use leverage, as doing so may force him out of a position he would otherwise be able to ride through a dip. In fact, not using leverage means that at lower levels where a leveraged investor would be forced out of a position, Klarman can add to the position.
Baupost Group's Latest Form 13F Filing
On November 13, 2017, Klarman's firm The Baupost Group filed their quarterly Form 13F regulatory filing. I reviewed the 13F filing to get a sneak peek at holdings in Baupost Group's massive portfolio.
Continue reading Seth Klarman's portfolio review.