Happy New Year from Seth Klarman

I couldn’t think of a better way to kick off the New Year than with another terrific interview from one of the world’s most successful and most disciplined value investors.  The first half of this interview covers some of Seth Klarman’ s philanthropic efforts and values.  The highlights below review the second half of the session, on investing:

  • There is a gene for value investing.  For Klarman, it’s natural, but for a lot of people it is against human nature – while everybody appreciates a bargain, everyone also overreacts and gets scared when the market is going down.
  • Investing is the intersection of economics and psychology.  The economics is not that hard.  Controling the emotion is harder and it comes with experience.
  • Value investors have to be patient and disciplined.
  • Leverage can magnify returns but it also magnifies losses. If you are leveraged and greedy you blow up.
  • You need to balance arrogance and humility.  When you buy anything, it is an arrogant act.  You need the humility to know that you might be wrong.
  • Buffett evolved through three states: from buying cigar butts and getting something for free; to buying great businesses at cheap prices; to buying great businesses at fair prices and holding on forever.  Klarman is still in phase one.  Buffett has a better eye for great businesses.
  • Klarman does not have a Bloomberg on his desk, but he sits on a trading desk thinking big thoughts – “we are not traders.”
  • Baupost is making medium-to-long term investments – three to five years or longer.
  • The only reason to care about market gyrations is to buy something cheaper – benefit from volatility.
  • Baupost’ s rhythm is opposite most of the market’s rythym.
  • When the market goes straight up, the little guy finds it irresistable and get’s sucked in. The return for all mutual funds in the 90s was 600 bps higher than the average investor’s return because they get in at the wrong time and out at the wrong time.
  • Buying is easier.  Selling is hard.  There is no timing element.  You can never know how good a bargain someone will offer you tomorrow.  If you see a dollar laying around for sixty cents, you have to buy it, and buy a little more if it falls further.  The risk is that the dollar isn’t really worth a dollar.
  • A lot of stocks are cheap for a reason.  Many stocks are perennial undervalued because they are mismanaged.  Good management adds value.  Bad managements think of themselves first.
  • Klarman had no interest in the firm when he started Baupost. He looks for people that will put clients first.  If you do this, you will do great.
  • When people give money to instituional managers, there is a giant separation between the interest of the money and the interest of the stewards of the money.
  • The Earnings of financials hit 40% of the broad market several years ago. It seems ridiculous that we are an economy that only makes money from making money. The financial industry as a whole does not add any value.  Finance, in terms of complex secruties, etc. is disturbing.
  • The sovereign crisis is a large serious problem.  But the real problem is the banks that own government debt.  If one bank goes, they will go like dominoes.  The problem is the system is so interconnected.
  • Subordinated debt holders should take a haircut when businesses fail.  If Citi had done that, they would not have needed a bailout.  These things can be accomplished differently.
  • In this particular case, the problem in Europe is so large, they will likely need assistance.  Governments have created the problem by encouraging moral hazard.  We need to demand that our politicians man up and do the right thing.