Seth Klarman: Silent Assassin Of Value Investing

Source: http://seekingalpha.com/article/917141-seth-klarman-silent-assassin-of-value-investing

I love studying successful investors, especially fellow value investors. My academic and early investing years were spent studying Warren Buffett and Michael Price. Now I am intrigued by current managers and how they fared during the financial crisis. I covered Joel Greenblatt in a previous blog - his "magic formula" is simple to understand and would have pleased Benjamin Graham. I love it so much that ValueMyStock created our own daily report of stocks that pass his test.
Many investors have heard of Joel Greenblatt, mostly from his popular "The Little Book That Beats the Market" book. Fewer have heard of Seth Klarman, whose own book "Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor" is now out-of-print.
A graduate of Cornell University and Harvard Business School, Mr. Klarman got his chops in the real world working for Max Heine and Michael Price of the famed value investing fund Mutual Shares. His investment philosophy is preservation of capital, not stellar returns. He keeps a low profile and prefers the laid-back attitude of Boston to the financial chaos of New York City.

His Own Fund
In 1982 he founded Baupost, which started as an investment pot for a family of one of his former Harvard professors. In fact, "Baupost" is an acronym for these families' surnames. He was granted control over $27 million and has experienced phenomenal growth. For a man whose goal is preservation of capital, he now oversees $25 billion in assets, despite the fact that Baupost was closed to new investors years ago. Baupost is now the eleventh-largest hedge fund in the world, and Klarman is the fourth most successful fund manager in history, with net gains of $23 billion from inception through 2011. How did he fare during the financial crisis? Well, since 2007, the fund's assets have tripled. With returns like these, it is no wonder that his clients include the endowments of Yale, Harvard and Stanford.
Investment Strategy
Mr. Klarman does not have a publicly-known formula or list, such as Joel Greenblatt, but his extremely risk-averse style is worth studying. Mr. Klarman is a strict adherent to Benjamin Graham's style of value investing. He will look beyond equities and purchase distressed debt positions (as will Michael Price), but every investment must pass his "margin of safety." Margin of safety is used to describe the distance between what a stock is currently selling for and its calculated price, or intrinsic value. His aversion to risk is legendary - he maintains a huge cash position (at times up to 50% of his portfolio) rather than always chasing the next buying opportunity. He makes sure the price he will pay for a company is at its absolute best before pulling trigger.
His slow-and-steady, fly-under-the-radar style is in direct opposition to many of today's hedge fund managers, and it mates perfectly with the principles of value investing. The virtues of value investing (and any successful strategy, in my opinion) are research, patience and diligence. Every investor can learn from studying Mr. Klarman's style, and should be emboldened by his aversion to risk. I encourage readers to draw the following conclusions from his investment strategy:
1. The principles of Benjamin Graham are relevant today, just as they were 70 years ago. Adopting a Graham-style approach will bring investors closer to the performance of Warren Buffett, Seth Klarman and Joel Greenblatt.
2. Do not be afraid to sit on cash. Investment opportunities exist every day, but great opportunities come around less often. Keep enough cash to take advantage of a great opportunity rather than being locked up in average performers. A 30% return over the course of a year is not as good as an 80% return over the course of two years. How much cash do you maintain? Do you have the patience to sit on small or zero returns for several months?
3. Drawing attention to yourself and your trades creates expectations. Expectations lead to stress and short-term decisions, which can lead to failure. Mr. Klarman does not measure himself against other managers or indices. His investors trust his long-term outlook and do not hold him accountable to short-term benchmarks.
4. Accept the fact that sometimes there is a lack of buying opportunities. Do not buy for buying's sake. In 2010 Baupost returned 5% of capital to investors - Mr. Klarman did not find enough opportunities in the market.

Hedge Fund Legend Seth Klarman Could Win Big In Suit Against JPMorgan

One of the men who made money predicting the financial crisis is now in position to earn big through the prosecutions against the banks responsible for dealing securities tied to toxic home loans. 

Baupost Group manager Seth Klarman first cashed in after betting against the housing bubble and now his fund is the lead plaintiff in a private suit against EMC, the former Bear Stearns mortgage unit also the target of the New York AG's lawsuit against JPMorgan Chase, according to CNN Money's Stephen Gandel.

From Gandel:

...if things go Klarman's way, Baupost alone could end up collecting about $310 million from JPMorgan, with a big assist from the government.

Klarman's suit is one of the many so-called put-back cases bedeviling the banks right now, in which investors who bought mortgage bonds in the year or so leading up the credit crisis, when loan officers were basically handing out mortgages like candy on Halloween, are demanding their money back.

The Boston Hedge Fund manager could end up collecting $310 million from JPM, which bought Bear Stearns and EMC in 2009. New York AG Eric Schneiderman has superior subpoena power than Baupost has in the private suit, but the evidence Schneiderman unearths could go a long way to help Klarman cash in.

Klarman has returned his investors nearly 20% a year for the past two decades and his out-of-print investment book sells for $1,700 on Amazon.

What's more interesting is that Klarman didn't even get burned in the financial crisis but made money betting against faulty mortgages. His case stems from his purchasing of $160 million worth of mortgage bonds in 2009, when they were selling for $0.40 on the dollar. 

Gandel writes:

"Klarman put himself and his investors in a position, even though he predicted better than most Wall Street's house of cards, that they, like other investors were lied to."

The saga only bolsters Klarman's rep for being one step ahead of the country's major financial institutions.

Read more: http://www.businessinsider.com/seth-klarman-outwits-jpm-again-2012-10#ixzz29ZN9971d

GURU ETF Does Not Replicate Hedge Fund Performance

Global X announced yesterday that it was going to launch an ETF that mimics the moves made by hedge funds on the market. The Global X Top Guru Holdings index (NYSE:GURU) supposedl follows hedge funds based on their 13F filings with the SEC for each quarter.
A similar fund was opened by AlphaClone last week. The fund name is the AlphaClone Alternative Alpha Index (NYSE:ALFA). Although, we have not examined this fund in particular.
This article focuses on the GURU ETF.

The funds seem like an interesting investment, and the idea may well catch on, but there are many reasons to be wary. Many investors will know the facts stated below, but it is necessary to reiterate them.
By definition, in a hedge fund’s 13F filings they disclose what equities they were holding at the end of the previous quarter. These disclosures have to be made within 45 days of the close of the quarter.
First of all, the 13F filings which the ETFs are ‘tracking’ will not clone hedge fund performance. The filings have to be made, legally, within 45 days of the end of a quarter. Most funds wait out that entire period and file their reports on the last possible day.
That leaves the new ETF at least 45 days behind the market. Much can change in a 45 day period, and the ETF will be vulnerable to those changes. This leaves the ETF far behind both the long thought out and split second decisions made by hedge funds. It is the brain power behind these funds that lead to their success.
The fund will only track hedge funds that disclose more than $500 million in its ETF filings. It will also weed out hedge funds that tend to have a high equity turnover, though it is not clear what the fund considers high.
Hedge funds tend to hold more than just equities in their portfolios. They hold bonds and commodities and many other types of investment. Most movements unaccounted for by the index, leading to even greater inaccuracies along with the market lag.
Seth Klarman’s Baupost Group is an excellent example. It has $24 billion under management but only about $3 billion in equities. The other $21 billion, remarkably few people know what it consists of. We have sources at Baupost who told us its 22% cash, and the rest in a lot of private assets like real estate, along with many European stocks. Readers would not know that information if they were not viewing this article. Additionally, the GURU etf will not track 88% of Klarman’s fund holdings.
Institutional investors are required to file with the SEC when they purchase 5% of a publicly traded company. This is the 13D, or sometimes 13G filing and must be made within ten days of acquiring the stake.
The hedge fund tracking ETFs, which mimic on 13F filings, will not take these positions into account. They are in the public eye, but the hedge fund ETF does not see them. This is another significant inaccuracy and disadvantage.
ETFs can be dangerous. We’ve seen that before. The instruments are little understood and untested in many market environments. The general ETF problems apply to hedge fund ETFs, but they are not the crucial issue here.
The issue is that these funds that purport to follow the moves made by the biggest and most successful hedge funds do nothing of the sort.
Retail investors looking to mimic hedge funds may be attracted to these ETFs. Like everything else in finance, there are no promises. The design is poor, and with the Guru X following 68 funds, the cumulative disconnect between the ETF and the index it is supposed to follow is a chasm.

What's in a name? Baupost Group

Teaching, it has been said, provides its own reward. For a group of professors at the Harvard Business School, having Seth Klarman – founder of Boston-based hedge fund firm Baupost Group – as a pupil proved to be a little more than that.
Baltimore-raised Klarman impressed his professors at Harvard Business School to such an extent that a group of them pooled their money to help him form his firm, the founder using the first letters of said seed investors’ last names as the basis for the endeavour’s name – Baruch, Auerbach, Poorvu and Stevenson.
Klarman has proved he warranted his professors’ faith by returning 19% annually since the fund launched in May 1982. Baupost, among the world’s 20 biggest hedge fund managers, is now thought to oversee AuM of around $24bn.
The successful hedge fund manager wrote a book in 1991 called Margin of Safety, that outlines his investing philosophy. The out-of-print book now sells on Amazon for upwards of $800. One suspects Baruch, Auerbach, Poorvu and Stevenson have their own copies already. No doubt signed by, surely, their most rewarding investment to date.

Seth Klarman Buys More Idenix Pharma, NovaGold, Theravance Inc, Sells Microsoft, BP, Genworth

Renowned value investor Seth Klarman just reported his first quarter portfolio. He did not buy any new stocks, but added to his positions in Idenix Pharma, NovaGold, Theravance Inc. He reduced his positions in Microsoft Corp, BP Plc. He sold out his position in GenWorth, PDLI Biopharma, Targacept Inc. As of 03/31/2012, The Baupost Group owns 20 stocks with a total value of $3 billion.

We have reported before that Seth Klarman gave up Targacept; sold out this position in our Real Time Picks . Mr. Klarman apparently has given up hope that the company will recover from its stock price collapse.

In understanding how Seth Klarman invests, we can look at his own words. He separates value investors into three categories. The first group buys cigar butt at cheap prices. The second buys high quality companies at low prices. The third buys high quality companies at fair prices. He thinks that Warren Buffett belongs to the third group; he himself belongs to the first group.

These are the details of the buys and sells.

• Added Positions: IDIX , NG , THRX ,
• Reduced Positions: MSFT , BP , ALR , MGAM ,
• Sold Out: GNW , PDLI , TRGT ,

Seth Klarman Betting Big On These 2 Stocks

Seth Klarman's Baupost Group is one of the largest hedge funds and regarded very highly in the world of "Graham-Dodd" value investors. Seth Klarman is also the author of "Margin of Safety" (which is out of print and retails for $1,500), which reflects his views on investing and he is revered among investors. After graduating from Harvard Business School one of his professors, Bill Poorvu (also known as a shrewd real-estate investor), asked him to help manage money for his company Baupost (which combines the names of his partners Howard Stevenson, Jordan Baruch and Isaac Auerbach).
While Baupost is not solely focused on U.S. equities, because of Klarman's long-term view and relatively low turnover, there is a lot of information to be gleaned from looking at his reported equity positions over time. This reason, coupled with Klarman's stock-picking ability, makes Baupost one of the more profitable funds to clone over time and is included in our AlphaStratus Select portfolio.
In Q4 of last year, Klarman made some big changes in the portfolio, most notably:

• Shares in Theravance Inc. (THRX) increasing 42%
• Shares in NovaGold (NG) Increasing 49%
• Shares in PDL BioPharma (PDLI) decreasing 49%
• Shares in Idenix Pharma (IDIX) increasing 127%

In Q1 of this year, Klarman didn't add any new stocks but dropped: PDL BioPharma, Targacept Inc. and Genworth Financial (which was a top 10 position). Notable changes among top 10 positions in Q1 include:

• Reducing shares in BP by 22%
• Reducing shares in Microsoft (MSFT) by 42%
• Increased shares in IDIX by 46% (combined with an increase in market value to make it a top 10 position)
• Increased shares in NG by 34% (now a top 10 position)

NovaGold was a new position in Q3 2011 (5M shares) and Klarman added 2.5M shares in Q4 2011 and another 2.5M in Q1 2012. This is a popular stock among hedge funds with Tradewinds, Paulson & Co., York, Chilton and Blue Ridge all holding meaningful positions:

Idenix Pharmaceuticals Inc. started in the portfolio in Q2 2011 at 1.2M shares ($6.2M dollars). Klarman has added significantly to this position every quarter since and the position now stands at $81M and represents about 3% of all reported longs (and is a top 10 position):

Seth Klarman Biography

Seth Klarman is the founder and president of the Baupost Group, a Boston-based private investment partnership, and the author of Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor a book on value investing.
Klarman grew up in Baltimore, where his father was a public health economist at Johns Hopkins University and his mother taught high school English.
Klarman is a graduate of Cornell University and Harvard Business School. At Cornell, he was a member of the Delta Chi fraternity, where he commonly studied while watching TV in the fraternity library/TV room. Despite this unorthodox study style, he achieved Phi Beta Kappa.
Before founding Baupost, Klarman worked for Max Heine and Michael Price of the Mutual Shares fund (now a part of Franklin Templeton Investments). He founded the Baupost Group in 1982, which managed USD 22 Billion as of 2010. Despite his unconventional strategies, he has consistently achieved high returns. He is a very conservative investor, and often holds a significant amounts of cash in his investment portfolios, sometimes in excess of 50% of the total. He often makes unusual investments, buying unpopular assets while they are undervalued, using complex derivatives, and buying put options. Klarman typically keeps a low profile, rarely speaking in public or granting interviews. He has recently, however, spoken pessimistically about the stock market and warned of future inflation.

In 1991, Klarman authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since has become a value investing classic. Now out of print, Margin of Safety has sold on Amazon for $1,200 and eBay for $2,000.
Klarman is the older brother of Harvard Law Professor Michael Klarman.

Klarman is the key U.S. investor behind The Times of Israel, an online English-language newspaper which reports on Israel, the region and the Jewish world.