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.
Wednesday, October 17, 2012
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.
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