“In capital markets, price is set by the most panicked seller at the end of a trading day. Value, which is determined by cash flows and assets, is not. In this environment, the chaos is so extreme, the panic selling so urgent, that there is almost no possibility that sellers are acting on superior information. Indeed, in situation after situation, it seems clear that fundamentals do not factor into their decision making at all.” – Seth Klarman
In a recent issue of the Idea Farm, Meb Faber starts a great profile on investing demigod Seth Klarman with this quote. Really stop for a minute and re-read it a couple times. Print it out and tape it to your monitor. Next time you live through a good market crash, recite it like holy writ.
The dirty little secret of the money management profession is that we all have Klarman envy. We don’t just want his returns; we actually want to be him, have his super-human emotional control, and be able to wield that power of that brain of his.
Alas, all of us mortals will have to settle for reading his out-of-print book–which sells on Amazon for thousands of dollars. So desperate are value investors to get their hands on a copy of Margin of Safety, I expect that plenty would be willing to do back-alley deals with men in trenchcoats.
At any rate, here is an excerpt of the profile:
Since founding Baupost Group in 1983, Klarman has grown it into a hedge fund giant managing as much as $30 billion. It’s flagship fund has churned out more than 17% annual returns since its founding, handily beating the S&P 500 rise of about 11% annually during that period, and doing it while often holding 40% or more of assets in cash…
How does he do it? Klarman explained his basic philosophy to television talk-show host Charlie Rose during a 2010 interview.
“Investing is the intersection of economics and psychology,” Klarman said. “The economics – the valuation of the business — is not that hard. The psychology – how much do you buy, do you buy it at this price, do you wait for a lower price, what do you do when it looks like the world might end – those things are harder. Knowing whether you stand there, buy more, or something legitimately has gone wrong and you need to sell, those are harder things. That you learn with experience. You learn by having the right psychological makeup.”
Klarman has a special knack for complex transactions that often come with limited liquidity. He has purchased real estate that was acquired by the U.S. government in the savings and loan collapse of the 1990s, dabbled in Parisian office buildings and drilled into Russian oil companies…
Although Klarman seems to delight in fishing for opportunity in obscure and complex deals, he is no slouch when it comes to stock picking. He runs concentrated portfolios, as is evidenced by his positions as of the third quarter of 2014. The top five represented the lion’s share of his invested assets…
As a long-term investor, Klarman doesn’t spend much time monitoring the daily movements of markets. His office features a desk piled high with papers, a computer, some half-filled water bottles, but no Bloomberg terminal, the device with access to market data that traders rely upon…
What Klarman prides himself on as much as making money is not losing it. He has had only two negative years (1992 and 2008).
And here’s a quote that will simultaneously make you love and hate Klarman: “When Charlie Rose asked Klarman to name his biggest mistakes, the Sage of Boston thought a moment but came up empty. ‘I have never really screwed up a lot,’ Klarman said.”
By the way, if you don’t already subscribe to Faber’s Idea Farm, you should. It’s full of good nuggets like these.