Friday, May 15, 2009

Seth Klarman Letters: 1995 - mid 2001

It is hard for me to overstate just how great these letters are. They are probably the best example I have ever seen of someone (and an entire firm) keeping his head cool and staying disciplined while just about everyone else was going crazy. A BIG thanks to Max for pulling the information off of the SEC web site and putting the letters in a nice format.


Related links:


A few quotes from Seth Klarman (from Quotes page):

“Value investing is at its core the marriage of a contrarian streak and a calculator.”

“If only one word is to be used to describe what Baupost does, that word should be: 'Mispricing'. We look for mispricing due to over-reaction.”

“At Baupost, we constantly ask: 'What should we work on today?' We keep calling and talking. We keep gathering information. You never have perfect information. So you work, work and work. Sometimes we thumb through ValuLine. How you fill your inbox is very important.”

“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.”


Klarman on position sizing (my transcription from one of his answers at last year’s Graham & Dodd Breakfast):

“It seems to me that, as we know, you diversify most of the diversifiable risk away from a portfolio by owning 20 or 25 positions, and that if one is able to tell a good investment from a bad, one should be able to tell a great investment from a good. So I see no sense in having the same size position with your best idea and your hundredth best idea to round out a 1% idea type of portfolio. When we take a concentrated position, I’d say a dozen times over 26 years, we have had a 10% or so position. It also depends on the definition: Is a position in a type of investment a position or is it only a particular issuer? So a little definitional clarity might also be needed. But in general, in one particular company’s securities, every 2 years or so we have a 10% position. Most of the time, we have 3, and 5, and 6 percent positions as our most favorite ideas. We will take them higher when a cheap position becomes much, much better a bargain or when there’s a catalyst for the realization of underlying value. We favor catalysts because it gives you a much shorter duration on the investment and greater predictability that you will in fact make money on that investment and aren’t subject to the vagaries of the market and the economy and business over a longer period of time. So we would not own a 10% position in a common stock that was just plain cheap unless we had a seat on the board and control, because too many bad things can happen. But we’d own a 10% position in a senior, distressed debt investment where there was a plan in place, where the assets were very safe – either cash or receivables or something where we could count on getting our money back, and where we saw almost no chance of principal loss over a couple of years and a chance of a very high, meaning 20% plus, type of return. So that’s how we think about it. I think when people make mistakes, it often is on both sides of diversification. Occasionally, new managers especially, that aren’t that experienced in the business, will have a 20% position or perhaps even two in one portfolio. And those two might even be correlated – [i.e.] same industry, [or] the same exact kind of bet in two different names. That’s absurdly concentrated; maybe not if you have enormous confidence and it’s your own money, but if you have clients, that’s just not a good idea. But 1% positions also are too small to take advantage of what are usually the relatively few great mispricings that you can find. When you find them, you do need to step in and take advantage.”