Part 1
Part 2
Part 3
Part 4
Part 5
Oct 30, 2009
Oct 23, 2009
Oct 20, 2009
Interview of Seth Klarman - Absolute Return+Alpha
Seth Klarman Interviewed by Absolute Return+Alpha. Its an old article but a pretty interesting one.
25 June 2008
"We're not the stereotypical hedge fund in terms of an idea a minute. We come in with a view that a security is trading for less than it’s worth, and we buy it."
How did you decide value investing was for you?
I was fortunate enough when I was a junior in college — and then when I graduated from college — to work for Max Heine and Michael Price at Mutual Shares [a mutual fund founded in 1949]. Their value philosophy is very similar to the value philosophy we follow at Baupost. So I learned the business from two of the best, which was better than anything you could ever get from a textbook or a classroom. Warren Buffett once wrote that the concept of value investing is like an inoculation- — it either takes or it doesn’t — and when you explain to somebody what it is and how it works and why it works and show them the returns, either they get it or they don’t. Ultimately, it needs to fit your character. If you have a need for action, if you want to be involved in the new and exciting technological breakthroughs of our time, that’s great, but you’re not a value investor and you shouldn’t be one. If you are predisposed to be patient and disciplined, and you psychologically like the idea of buying bargains, then you’re likely to be good at it.
What traits in Heine and Price influenced you?
Max Heine was great at not looking at what something was called, what its label was. He looked at what it actually was. For example, back in the late ’70s, Mutual Shares was buying the bonds of bankrupt railroads, and I think a lot of people would have said, “They’re bankrupt,” and “Who needs railroads?” Max and one of his partners knew how many miles of track the railroad had, what the scrap steel on the track could have been sold for and which railroads might have wanted pieces of those networks. They also knew what the real estate rights above the terminals were worth.
Michael Price was fabulous at pulling threads. He would notice something, and then he would get curious and ask questions. And one thing would lead to another thing, and that would lead to another thing. I remember a chart that Michael made of interlocking ownership of mining companies that was an extension of a thought where one good idea led to another and had the potential to lead to many more if the threads kept being pulled. That was a great lesson — to never be satisfied. Always be curious.
Value is your mantra.
We don’t even think of ourselves as a hedge fund. We see ourselves as basically long-only investors. Unlike hedge funds, we don’t leverage the portfolio — never a nickel of portfolio leverage. We have a minimal amount of shorts, currently less than 1 percent of the total assets. We’re not the stereotypical hedge fund in terms of an idea a minute. We’re very bottom up, not top down. We don’t come into the office with a view that interest rates, the dollar or the economy are going to do this or that. We come in with a view that this particular asset or security is trading for less than it’s worth and we want to buy it. We have a different approach than a lot of, quote, “hedge funds.”
What were some of your best value investments?
Distressed-debt investments where we owned the senior debt. That is a favorable place for a value investor. You have a margin of safety since, as things go bad, people who are junior to you are the ones who lose value before you do. Second, the bankruptcy process itself is a catalyst. A cheap stock can stay cheap forever, but if you own a bankrupt bond, the process of emerging from bankruptcy and distributing new securities offers a practical catalyst to realize the value. Back in 2001, 2002, we successfully invested in the debt of funeral home companies like Service Corp. International and Stewart Enterprises. We were investors in Xerox Credit Corp. debt.
Biggest mistakes?
There are too many examples that we could say, “Ah, that was right in our sweet spot, and we should have had it.” All investors need to learn how to be at peace with their decisions. We as a firm are always going to buy too soon and sell too soon. And I’m very at peace with that. If we wait for the absolute bottom, we won’t buy very much. And when everybody’s selling, there tends to be tremendous dislocation in the markets.
What’s the secret to success?
Every manager should be able to answer the question, “What’s your edge?” This isn’t the 1950s, when all you had to do was buy a corner lot and build a small drugstore and it gradually became incredibly valuable land or you owned a skyscraper or you built a small shopping center and it became the big regional mall. The market’s very competitive; there are a lot of smart, talented people, a lot of money chasing opportunity. If you don’t have an edge and can’t articulate it, you probably aren’t going to outperform.
Why do some hedge fund managers fail?
Their clients are pressuring them for short-term results, or they think their clients want short-term results. That’s probably the biggest problem for professional money managers. It makes it very, very hard for an investor to hold a stock that’s going down, to take a contrary viewpoint. I also think leverage is a great risk. If you look at hedge fund failures, virtually all of them were on the back of excess leverage.
Are you worried about the hedge fund industry becoming too crowded?
If you took some of the people in your [Hall of Fame] group and compare what they do with what we do, there would be no overlap of positions. Probably ever. So are there too many? No. It’s not competition for us, but yes, more and more money has gone into the kinds of strategies many hedge funds follow. On the other hand, there are also some bad hedge funds — overleveraged hedge funds — and those are the causes of tremendous selling opportunities. When they get in trouble, they may be forced to sell at bargain prices.
Is it getting more difficult to find value?
Sure, but I can’t worry too much about things I can’t control. If suddenly tomorrow I got the conviction that all securities were efficiently priced, that nothing was dropping to levels where I cared about it, I would be happy to close up shop. But human nature makes it hard for the markets to be efficient. As recently as earlier this year, there were days when it felt to a lot of people like the world was ending, that we were staring into some kind of abyss of financial distress, and a lot of buyers weren’t buying. Those were interesting days. We were looking for bargains, and the Fed massively intervened, and people decided it was safe to invest again, and the markets worked out. So the question is not, Are people smart, are people sophisticated, do they have clever ways of looking at things, are they looking in the right areas? The question is, Are there periods when none of that matters because their human natures get the best of them?
What’s your opinion on hedge funds going public?
It’s a terrible mistake. One of the worst days for the hedge fund industry was the day the first one became public. As an investor, you do best when you think about what’s in your client’s interest, which is managing a reasonable amount of money that will earn a good return with limited risk. When you go public, you change that risk-return equation and start thinking about how much money you can make. It becomes a business where the client relationships don’t have to be longer than the next quarter and the talent can leave and the clients can leave.
Name one of the most pressing issues the world faces today.
It would be great if we got a long-term energy policy in this country, because if we could put a floor under the price of oil, we could enable alternatives to spring up. We can’t risk oil going back to $40, and we’re just so shortsighted and stupid about that. We could have a global war over energy if we’re not careful.
What’s your philosophy when it comes to philanthropy?
I’m not a big fan of giving to endowments, because people in endowment situations tend to give away the minimum. I believe problems are compounding faster than the money, so spending more money sooner rather than later is more likely
to address a problem. I’m interested in situations where you get a sizable bang for the buck, where it’s proven that intervention is effective and where even a relatively small amount of money or a relatively targeted amount of money can change the game.
Oct 15, 2009
Thouhgts Before Diwali...
Wish you all HAPPY DIWALI AND A PROSPEROUS NEW YEAR!!!
In last 10 months, Mr.Markets have tought me lot of things. I have been in this field investing my own money for last 4 years, but the most i have learned is in this Bear phase. It has been a great learning curve for me and i feel that without such days and months, it would have been difficult for me to understand and differentiate between "what is quality" and "what is junk". Period between Jun 07 and Dec 07, everything in the market was looking Quality. But its only in the tough times the difference between the two is realised.
The story so far...
In last 10 months i saw the best of companies available at mouth watering prices. Though could not grab on to all of it, but yes, could take the opportunity to invest in couple of good businesses. What i saw in last 4 months was that my money doubled and in few cases easily went 3- 4 times. Mind blowing money in short span!! But if it was so easy to make money so fast, i would not have been in the business of Investment. Before Diwali we have seen Indian markets giving great returns to Investors and has revived the lost confidence among the Domestic and International investors. Lot of ideas(businesses) were floating at their bottom 8-9 months back, and Mr. Market was offering it at dirt cheap levels, but perception of the people investing was different. Nothing dynamic has happened except the Goverment coming with full majority. But that has just changed the perception not the real Business fundamentals from day 1.
What i am trying to draw the point is that we were not at such bad condition at that point of time than what we had perceived and the same is again at current situation. People perception has changed and PE's are at times driven by perception.
The returns that I have capped right now are just "reversion to the mean". But now the real battle begins when the difference between " Man and Boys" will be realised and will see few Boys getting matured to become Man, and real Mans taking up further to next leap.
I am not smart enough to predict the market, but what i have learned in Value Investing is that 'buy' when you find it at a discount to its real value or what we call intrinsic value and the Indian markets in my view are not available at a discounted value at current point of time. I dont call it a 'Sell' just because there is no value, but avoid buying at this point of time. We have to be alert to spot the Right Boys and Hold onto the Mans for our Portoflios to excel on 3 year period.
I am confident that we will be able to spot the Right Mans and the Right boys, in this market. The key to be succesful in it, would be to focus what "Graham tought years back, Buy it when the price we find is at a discount to its value" We will need to have patience for buying,holding it would be a second stage.
Happy Investing in the New year!!!
Oct 13, 2009
Book Review - "Margin of Safety" - by Seth Klarman - Chapter 1
In Coming few months I shall cover important highlights from every chapter of "Margin of Safety" - by Seth Klarman. The book is a master piece written by Seth Klarman. His words are full of wisdom. His thoughts should definitely have an impact on real investors. I in my own way shall try to cover the key highlights from Chapter to Chapter and from topics to topics. I hope that this shall be useful to all those who don't posses the book. This book is not available in the market and is auctioned at Sky high prices on Amazon. I wish my effort will help all the readers who plan to read this book.
Oct 12, 2009
Value vs. Glamour Revisited - Brandes Institute
Value vs. Glamour Revisited: Historical P/B Ratio Disparities and Subsequent Value Stock Outperformance
The Brandes Institute recently revisited its Value vs. Glamour research, focusing on the relationship between the valuation difference in price-to-book ratios, and subsequent relative performance.
The Institute discovered that, historically, when the difference in P/B ratios between value and glamour stocks was at or near its peak, value stocks delivered meaningful outperformance over the subsequent 5-year period. This article documents the recent expansion in the gap between median P/B ratios for value and glamour stocks and examines the implications for investors.
The Brandes Institute recently revisited its Value vs. Glamour research, focusing on the relationship between the valuation difference in price-to-book ratios, and subsequent relative performance.
The Institute discovered that, historically, when the difference in P/B ratios between value and glamour stocks was at or near its peak, value stocks delivered meaningful outperformance over the subsequent 5-year period. This article documents the recent expansion in the gap between median P/B ratios for value and glamour stocks and examines the implications for investors.
Oct 8, 2009
Cracking the Color Code
Drawing on the latest scientific findings and technology, Cracking the Colour Code is a documentary series for people who are seeking answers to many of the questions that relate to colour and who, at the same time, wish to enjoy the incredible diversity and sensation that colour has to offer in our world.Based on three years of extensive research, Cracking the Colour Code draws on a range of disciplines and leading experts – including physicists, neurologists, artists, ethnologists, colour consultants, historians, artisans and marketing executives – each in some way intimately concerned with the nature and power of colour. Each offers insights – even new discoveries – that will challenge our understanding of colour.
The Nature of Colour
The Making of Colour
The Power of Colour
Common Mistakes Even Smart Investors Make
Common Mistakes Even Smart Investors Make
In this Interview Mr. Michael Mauboussin talks about the Individuals psychoogy which actaully leads to Smart Investors make Common mistakes. How small things around us force us to make decision which are not our eternal.
In this Interview Mr. Michael Mauboussin talks about the Individuals psychoogy which actaully leads to Smart Investors make Common mistakes. How small things around us force us to make decision which are not our eternal.
Oct 6, 2009
Mr.Tilson on Value Investing
Mr. Tilson at Value Investing Conference. An extensive 2 hour of learning from a great Value Investor
1929 Wall Street Stock Market Crash
The most devastating stock market crash in the history of the United States; Its from my favorite documentary by PBS - New York.
Dan Ariely on - Are we rational when we make Decisions?
Behavioral Economist Dan Ariely, the author of Predictably Irrational, uses classic visual illusions and his own counterintuitive research findings to show how we're not as rational as we think when we make decisions.
Oct 5, 2009
Seth Klarman on Psychology of Leadership at Harvard
Seth Klarman on Psychology of Leadership at Harvard - He is simply genius
Warren Buffett Talks Business
This is amazing interview of Mr. Buffett, in which he discusses on Business,how is looks into it
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