"Once you adopt a value-investment strategy, any other investment behaviour starts to seem like gambling."
Seth Klarman - Investor and Hedge fund manager
Net Worth $1.55 Billion (February 2017)
Net Worth $1.55 Billion (February 2017)
Seth Andrew Klarman (born May 21, 1957) is an American Investor and Hedge fund manager. He is currently the chief executive and portfolio manager of the private investment partnership Baupost Group. Like many other value investors, Klarman has been able to outperform the market by a substantial margin. Between the period 1983-2014 Klarman's firm posted a CAGR of 17% and according to the most recent figures obtained Baupost's three private partnerships have generated annual returns of 19% since inception. Klarman is a disciple of the Ben Graham approach to value investing and places great importance on the mitigation of risk and the importance of a margin of safety. Below is a summary of Klarman's investment strategy.
Klarman's investment strategy
- Focus on complicated investments - Klarman is attracted to investment opportunities which are hard to analyse as this increases the probability that a mispricing exists as other investors are not willing to put in the extra time and effort to understand them.
- Pay attention to special situations - Klarman will pay close attention to 'special situations' in order to find potential investment opportunities. In general, the market tends to overlook special situations as they are either misunderstood or disliked. Fund managers may be prohibited from investing in them and they may fly under the radar of the wider investment community. Common stock holders who receive shares through spin-off distributions tend to sell as they have neither the time, nor the interest, to dig deeper in search of value.
- Pay attention to demutualizations - From time to time companies with a mutual structure will demutualize and go public. As a general rule, new shareholders receive shares in the company and the proceeds from the IPO. This basically means that they get the business for free, irrespective of the IPO price. Evidence also shows that the operating performance of companies tends to improve post-demutualization as the profit mechanism and entrepreneurship comes into full force. Klarman will take the time to examine these investments as the returns can be high.
- Pay attention to stocks removed from an index - Klarman is attracted to companies which are removed from an index. Once removed forced selling ensues as funds which either, use the index as their benchmark, or which track it, offload their positions. Companies which are removed from an index have typically under-performed it prior to their expulsion. This means that they are likely already undervalued and will become more so under heavy selling pressure.
- Look for value in emerging markets - Klarman often looks for value in emerging markets where information may not be readily available and accounting rules may be opaque. Since the investment crowd is discouraged from looking at these markets there tends to be a greater abundance of value to be found.
- Buy on a down-scale in bear markets - Klarman suggests that intelligent investors are aware of the folly of picking a market bottom, for this reason it makes sense to buy on a down-scale in the knowledge that any undervalued securities purchased may fall lower prior to a correction in the mis-pricing.
- Hedges can be utilized for protection or investment gains - Klarman often uses hedges in order to protect his portfolio from down-side risk or to capitalize on corrections in overvalued securities. Between 1996 and 2000 Klarman hedged his portfolio, whilst this was a drag on his performance it paid off after the dotcom bubble imploded.
- Avoid unnecessary distractions - Much like other successful value investors, Klarman avoids the distractions of the financial media. He is known to not have a Bloomberg terminal in his office and places great importance on self-reliance to generate investment ideas. This reduces the risk of bias clouding one's judgement and avoids the costs incurred with costly subscriptions.
To find out what stocks Seth Klarman holds in his portfolio see here