market folly

Absolute Return + Alpha is out with an excellent in-depth profile of legendary investor Seth Klarman and his investment firm, Baupost Group. Stephen Taub has penned a nine page history lesson on the guru laced with various tidbits such as the fact that 'Baupost' is an acronym for the names of the four founders of the firm, but Klarman was left out of that because he 'came in later.' And, interestingly enough, we see that the founders took a chance on a relatively inexperienced Klarman at the time and paid him only $35,000 a year. That certainly turned out to be a hell of a deal (for the founders, anyways).

We've of course been longtime followers of Baupost Group given their patience, unique style, and impressive returns. We recently highlighted Seth Klarman's recommended reading list as a great resource for those trying to learn to be a better investor. And of course you can track down Klarman's own investing book, Margin of Safety to learn about his framework. Klarman's investing career speaks for itself and his is one of the few names that can be uttered in the same sentence as the almighty Warren Buffett.

While we've tracked Baupost Group's equity portfolio on an in-depth basis, this profile just goes to emphasize what little equity exposure Klarman truly has. Only around 7% of Baupost's overall assets under management are invested in equities. But, when you consider that these are the only publicly available disclosures, what other choice do we have? The article confirms that Klarman often prefers bonds as they are a senior security, offer more safety, and pay current principle and interest. Klarman is also famous for keeping large amounts of cash on hand (20-30%) as he lies in wait for screaming opportunities.

However, he currently doesn't see too many. As we've detailed thoroughly, Klarman is worried about the markets. He professed his concern at the recent CFA Conference in Boston and then again at the Ira Sohn Investment Conference. You don't see too many public appearances from the Baupost manager, so when he speaks, you listen. His concern for the markets obviously coincides with the fact that he now has around 30% of Baupost's assets in cash. While he doesn't focus on macro calls, Klarman will hold cash until he sees opportunities. And right now, he doesn't see too many opportunities.

Despite Klarman's typically high levels of cash, Baupost has still generated astonishing performance. It was up 22% in 2006, 54% in 2007, and around 27% in 2009. During the crisis in 2008, Klarman's funds lost "between 7% and the low teens." Still though, he certainly outperformed the market indices and much of his investment management brethren in a time of panic.

So while we'll have to wait and see if Klarman's extreme worry is duly warranted, you certainly have to take his words seriously as his pedigree is unquestionable. He says he refined his investing principles via mentors Max Heine and Michael Price and attributes much of his success to the fact he was able to learn under those talented managers. That experience, he says, is far more valuable than anything learned in a classroom. You certainly can't argue with that. And you can't argue with Baupost Group's 19% annualized returns, either.

The profile of Seth Klarman and Baupost Group is embedded below in its entirety courtesy of AdvisorAnalyst.com:



You can download a .pdf copy here.

Definitely an insightful and in-depth piece done by Stephen Taub. Make sure to take a free two week trial to Absolute Return + Alpha if you're interested in all things hedge fund. And as always, for more on Seth Klarman, you can continue to follow him via our coverage of Baupost Group.