The September/October 2010 edition of the Financial Analysts Journal (FAJ) includes a transcript of an interview with Seth Klarman, President and Portfolio Manager of The Baupost Group. The moderator was the Wall Street Journal’s Jason Zweig and the title of the presentation is “Opportunities for Patient Investors.” Klarman is a leading figure in investing, not just value investing.
The interview took place on the main stage at the 2010 CFA Institute Annual Conference and I was lucky enough to be in the audience for that event. The room was packed.
I have excerpted the parts of the interview, but please read the whole thing at http://www.cfapubs.org/doi/pdf/10.2469/faj.v66.n5.2 (one-time purchase required).
…Zweig: In a Forbes article in the summer of 1932, Benjamin Graham wrote, “Those with enterprise haven’t the money, and those with the money haven’t the enterprise, to buy stocks when they are cheap.” Could you talk a little bit about courage? You make it sound easy. You have great clients and great partners. Was it easy to step up and buy in the fourth quarter of 2008 and the first quarter of 2009?
Klarman: You may be skeptical of my answer, but, yes, it was easy. It is critical for an investor to understand that securities aren’t what most people think they are. They aren’t pieces of paper that trade, blips on a screen up and down, ticker tapes that you follow on CNBC.
Investing is buying a fractional interest in a business and buying debt claims on a business…if you have the conviction of your analysis–are sure that your analysis wasn’t optimistic or flighty or based on a snapshot of an economic environment that cannot tolerate any stress—then you will not panic…Our approach has always been to find compelling bargains. We are never fully invested if there is nothing great to do.
So, by being conservative all of the time—by being both a highly disciplined buyer to ensure that you hold bargains and a highly disciplined seller to ensure that you don’t continue to own things at full price—you will be in the right frame of mind. Avoiding round trips and short-term devastation enables you to be around for the long term.
Zweig: I once paraphrased Graham’s wonderful sentence as, An investor needs only two things: cash and courage. Having only one of them is not enough. And you are saying that courage is not just a matter of temperament but also a function of process.
…Zweig: If clients should give you more money when things are undervalued, do you give it back when markets are overvalued?
Klarman: Great question….Throughout my entire career, I have always thought size was a negative. Large size means small ideas can’t move the needle as much. You may be less nimble because you have larger positions. Today, we have $22 billion in assets under management, but 20 years ago we were at $200 million.
As we entered the chaotic period of 2008, we anticipated that things would start to get pretty wild. And so, around February 2008, for the first time in eight years, we went to our wait list because we recognized that the opportunities were likely to be both plentiful and large—and lumpy and arriving unpredictably…
… One of the nice things about our investment approach is that we always have cash available to take advantage of bargains—we now (May 2010) have about 30 percent cash across our partnerships—and so if clients ever feel uncomfortable with our approach, they can just take their cash back…
… I think returning cash is probably one of the keys to our future success in that it lets us calibrate our firm size so that we are managing the right amount of money, which isn’t necessarily the current amount of money.
Zweig: How do you decide whether you have the right amount of assets under management?
Klarman: Our capacity level is absolutely market dependent. We don’t want to be a distressed-debt firm that suddenly buys bonds at par. We want to buy bargains, and our only goal as a firm is excellence. I really don’t care if our firm has $5 billion or $25 billion in assets. And I don’t care to ever go public, to sell out, which would, I think, ruin our firm.
If my partners and I can go to bed every night and retire at the end of a long career feeling that we have done right by our clients, that we have put them first, that we have always thought about their interests before our own, that we haven’t gouged them and haven’t proliferated products, I am going to feel great…
…Zweig: You spoke of deploying capital and being fully invested in 2008 and 2009. Can you give an example of a situation that justified deploying your capital in the midst of a decline of that magnitude?
Klarman: We began by asking, Is there anything we can buy and still be fine in the midst of a depression? Our answer was yes…