Apparently, Seth Klarman is in the market for capital. This is always news because Klarman has a reputation for shunning capital from new investors and frequently returning excess capital to existing investors. However, the author of the attached story has made the following leap:
“…the fact he is seeking cash from any source is somewhat encouraging.”
A closer look will reveal that the last time Klarman sought capital was early 2008, which Klarman verified in a speech that I attended at the CFA Institute’s Annual Conference in 2010. He raised that cash in early 2008, not because he wanted to put that cash to work immediately, but because he felt it was highly likely that markets would become distressed soon and that the best time to raise capital was before they became distressed.
For example, I tried desperately to raise capital for the first time in late 2008 and early 2009. I would eventually be more than fully invested by March of 2009 as I exploited all of the bargains that existed in that period. But, it was too late to raise cash in late 2008 and early 2009 when the best opportunities were just sitting there; trying to raise capital to invest was nearly impossible given the rampant fear.
As any good contrarian would, Klarman waited until the markets became distressed in late 2008 and then put all of that fresh capital to work. When Jason Zweig asked him at the CFA conference how easy it was for him to do that given all of the fear that existed, Klarman said it was remarkably very easy for him. I agree, the amount of low-hanging fruit was remarkable, which was why I went all in and even used leverage for the first time in the first quarter of 2009.
The point is this: the author of the attached story has it wrong. Klarman is not seeking fresh capital because he believes that there are plenty of bargains available now, which would be an encouraging sign. No, Klarman is seeking fresh capital now because he believes that markets will soon become distressed again. He will bide his time until then, and then he will pounce.
That is exactly what we are doing….again. We are nearly at a net long position of zero, the lowest since launching the fund. We have plenty of cash and shorts waiting for what seems like the most-telegraphed debacle in a long time. People do not change their behavior overnight on their own volition, but a massive change in perspective and behavior is what is required to make a real, permanent fix in the global economy.
Equity is going to have to be king again and that equity is not going to come from China, much as the optimists are hoping; it is going to have to come from savings and retained earnings, which is going to require a new way of viewing the world and of operating. Because most around the globe believe that they are entitled to much more than what they can earn, the disruptive forces could be devastating.
One important note: We are not macro investors nor do we place much weight on forecasts. In fact, we believe it is best to ignore forecasts and search for value company-by-company from the bottom up–to seek asymmetric opportunities–which is exactly how we operate. Our research is uncovering few bargains–few asymmetric opportunities that have a high margin of safety–so we think risks are high. To manage risk, we focus hard on seeing the world–the big picture–as it exists today based on facts that are knowable today, not forecasts. The biggest risk is not volatility, but high levels of asset prices relative to knowable, fundamental values–the lack of a margin of safety.
Those who think that the Mr. Market has already factored a debacle into asset prices must explain why, in equity markets, the CAPE is way above its historical average and Tobin’s Q is near its all-time high except for the peak reached during the dot com bubble. They must believe that one of the most outstanding spurts of global growth in history is just around the corner, as if the cotton gin, combustion engine, or microchip were just invented last month and will be put into mass production this month. Is the iPhone 4s or iPad 3 the equivalent of the cotton gin?