Klarman Holding 50 Percent Cash

[oddballstocks]

Everyone is so quick to make a comparison to the dot-com bubble, why is that?  Why is it bad if we're in a plain old bull market?  Why is everyone always so quick to call everything a bubble?

 

Because like Mr Klarman, we are (mostly) value investors. When stocks are going up...what else will we do?  ;D

 

Take your gains and enjoy life!!!  ;D

[stahleyp]

Something else to think about. Munger, at DJCO, held cash I heard for like 7 years and then deployed almost all of it in early 2009.

 

How much cash is he holding at DJCO today?

 

None, that I'm aware of. The point I was trying to make here is that sometimes, cash can be a good alternative. ;)

 

As I said before, I'm still mostly fully invested (ie somewhere between 95-100% in stocks) but a good chunk of my new money is going to cash unless something else interesting pops up. I have you and Packer to thank for that, by the way. ;)

 

Speaking of which I hope you guys can make it out to Omaha in May.

 

On another note, I don't think we even need to compare it to the dot-com bubble.  The way I look at it is like this. Money is being put into the market and into risk assets due to the Fed's policy. People are being forced to buy stocks since bonds are paying next to nothing. I don't see how that doesn't create out of whack pricing. From a historical perspective, bull markets tend to last about 4-5 years on average. We're basically there. Now, they can last much longer (1991-early 2000) but that is against the averages.  Do you think people can usually see bubbles? Not many value investors saw it in 2007. Income inequality is also at the highest point since around the Great Depression. Buffett's measure of GNP to market cap is also very much stretched. Heck, even in his annual report this year, he wasn't overly positive. I'm not saying that we're definitively in a bubble, but I am saying that people are getting more and more brazen. With all that being said, I do think the two market crashes we've had in the past 15 years has made people a bit more cautious.

[Saidal]

Has anyone gotten a hold of the full letter yet?

[indythinker85]

I dont think anyone will check out latest VII has nice excerpt from the letter, wish i could post it, but cant...

[Palantir]

 

 

On another note, I don't think we even need to compare it to the dot-com bubble.  The way I look at it is like this. Money is being put into the market and into risk assets due to the Fed's policy. People are being forced to buy stocks since bonds are paying next to nothing. I don't see how that doesn't create out of whack pricing. From a historical perspective, bull markets tend to last about 4-5 years on average. We're basically there. Now, they can last much longer (1991-early 2000) but that is against the averages.  Do you think people can usually see bubbles? Not many value investors saw it in 2007. Income inequality is also at the highest point since around the Great Depression. Buffett's measure of GNP to market cap is also very much stretched. Heck, even in his annual report this year, he wasn't overly positive. I'm not saying that we're definitively in a bubble, but I am saying that people are getting more and more brazen. With all that being said, I do think the two market crashes we've had in the past 15 years has made people a bit more cautious.

 

I agree that pushing money into the system can distort asset prices, but I would say that to some extent in a sense that is indeed the Fed's goal to do so. But I don't believe that implies that markets will see a dramatic reversal just because they are overvalued now.

 

I see what you're saying about 2007, but I think it's a mistake to use 07 as a template for right now, I think you will agree the economy is in a different place, and most market observers are looking at things very differently.

 

Ultimately, I believe that somebody's view of this is based on their political views. In 2008  a conservative, Nobel winning economist remarked that prices were very high because of high demand! So in a sense he viewed it as healthy and normal because prices were thought to be driven up by free market forces, but prices are equally high now, I don't feel he would view this as healthy and normal! Your reaction seems to be dependent on whether you are in favor of the Fed's policies or not, I think making it difficult to come up with a clear, unbiased answer.

[mvalue]

My personal impression of the psychology of the past few years (including some of my own!):

 

2009: Stocks were incredibly cheap, especially my picks. It was inevitable.

2010: Nice gains, but the pace has to slow and macro risks remain. Look at what smart guys like Klarman say.

2011: A new crisis. Just like Einhorn says, value investors can't just ignore macro.

2012: The market is looking expensive, but there are still bargains if you look hard enough.

2013: First half: The market is looking expensive. Second half: Bull markets can keep going longer than the typical myopic curmudgeon expects.

2014: Seth Klarman sure has flimsy logic. Why would anyone be so dogmatic? Cash is a headwind, just like Buffett says.

 

Klarman on tech/social media bubble (note: I cannot upload it but part of the latest Klarman letter is in the latest excerpt from VII) http://www.valuewalk.com/2014/03/klarman-on-tesla-motors-inc-netflix/

 

Maybe the actual letter has more insights than the summary, I can't comment on it since I haven't seen it, but pointing out a bunch of business trading at very high valuations doesn't really draw a convincing parallel with, for example, the dot-com bubble, IMO. To be clear: I'm not saying these companies aren't overvalued and that you should invest in them. Just that the parallel he seems to be making isn't that obvious to me.

 

Back in dot-com days, you had a whole index trading sky-high, and even old-economy companies were trading super high (Coca-Cola at 50x). But another important difference is that a lot of the dot-com companies were not real businesses. They had no customers and nobody had made money on the things they were doing before. They were truly tulip bulbs.

 

A lot of the current high flyers have actual businesses and real customers. Maybe they are very overvalued, but if the price of Netflix or Tesla drops by 50% or 75%, the business will keep going, or others will take their place because what they're doing is meeting real needs and providing real value. Maybe they'd have to cut R&D and fire employees if they couldn't raise as much equity, but they can be profitable.

 

Most of the dot-com companies had no other reason to exist than to IPO and extract money from delirious investors. Nobody had shown you could make money with what they were doing before, and after the crash, they almost all disappeared.

 

Twitter might be very overvalued, I don't know, but it has real users and could make real money selling ads and sponsored content and such. If there's a big correction, it won't just disappear as if it had been just a mirage all this time. And if you aren't investing in these high-flyers, I'm not sure they have such a big impact on the rest of the economy that you should worry..

 

I guess if we invert, we could ask: Is there any period over the past 100 years when there wasn't a bunch of high-flying stocks? Probably a few, but I doubt the rest of the time it always meant we were on the edge of the precipice. A correction? Sure. A bubble bursting, leaving rubble in its wake? I don't really see it, IMO. There can always be big external shocks (a big war, whatever), but I don't think valuation alone is bubbly overall.

 

Not that all this is worth much, but it's my 2 cents.

 

+100 very insightful.  I completely agree.  Yes maybe Twitter and Facebook and LinkedIn are overvalued, but they have real users and have a viable business model.  They are providing value to users and making money themselves.

 

Everyone is so quick to make a comparison to the dot-com bubble, why is that?  Why is it bad if we're in a plain old bull market?  Why is everyone always so quick to call everything a bubble?

[vinod1]

I think we are reading too much into Klarman's cash position. I do not think his cash position has anything to do with his macro views.

 

From my notes on Klarman but not sure if these are his exact words:

People like to ask: “What do you think about the dollar or the economy?” We have those views but we refuse to bet on them. Most people don’t have any edge in macro issues.

 

Also, it is hard to turn a macro view into a portfolio. When you go from interest rates to economy, to an industry, and to specific companies, you have to be right every step of the way and you have to be early.

 

When you go bottom up, all you have to do is to be right about the specific one-off situation. You can be wrong about the country, wrong about the economy, wrong about the interest rates, and still make money.

 

"Our 45% cash position is not a macro bet. It is just tough to find bargains now." (early 2006)

 

Vinod

[Liberty]

Vinod, I agree, that's why I pointed out Klarman's style. If I was investing like him, I'd probably build up huge cash positions too while waiting for big distressed debt events. His way obviously works, but I'm not sure if investors with different approaches are taking away the right things from his allocation (apples to oranges).

 

But it doesn't mean that we can't look at his macro comments - even if he says he doesn't act on them - to see if they are convincing. I agree we're probably overdue for a correction, but some people seem to read into his comments (and cash) that we're in very bubbly territory, and I'm not sure it's the case for reason I pointed out above.

 

But who knows? Maybe we're about to see a massive selloff and 30% drop...

[vinod1]

Vinod, I agree, that's why I pointed out Klarman's style. If I was investing like him, I'd probably build up huge cash positions too while waiting for big distressed debt events. His way obviously works, but I'm not sure if investors with different approaches are taking away the right things from his allocation (apples to oranges).

 

But it doesn't mean that we can't look at his macro comments - even if he says he doesn't act on them - to see if they are convincing. I agree we're probably overdue for a correction, but some people seem to read into his comments (and cash) that we're in very bubbly territory, and I'm not sure it's the case for reason I pointed out above.

 

But who knows? Maybe we're about to see a massive selloff and 30% drop...

 

Liberty - Completely agree with what you have posted in this thread.

 

Vinod

[indythinker85]

Seth Klarman On "Born Bulls", Bitcoin, & "The Truman Show" Market http://www.zerohedge.com/news/2014-03-08/seth-klarman-born-bulls-bitcoin-truman-show-market

[constructive]

+100 very insightful.  I completely agree.  Yes maybe Twitter and Facebook and LinkedIn are overvalued, but they have real users and have a viable business model.  They are providing value to users and making money themselves.

 

Everyone is so quick to make a comparison to the dot-com bubble, why is that?  Why is it bad if we're in a plain old bull market?  Why is everyone always so quick to call everything a bubble?

 

I think if you look carefully, you may be surprised by how many public companies these days are unprofitable compared to past periods (other than the dot-com bubble). Pre 1990s it was rare to IPO unprofitable or heavily indebted companies - now it is normal.

 

My sense is that the action in penny stock pump and dumps is up a huge amount in the last year.

 

Many growth darlings are also performing worse rather than better the past year or two - look at AMZN, CRM, etc. A few years ago they were growing income/free cash flow - now in order to grow, they need to lose money.

[moody202]

 

I think if you look carefully, you may be surprised by how many public companies these days are unprofitable compared to past periods (other than the dot-com bubble). Pre 1990s it was rare to IPO unprofitable or heavily indebted companies - now it is normal.

 

My sense is that the action in penny stock pump and dumps is up a huge amount in the last year.

 

Many growth darlings are also performing worse rather than better the past year or two - look at AMZN, CRM, etc. A few years ago they were growing income/free cash flow - now in order to grow, they need to lose money.

 

My opinion is that it's hard to compare today's market to pre 90's as there were no software companies back then. If I look at today's market, the cloud/mobile/big data companies are overvalued as they have to execute perfectly to deserve their current valuations. However, if you look at traditional brick and mortar businesses, I don't see overvaluation.

[cubsfan]

 

I think if you look carefully, you may be surprised by how many public companies these days are unprofitable compared to past periods (other than the dot-com bubble). Pre 1990s it was rare to IPO unprofitable or heavily indebted companies - now it is normal.

 

My sense is that the action in penny stock pump and dumps is up a huge amount in the last year.

 

Many growth darlings are also performing worse rather than better the past year or two - look at AMZN, CRM, etc. A few years ago they were growing income/free cash flow - now in order to grow, they need to lose money.

 

My opinion is that it's hard to compare today's market to pre 90's as there were no software companies back then. If I look at today's market, the cloud/mobile/big data companies are overvalued as they have to execute perfectly to deserve their current valuations. However, if you look at traditional brick and mortar businesses, I don't see overvaluation.

 

Actually in the 80's there were many, many software IPO's - and I don't remember any that did not have positive earnings or high revenue growth.

Microsoft came out in the thick of them - in 1986, I believe. But I worked for 3 of these IPO's - they did not get crazy valuations until the

late 90's. And none of the software companies had any debt.

 

[Liberty]

I think the internet + globalisation changed expectations significantly because it means that these asset-light software companies can grow much faster than before. Software in the 80s was mostly sold on diskettes and/or installed by IT departments, and companies took a lot longer to get out of their home country and expand internationally.

 

Now, in a few years a company like Facebook can go from a university dorm to over a billion users around the world. That certainly makes a difference in investor expectations, and so they will pay more because they expect more growth.. This land grab mentality also makes it a higher priority to grow first and then monetize rather than wait around to find the best business model and then try to grow.

 

Just a theory. I'm not saying it won't end in tears for many.

[moody202]

To illustrate overvaluation, What'sApp was bought of 19B and SnapChat owners declined a $3B offer. How in the world are these companies worth these valuations when neither one of them produces a dollar of revenue (not profit) if I am not mistaken!

 

Commenting on the buyers, Google is in so many different business models at this point but FaceBook is essentially a one trick pony and seem to have been scared out of their minds on declining usage numbers in Asia so bought What'sApp as survival strategy. To add, most of the people in US don't even know what What'sApp is!

[constructive]

 

I think if you look carefully, you may be surprised by how many public companies these days are unprofitable compared to past periods (other than the dot-com bubble). Pre 1990s it was rare to IPO unprofitable or heavily indebted companies - now it is normal.

 

My sense is that the action in penny stock pump and dumps is up a huge amount in the last year.

 

Many growth darlings are also performing worse rather than better the past year or two - look at AMZN, CRM, etc. A few years ago they were growing income/free cash flow - now in order to grow, they need to lose money.

 

My opinion is that it's hard to compare today's market to pre 90's as there were no software companies back then. If I look at today's market, the cloud/mobile/big data companies are overvalued as they have to execute perfectly to deserve their current valuations. However, if you look at traditional brick and mortar businesses, I don't see overvaluation.

 

I'm not just talking about social media and cloud/mobile/big data. There are many areas of the market with very high multiples: biotech, green energy, healthcare IT, internet retail, semiconductors, 3d printing, etc.

[plato1976]

semiconductor 's PE is ok

 

Intel, qualcomm, ...

 

 

I think if you look carefully, you may be surprised by how many public companies these days are unprofitable compared to past periods (other than the dot-com bubble). Pre 1990s it was rare to IPO unprofitable or heavily indebted companies - now it is normal.

 

My sense is that the action in penny stock pump and dumps is up a huge amount in the last year.

 

Many growth darlings are also performing worse rather than better the past year or two - look at AMZN, CRM, etc. A few years ago they were growing income/free cash flow - now in order to grow, they need to lose money.

 

My opinion is that it's hard to compare today's market to pre 90's as there were no software companies back then. If I look at today's market, the cloud/mobile/big data companies are overvalued as they have to execute perfectly to deserve their current valuations. However, if you look at traditional brick and mortar businesses, I don't see overvaluation.

 

I'm not just talking about social media and cloud/mobile/big data. There are many areas of the market with very high multiples: biotech, green energy, healthcare IT, internet retail, semiconductors, 3d printing, etc.

[udravi]

Might be interesting :

Klarman warns of impending asset price bubble, FT article : 09 March 14

http://www.ft.com/cms/s/0/6dd806e2-a627-11e3-9818-00144feab7de.html

Quote from the article : Mr Klarman wrote in a private letter to clients: “When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ . . .  Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

[fareastwarriors]

Might be interesting :

Klarman warns of impending asset price bubble, FT article : 09 March 14

http://www.ft.com/cms/s/0/6dd806e2-a627-11e3-9818-00144feab7de.html

Quote from the article : Mr Klarman wrote in a private letter to clients: “When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ . . .  Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

 

 

Easier to see for free here at http://www.cnbc.com/id/101479544

 

[Kraven]

For someone as publicity shy as Klarman he sure is making some noise.  He's on his way to becoming the next Marc Faber.

[stahleyp]

For someone as publicity shy as Klarman he sure is making some noise.  He's on his way to becoming the next Marc Faber.

 

To be fair man, it does say "The Baupost Group declined to comment" according to FT. ;)

[Kraven]

For someone as publicity shy as Klarman he sure is making some noise.  He's on his way to becoming the next Marc Faber.

 

To be fair man, it does say "The Baupost Group declined to comment" according to FT. ;)

 

Like when Howard Marks' letters say "Confidential" on every page.

[stahleyp]

For someone as publicity shy as Klarman he sure is making some noise.  He's on his way to becoming the next Marc Faber.

 

To be fair man, it does say "The Baupost Group declined to comment" according to FT. ;)

 

Like when Howard Marks' letters say "Confidential" on every page.

 

Nah. Baupost actively forces people to take down the letters when they're posted (I'm assuming that bits and pieces can be published). Valuewalk had some issues with it a while back. I can hop onto Oaktree's site and get Marks' letters. If you know of a place I can get Baupost's, I'd love to know!

[APG12]

This is the largest excerpt I've seen yet: http://www.gurufocus.com/news/250403/seth-klarman-2013-letter-to-investors-the-truman-show

[indythinker85]

This is the largest excerpt I've seen yet: http://www.gurufocus.com/news/250403/seth-klarman-2013-letter-to-investors-the-truman-show

 

Baupost is still enforcing, just they are being more clever about it (cannot go into detail). I assume Baupost will ask for this to be removed (no way to claim fair use if you add no analysis to piece) so save it while you can!