Big excerpt from Baupost 2012 annual letter

[stahleyp]

http://www.valueinvestorinsight.com/pdfs/IssueTrialFE2013VII.PDF

 

Starts on page 22

 

props to valuewalk.

[giofranchi]

Thank you! Much appreciated!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[rijk]

great article, thanks for sharing!

 

regards

rijk

[Guest hellsten]

Thanks!

 

This is also my plan for 2013:

Extremely high prices, for example, are useful for taking profits. Were the markets to rise dramatically from today’s levels, we would

undoubtedly take advantage by selling into strength. Conversely, if the markets were to drop significantly, we would redeploy cash on hand to thoughtfully scoop up the bargains uncovered by the receding tide.

[berkshiremystery]

Thanks for posting  :)

[mhdousa]

Klarman is a great investor, but that's what he is.  He's not an economist and he's not a behavioral scientist.  He should lay off the moralizing and the macro.  This letter would be a lot more interesting if he actually discussed one of his investment theses in detail, but, of course, we get none of that.

 

[Shane]

It's a bit depressing to read, but I think what he discusses makes a lot of sense and I appreciate him laying his thoughts out.

[jay21]

Klarman is a great investor, but that's what he is.  He's not an economist and he's not a behavioral scientist.  He should lay off the moralizing and the macro.  This letter would be a lot more interesting if he actually discussed one of his investment theses in detail, but, of course, we get none of that.

 

I disagree with this because he is heavily involved in real estate and bond markets.  Interest rate environment is very important to him.

 

I also love the way Klarman can distill the important facets of value investing in a few paragraphs:

 

We clear a high bar before making an investment, and we resist the many pressures that other investors surely feel to lower that bar. The prospective return must always be generous relative to the risk incurred. For riskier investments, the upside potential must be many multiples

of any potential loss. We believe there is room for a few of these potential five and ten baggers in a diversified, low-risk portfolio. A bargain price is necessary but not sufficient for making an investment, because sometimes securities that seem superficially inexpensive really aren’t. “Value traps” are cheap for a reason – perhaps an inept and entrenched management, a poor history of capital allocation, or assets whose value is in inexorable decline. A catalyst for the realization of underlying value is something we seek, but we will also make investments without a catalyst when the price is sufficiently compelling. It is easy to find middling opportunities but rare to find exceptional ones. We conduct an expansive search for opportunity across industries, asset classes, and geographies, and when we find compelling bargains we drill deep to verify the validity of our assumptions. Only then do we buy. As for what we own, we continually assess and reassess to incorporate new fundamental information about an investment in the context of market price fluctuations. When bargains are lacking, we are comfortable holding cash. This approach has been rewarding – as one would hope with a philosophy that is painstaking, extremely disciplined, and highly opportunistic.

[racemize]

I think Klarman is the only of the "great" value investors that I just don't really like.  Something about the way he writes, or what he says, just doesn't work for me.

[texual]

We are a dying breed and part of me likes that we have a club and the club is awfully smart and that's all that makes a market. Good work on this community being focused on a single principle of value investing.

[steph]

Hey Racemize, I completely agree with you.  I never dared to say it, but reading 'margin of safety' was a big disappointment for me.  I probably expected too much...and I thought it was just another average investment book.

[jay21]

Hey Racemize, I completely agree with you.  I never dared to say it, but reading 'margin of safety' was a big disappointment for me.  I probably expected too much...and I thought it was just another average investment book.

 

I'm in the exact opposite camp.  Margin of Safety is the closet thing to a Holy Grail in investing imo.  Also, Klarman has fantastic quotes/paragraphs on investment process that sum up successful investing so well.

[Guest FFHfan]

Hey Racemize, I completely agree with you.  I never dared to say it, but reading 'margin of safety' was a big disappointment for me.  I probably expected too much...and I thought it was just another average investment book.

 

I'm in the exact opposite camp.  Margin of Safety is the closet thing to a Holy Grail in investing imo.  Also, Klarman has fantastic quotes/paragraphs on investment process that sum up successful investing so well.

 

I like Margin of Safety too.  Regarding his annual letter, part of it, could have been written by Robert Rodriguez or Roger Lowenstein. Prem Watsa has talked about the macro environment as has Warren Buffett. Klarman is doing the same.

 

Loved these sections: Antifragile and High Bar.

 

 

 

[mhdousa]

Hey Racemize, I completely agree with you.  I never dared to say it, but reading 'margin of safety' was a big disappointment for me.  I probably expected too much...and I thought it was just another average investment book.

 

I'm in the exact opposite camp.  Margin of Safety is the closet thing to a Holy Grail in investing imo.  Also, Klarman has fantastic quotes/paragraphs on investment process that sum up successful investing so well.

 

I like Margin of Safety too.  Regarding his annual letter, part of it, could have been written by Robert Rodriguez or Roger Lowenstein. Prem Watsa has talked about the macro environment as has Warren Buffett. Klarman is doing the same.

 

Loved these sections: Antifragile and High Bar.

 

I think there's a difference.  Prem (who devotes 1-2 sentences to macro in his letter) uses his macro thoughts to explain their investment thinking and process.  Somehow, Buffett is able to write a whole letter about the dozens of companies he owns and not mention the word "Bernanke" once.

 

Klarman devotes most of this excerpt to railing against everything that he sees wrong with the current macro environment.  There's clearly a political agenda with the letter.

 

In no way am I hoping this thread devolves into a political discussion.

 

 

 

[jay21]

I think there's a difference.  Prem (who devotes 1-2 sentences to macro in his letter) uses his macro thoughts to explain their investment thinking and process.  Somehow, Buffett is able to write a whole letter about the dozens of companies he owns and not mention the word "Bernanke" once.

 

Klarman devotes most of this excerpt to railing against everything that he sees wrong with the current macro environment.  There's clearly a political agenda with the letter.

 

In no way am I hoping this thread devolves into a political discussion.

 

Klarman is a very media shy person.  If he had a political agenda, I think he would go about his promotion differently (these letters aren't even supposed to get out to the public.  This was only published after someone asked him [i guess you could say he is only disseminating his political opinions as a counter to my response, but I don't think that his primary agenda]).

 

As I mentioned before, the bulk of his investments are fixed income and real estate, which are hugely affected by yield curves.  It is fine that he thinks and talks about easing a lot.  Also, his saying is "We invest bottom-up, but worry top down."  He's done his due diligence on his positions and is worried about what could turn what  he thinks are 50 cent dollars into 50 cent quarters.  A shift in the yield curve could do that.

 

 

OP, thanks for the link.  Also enjoyed Ackman's interview.  He's another guy who mentioned he could have permanent capital in the future.

[Palantir]

Mr Klarman, like many value investors seem to get really really weak and un-insightful when talking about macroeconomic issues and tend to distill their points into the same buzzwords of "easy money", "ticking time bomb", "debasement" etc. etc. Just like how last year, with David Einhorn's usual soundbites of "Ben Bernanke is printing too much money". Kind of disappointing. Buffett also has this problem, but thankfully, doesn't stray into it as much.

 

Would have been more insightful had he talked about his strength - finding undervalued securities, but he keeps that knowledge close to his vest, and we get this.

[beerbaron]

For Macro I usually only listen to Ray Dalio, he clearly understands how the economic machine works. Value investors usually don't make good macro analisys.

 

BeerBaron

 

 

[mhdousa]

Mr Klarman, like many value investors seem to get really really weak and un-insightful when talking about macroeconomic issues and tend to distill their points into the same buzzwords of "easy money", "ticking time bomb", "debasement" etc. etc. Just like how last year, with David Einhorn's usual soundbites of "Ben Bernanke is printing too much money". Kind of disappointing. Buffett also has this problem, but thankfully, doesn't stray into it as much.

 

Would have been more insightful had he talked about his strength - finding undervalued securities, but he keeps that knowledge close to his vest, and we get this.

 

I agree.  I wonder if we get value investors railing against quantitative easing because nothing pisses them off more than the rising tide lifting all boats.  How can you distinguish yourself if everything is going up?

[Palantir]

For Macro I usually only listen to Ray Dalio, he clearly understands how the economic machine works. Value investors usually don't make good macro analisys.

 

This. Ray Dalio's reports really have become my template for "understanding what's going on". I thought value investors were supposed to keep their eye on the ball, focus on finding undervalued securities and good micro opportunities and stay away from grand prognostication. Best example is the tripe Charlie Munger was preaching "civilized people don't own gold". Yeah ok.

 

I agree.  I wonder if we get value investors railing against quantitative easing because nothing pisses them off more than the rising tide lifting all boats.  How can you distinguish yourself if everything is going up?

 

Could be it, their mental models which are really designed to take advantage of pessimism on both the long and short side, which stops working.

 

 

[siddharth18]

In Value Investing, there seems to be a pervasive attribute that whoever has the most pessimistic view at any given time, is the most conservative and hence the shrewdest/smartest investor. Yes Klarman, we get it, that the US is deeply entrenched in trillions of debt and the hole is being dug deeper each passing day. Is he hoping for sort of change that will emanate from his lengthy ramblings or trying to justify his hum-ho returns?

 

Would've been more flattered if he said something along the lines of "even in the perilous period of the debt fueled economy, there seem to be some sectors/pockets in the market that continue to be attractive."

 

I came for the micro, but all I got was macro.

[mhdousa]

...his hum-ho returns?

 

 

What's the story here?

[moore_capital54]

Wow! reading this letter felt like reading my own 2012 letter!.. I have known for a while that Baupost was loading up on Gold (having personally met the brilliant Hiro Iwanaga, Baupost's Gold analyst at trade conferences as early as 2010) but its nice to see Klarman's conviction.

 

As I said in the other thread, either this is the first bull market in my 30 year career that I will sit out or the laws of economics will once again prevail and we are going to see a nasty resolution to all of this.

 

 

[goldfinger]

Wow! reading this letter felt like reading my own 2012 letter!.. I have known for a while that Baupost was loading up on Gold (having personally met the brilliant Hiro Iwanaga, Baupost's Gold analyst at trade conferences as early as 2010) but its nice to see Klarman's conviction.

 

As I said in the other thread, either this is the first bull market in my 30 year career that I will sit out or the laws of economics will once again prevail and we are going to see a nasty resolution to all of this.

 

So are you loading up on cash or loading up on gold?