Seth Klarman discussed the key principles and strategies that power his investing approach.
The Baupost Group boss searches far and wide for winning assets, and always limits his losses.
Klarman underscored the challenges of a bear market, and argued investing has become harder.
Seth Klarman delved into his investing philosophy, outlined his approach to finding bargain assets, and revealed how he's been preparing his analysts for a bear market in a rare interview with Harvard Business School.
The billionaire boss of Baupost Group — who's been heralded as the next Warren Buffett — also explained why he casts a wide net in his search for winning assets, warned against excessive risk-taking, and asserted that investing has become trickier over time.
Here are Klarman's 12 best quotes, lightly edited for length and clarity:
1. "Our approach is, 'Let's look a mile wide, let's look at everything that we can possibly figure out.' Then we find something that seems like it might be a bargain, an inefficient pricing, and we go a mile deep."
2. "We look between the silos. We look for cracks, we look for things leaking out, and we look for things that can't be easily siloed. There are fewer competitors in those, and if I love one thing, it's the lack of competition."
3. "When you just know a certain kind of company, or you only know 20 stocks well, it's the hammer-and-nail problem that you know those things really well, but you don't know anything about anything else. You have no perspective to say, 'Well, this is the best of those biotech stocks that I look at, but maybe even the best of them is not nearly as good as those stocks over there.'"
4. "When I'm running a portfolio, I want to make the same decisions in July as I do in January. I want to make them whether the market is up or down, I want to make them whether my fund is up or down, I want them the same at 8 a.m. on a Friday and 4 p.m. on a Monday."
5. "I'm of the view that every stock is a potential buy at one price, a hold at another price, and a sell at a higher price. What that means is that risk is related to what you pay, not just to what you buy."
6. "Warren Buffett never tried to make the most money. He never tried to get rich quick, he tried to get rich slow. That's what value investing is — it's a philosophy that stays away from the hot, flashy, trendy investments and focuses more on never losing big."
7. "Getting your capital back and trying to make a return — if I had to choose one of those, I'd always choose getting your capital back because you live to play another day. Losing money is a real challenge because it can be very, very hard to make it back. You always want to be thinking about not blowing up, not getting too far over your skis." (Funds that incur large losses often suffer further headaches in the form of client redemptions, higher employee turnover, recruitment challenges, and margin calls, Klarman said.)
8. "If we buy something and it goes down, you look at it, and you check and recheck your work, and then if nothing's different, you should like it more — it's a better bargain. It's like the sweater you bought yesterday going on sale today. You might be frustrated that you bought it yesterday, but what you should do is stock up, and we do that with stocks and bonds."
9. "A bull market teaches one kind of lesson, a bear market teaches very different lessons. I work really hard to make the team understand that there'll be a day when everything you buy goes down, everything you waited on will seem like a heroically good decision, and everything you thought about selling and didn't will make you [feel like a fool]. You'll also start to lose confidence in yourself, because everything you thought now looks wrong, so suck it up and deal with that."
10. "Even in the last few months, my team has come up with investments that nobody knew would trade, nobody knew anybody would write that policy, and nobody knew that anybody would agree to that contract. You need to be out there, you need to always be on your toes with your analytical skills finely honed. You're always thinking, you're always hanging by the hoop, because something interesting might happen."
11. "I pat myself on the back and say, 'Okay Seth, you were a schmuck 20 years ago and 10 years ago for not figuring it out, but you were smart to figure it out five years ago.'" (Klarman was discussing how value investors have largely overlooked Amazon and other fast-growing technology companies.)
12. "Investors have had to raise their game massively in the last several decades. I know I have, and I'm not done raising it, and I probably haven't raised it as high as it needs to be." (Klarman argued that investors today face more uncertainty about macroeconomic forces, market volatility, and how technology is reshaping industries.)
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