Seth Klarman (Trades, Portfolio) is one of the world’s most respected value investors, but he is relatively secretive, which is a shame because when he speaks it’s always informative and there’s something for all investors to learn.
Klarman sent his full-year 2017 letter to investors of his hedge fund Baupost earlier this week, and ever since the financial media have been dissecting his comments on Donald Trump. As a respected investor who really speaks to the press, these comments have come as somewhat of a surprise to his followers.
But aside from the political commentary, Klarman’s letter contains some helpful advice for investors about equity investing. Specifically, the comments focus on how important it is to view a company as a company, study the business from the bottom up and forget about the global macro environment, which is entirely unpredictable.
Pointless
In the letter, Klarman spends several paragraphs describing how pointless it is for investors, hedge funds and Wall Street analysts to try to predict the future of the global macro economy. With so many moving parts, it is impossible for analysts to arrive at a fundamental outlook and if they do, it’s more by luck than judgment. This being the case trying to predict and invest according to global macro predictions is a fruitless task, according to Klarman. Instead, investors should concentrate on single stocks.
Klarman has written many times about how important it is to view companies as companies; once you understand the nature of a business and value the businesses from the ground up with no regard to the rest of the market, it is easier to conclude whether the business is overvalued or undervalued. In today’s market, this is even more important. Quantitative easing has created an environment in which the rising tide will lift all ships, even those that would not normally be appealing to investors. What’s more, the rise of index trackers and ETFs that indiscriminately buy stocks no matter their fundamentals continue to create market inefficiencies, which can be exploited by the average value investor. In fact, these developments only increased the number of value opportunities available according to Klarman.
Long-term view
The Baupost investor is also known for his long-term investment outlook, similar to that of Warren Buffett (Trades, Portfolio) and once again Klarman touches on this subject in his full-year 2017 letter. His views on the subject can be summed up in one paragraph from a letter to Baupost investors sent out a few years ago:
“Value investors must be strong and resilient as well as independent-minded and sometimes contrary. You don't become a value investor for the group hugs. Indeed, one can go long stretches of time with no positive reinforcement whatsoever. Unlike some other fields of endeavor, in investing you can do the same thing as yesterday but achieve completely different reported results. In the long run, the research and analysis you perform should overcome market forces; the fundamentals ultimately matter. But in the short run, markets can trump effort and insight."
No secret
If you came here looking to discover the secret of Klarman’s impressive returns over the years, I’m sorry to disappoint, but there isn’t one. Klarman may be one of the best value investors who ever lived, but his strategy is not that much different from other famous value investors.
The 2017 letter merely reiterates what the billionaire investor has said many times before: to be a successful investor you need to have a long-term view, take advantage of market mispricings and not be swayed by short-term market movements. If you follow these rules, the market will do the rest of the work for you.
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