Regular readers of my articles will know that I often like to go back and review interviews and articles with famous investors from 2008 and 2009 (or older if they are available) and see how these investors were reacting during the financial crisis.
The financial crisis caused a lot of pain and misery on Wall Street, but there were a select few hedge fund managers and investors that came out in a much better position than when they went in.
One of these managers was Seth Klarman (Trades, Portfolio). The manager of the $30 billion hedge fund Baupost used the crisis to scoop up billions of dollars in discounted securities, including the debt of bankrupt investment bank Lehman Brothers, which ultimately returned several times the fund's initial investment over the next few years.
Klarman interview
At the height of the financial crisis, in June 2008, Klarman did an interview with Alpha Magazine. In the interview, he discussed his investment strategy and the influences that had helped shape his investment strategy over the years.
For example, Klarman explained that his value investment strategy was shaped by his Wall Street mentors, Max Heine and Michael Price (Trades, Portfolio). Both of these legendary value investors had a different approach to finding value, but they achieved the same aims. Max Heine "was great at not looking at what something was called, what its label was. He looked at what it actually was."
"For example, back in the late '70s, Mutual Shares was buying the bonds of bankrupt railroads, and I think a lot of people would have said, 'They're bankrupt,' and 'Who needs railroads?' Max and one of his partners knew how many miles of track the railroad had, what the scrap steel on the track could have been sold for and which railroads might have wanted pieces of those networks. They also knew what the real estate rights above the terminals were worth."
Meanwhile, Klarman described Michael Price (Trades, Portfolio) as "fabulous at pulling threads."
"He would notice something, and then he would get curious and ask questions. And one thing would lead to another thing, and that would lead to another thing. I remember a chart that Michael made of interlocking ownership of mining companies that was an extension of a thought where one good idea led to another and had the potential to lead to many more if the threads kept being pulled. That was a great lesson — to never be satisfied. Always be curious."
Both of these investors had an edge, which is one of the most important qualities any value investor should have:
"Every manager should be able to answer the question, 'What's your edge?' This isn't the 1950s, when all you had to do was buy a corner lot and build a small drugstore and it gradually became incredibly valuable land or you owned a skyscraper or you built a small shopping centre, and it became the big regional mall. The market's very competitive; there are a lot of smart, talented people, a lot of money chasing opportunity. If you don't have an edge and can't articulate it, you probably aren't going to outperform."
The bottom line
My main takeaway from this interview is that the financial world is highly competitive, and unless you have an edge in the market, it's unlikely that you'll succeed over the long term. There are hundreds of thousands of other investors just like you out there, all chasing returns on similar information.
If you have the same information as the rest of the crowd, it's unlikely you'll be able to beat the crowd. However, if you have an edge, you can succeed where many others might fail.
Disclosure: The author owns no share mentioned.
Read more here:
- Anatomy of the Bear: How to Navigate Bear Markets
- Is There Value in the Oil Patch
- Berkshire Is Playing it Safe
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