In times of market euphoria (the market is on track to print yet another all-time high today), I find it helpful to go back through the letters of some of history's best investors, to try and draw from their experience of investing in bull markets.
Today, I'm looking at some of Seth Klarman (Trades, Portfolio)'s old letters to investors. Here are some of the best quotes I've found in his letters about investing in bubbles, specifically, the dot-com bubble at the turn of the century.
These quotes cover several different topics. The one central theme running through them, however, is the need for discipline, patience and conviction. Even though it may be tempting to try to invest in some of the market's bubble stocks, as Klarman says, it is essential that, in times of euphoria, you stick to what you know, and focus on reducing risk as much as possible.
Baupost 1998 letter to investors:
"Going forward, we will seek to focus on low risk investments while emphasizing capital preservation. Although emerging markets are bargain priced by historical standards, we will maintain a much more limited exposure to them in the future, including, as much as possible, an emphasis on situations with catalysts for the realization of underlying value. Until the developed stock markets retreat from record levels of valuation, we expect to have less portfolio exposure to equities going forward and more exposure to event driven situations such as liquidations and reorganizations that are not so dependent on the vicissitudes of the stock market for their investment return. Also, we will demand more compelling undervaluation than before to incur market risk. In the absence of appropriate opportunities, we will hold increased levels of cash. Finally, while we still expect to hedge against extreme conditions, the aforementioned combination of greater undervaluation, catalysts, potentially higher cash balances, and hopefully better-aligned hedges should result in much-improved performance."
Baupost 2000 letter to investors:
"The Fund seeks to achieve its objective by profiting from market inefficiencies using a value-oriented and, often, an event-driven approach. We are not seeking to keep up with any particular market index or benchmark. Rather, we are attempting to achieve good risk-adjusted investment results over time through the successful implementation of our investment philosophy.
We continue to believe strongly in a value investment approach, attempting to buy assets or businesses at a considerable discount to underlying value. Bargains exist because the financial markets are inefficient, yet many investors lack the requisite patience and discipline to take advantage of them. A value approach may outperform or underperform the overall market at various times because of changing investor sentiment, but we believe that a value philosophy never goes out of style. When sentiment towards undervalued sectors of the market is at its nadir, it is the best time to be buying value."
Baupost 1999 letter to investors:
"Simply put, we are navigating through an unprecedented market environment, where fundamental analysis is thrown out the window and logic is turned on its head. We underperformed in 1999 not because we abandoned our strict investment criteria but because we adhered to them, not because we ignored fundamental analysis but because we practiced it, not because we shunned value but because we sought it, and not because we speculated but because we refused to do so. In sum, and very ironically, we got hurt not speculating in the U.S. stock market."
..."As we emphasized in our Semi-Annual Letter to Shareholders, our goal is to generate good absolute returns with limited downside risk over time. A portfolio of deeply undervalued, carefully chosen securities, many with catalysts in place for the realization of underlying value, is the most reliable way we know of to achieve this goal."
Disclosure: The author owns no share mentioned.
