In his 2018 letter, Seth Klarman (Trades, Portfolio) shared a long list of social, political and market risks. But with the market in a freefall, he sees lots of opportunities. With Baupost Partnerships generating a less than 1% negative return in 2018, Klarman is “balancing risk aversion with risk-taking”:
“The way to build a portfolio that will prosper over the long-term, while avoiding irresponsible exposure to the fiercest storms, involves a constant commitment to fact-based decision-making, diversification, an avoidance of recourse leverage, and the analytical imperative of making conservative assumptions.”
One key element of this strategy in 2018 was event-driven investments. We studied the use of this strategy by Warren Buffett (Trades, Portfolio) in the days of the Buffett Partnership.
Klarman pointed out the importance of the exposure to special situations investments in order to uncorrelate the portfolio’s returns with the general market while, at the same time, produce a decent return:
“We believe another key element in portfolio management is curtailing the duration (the weighted average life) of one’s portfolio through exposure to investments with catalysts for the realization of underlying value. Catalytic events shift the outcome of investments from a reliance on future market multiples and macroeconomic developments (which are not at all under your control) to a dependence on your assessment of the outcomes, probabilities, and implications of announced or anticipated corporate events, including mergers and acquisitions, bond maturities, debt restructurings, bankruptcies, major corporate asset sales, spinoffs, and tender offers. No strategy can avoid all risk of loss. But we believe our approach should increase the likelihood of achieving sustainable gains with limited downside risk over the long- run. To put it differently, a portfolio of near infinite duration (such as an all equity portfolio without catalysts) can trade just about anywhere. With such exposures, if stock prices plummet, the odds go up that an investor will feel pressure to do the wrong thing and sell into market weakness. A limited duration portfolio, both because of the hopefully truncated downside in a bad market as well as the beneficial cash inflows (buying power) that catalysts usually generate, is hugely advantageous in navigating through turmoil.”
Aided by the flexibility to look for ideas through different value investing strategies in any asset class, in public or private markets and with the structure to analyze a significant number of opportunities, Baupost has a strong competitive edge. This is complemented by a strong client base that shares the same long-term investing principles.
Read more here:
