With the possible exception of Warren Buffett, no investor today commands more respect than Baupost Group’s Seth Klarman. Since founding his investment partnership in 1983, Klarman has not only produced unrivaled returns, but he has also from time to time offered wise and timeless commentary on markets and the craft of investing.
Klarman is the author of Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor , which became a value investing classic ever since it was first published in 1991.
Now, the reason I am writing to you about Klarman today is twofold.
One, for the first time since 2011, Klarman who is known for his willingness to return capital to investors when he thinks opportunities are sparse, is seeking more capital for his fund. This comes less than three months after he wrote in a letter to his clients that the “the rocket fuel that has propelled markets in 2019 will run out,” which has actually happened but for other reasons. Klarman’s fund had about 31% its portfolio in cash at the end of 2019. In the recent weeks, however, the fund has spent about US$ 1.5 billion on assets amid the carnage caused by the Coronavirus pandemic and oil price war.
Anyways, the second reason I’m writing about Klarman today is for the letter he wrote to his clients in February 2009. That letter contained some timeless ideas on investing, including the power that investors can derive from uncertainty like we are witnessing now.
In this letter, titled “The Value of Not Being Sure”, Klarman described the biggest challenge in investing, how he was responding to the market’s turmoil then and why he considered fear of the unknown such a great motivator.
Here is an insightful piece from this letter –
Time horizons have shortened even more than usual, to the point where the market’s 4:00 p.m. close seems to many like a long-term commitment. To maintain a truly long-term view, investors must be willing to experience significant short-term losses; without the possibility of near-term pain, there can be no long term gain.
Buying early on the way down looks a great deal like being wrong, but it isn’t. It turns out you won’t be able to accurately tell who’s been swimming naked until after the tide comes back in.
If you look to “Mr. Market” for advice, or if you imbue him with wisdom, you are destined to fail. But if you look to Mr.Market for opportunity, if you attempt to take advantage of the emotional extremes, then you are very likely to succeed over time.
If you see stocks as blips on a ticker tape, you will be led astray. But if you regard stocks as fractional interests in businesses, you will maintain proper perspective. This necessary clarity of thought is particularly important in times of extreme market fluctuations.
In defense of ‘uncertainty’, he wrote…
Uncertainty breeds doubt, which can be paralyzing. But uncertainty also motivates diligence, as one pursues the unattainable goal of eliminating all doubt. Unlike premature or false certainty, which induces flawed analysis and failed judgments, a healthy uncertainty drives the quest for justifiable conviction.
Click here to download this 2-page letter, and read it from start to end.
Without doubt, the uncertainty we are witnessing now is unprecedented in living memory. It seems a time that’s worse than 2008, because this one involves human tragedy too.
However, for those searching their way through this ongoing storm as far as their investments are concerned, Klarman’s lessons act as a lighthouse.
Klarman does not advise you to go all out leaving your process behind, but understand the power of uncertainty in a new light and then try to benefit from it.
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