“I think Buffet is a better investor than me because he has a better eye for what makes a great business. And, when I find a business, I´m happy to hold it…most businesses don´t look so great to me”
Seth Andrew Klarman, also known as the Oracle of Boston, is the hedge fund manager of Baupost Group, which manages $32 billion. He was born on 21st May 1957 in New York. Klarman attended Cornell University to pursue economics and graduated in 1979. Later, in 1982 he concluded an MBA in administration at Harvard Business School. Surprisingly, he bought his first stock at 10 years old. The stock he bought was Johnson & Johnson. In his 5th grade, he gave a presentation to his class about the logistics of buying a stock.
During his childhood and youth, Seth Klarman had several small businesses like Warren Buffett such as a paper route, a snow cone stand, a snow shoveling business, and sold stamp-coin collections on the weekends.
Seth Klarman started his career in portfolio management in 1982, at 25 years old, when he founded The Baupost Group with four other associates. They started when William Poorvu sold his share in a local television station and asked Klarman and other associates to manage his money. The fund started with 27 million dollars and now has close to 27 billion dollars under management with an average annual return of 20%. That’s why he has the nickname of “Oracle of Boston“or “Warren Buffet of his generation”. In fact, according to Bruce Greenwald, a professor at Columbia Business School, there are only three funds where Warren Buffet would invest if he wanted to retire and stop managing money. One of them is The Baupost Group.
Net Worth and Portfolio
Currently, his net worth is $ 1.5 billion, placing him in 1415th place on the Forbes list.
Being a value investor, Seth Klarman´s goal is to pay less for an asset compared to its value. According to him, there are three ways to value stocks and decide if they are bargains or not: concern value, liquidation value, and stock market value. However, he points out that if we find an undervalued company, it is important to understand why the stock price is low. The company might have financial problems or is struggling with competitors, but it could be just an irrational market. This dictates if the stock is a buy or not. Also, he has distressed bonds in his portfolio. Distressed debt is “debt trading at a significant discount to its par value”. For example, let’s say a company is worth $1 billion, but then its value decreases to $100 million because the company is at risk of bankruptcy. However, if the company sells all the assets valued at more than $100 million, the debt could be a great investment. According to him, investing in this company is almost risk-free, which explains his investments in high yield bonds.
There are three main ways to avoid risk according to Seth Klarman: Diversification, Hedging and investing with a margin of safety.
This quote sums his thoughts on diversification: “Diversification, after all, is not how many different things you own but how different the things you do own are in the risks they entail”. Hedging is when we buy an asset and then sell another correlated asset to protect against a downturn in price. Finally, according to Klarman, the best way to protect against idiosyncratic risk is by investing with a margin of safety. He gives special importance to this margin of error comparing with other investors, because he knows predicting the future is too hard, so it is better to buy at a bigger discount price. For example, if he says company A value is 102$ and is trading at 100$, he will wait to buy at an even bigger discount.
Currently, the best returns of Baupost Group, based on an average purchase price, are Colony Capital Inc with a return of 77%, HD Supply Holdings Inc with 79.95%, and Atara Biotherapeutics Inc showing the biggest return of 126%.
In 1998 the fund declined in value for the first time (16,3%), due to high exposure to Russian equities and emerging markets. They lost trying to hedge the portfolio from market risk, as Seth Klarman said in his letter: “Given our recurrent fear of a severe market correction and spreading economic weakness, this required us to maintain expensive and imperfect hedges. A substantial portion of our equity exposure was in small-cap stocks (this is where the bargains were), and our results suffered when that part of the market became considerably more illiquid than usual.”.
Keryx: In the case of Keryx, Klarman formed a position at an average price of $14.50, and then the stock declined to $3. Keryx Biopharmaceuticals Inc stocks are no longer publicly traded due to a merger with Akebia Therapeutics.
Antero Resources: Seth Klarman started buying Antero Resources in February of 2015. His purchase prices were between $54.52 and $65.71, with an estimated average price of $57.97, and closed their position in February of 2017 with a huge loss since the stock is currently trading at $3.97.
Guyana Goldfields Inc: Baupost owned 19.7% of Guyana Goldfields Inc. and Klarman failed to achieve positive returns with this company because of wrong management decisions like trying to develop gold mines in South America for years. On the other hand, gold mining companies suffered for years as the price of gold tumbled.
Roberto Santos, BSc in Economia
Pedro Santos, BSc in Economia