Seth Klarman on Charlie Rose

Seth Klarman: Wall Street legend aims to strike pay dirt in Ontario

Seth Klarman is considered one of the world’s money managing impresarios, a superb value investor whose record of outsized returns has given him cult status on Wall Street.

What interests him now might be a surprise: rocks and spuds in a rural Ontario backwater.

While typical hedge funds flip stocks, commodities, and complex financial derivatives, Mr. Klarman’s Baupost Group has taken a position that is more down to earth, literally. It’s invested in Highland Companies, Ontario’s largest potato grower, which recently proposed developing a mega quarry on part of its sprawling spud lands.

Potatoes and gravel seem like far-out investment ideas, even for a U.S. hedge fund, and Mr. Klarman’s taking a shine to them suggests they may have upside potential currently not appreciated by the market.

The trade is likely to either cement Mr. Klarman’s reputation for acumen, or be a big flop.

On the side of acumen are some intriguing numbers. Baupost was part of a group funding Highland’s purchase of about $50-million worth of potato lands in Dufferin County in Southwestern Ontario, under which, at a relatively shallow depth of about six metres, lie an estimated one billion tonnes of limestone suitable for construction aggregate. The rock could be worth up to $25-billion, depending on its quality.

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Seth Klarman: Why Most Investment Managers Have It Backwards

For value investors, last fall’s crisis provided an unprecedented opportunity. Down markets are a great time to buy securities, as Graham and Dodd said in Securities Analysis, since the average investor can usually only get them “at prices that the future may cause him to regret.”

For Seth Klarman, founder and president of the Boston-based Baupost Group, last fall was a period that offered many of those opportunities. He delivered the keynote lecture at the annual meeting of the Boston Security Analysts Society last week. Klarman also was the lead editor of and authored the preface to the sixth edition of Graham and Dodd’s Securities Analysis, published in 2008.

In that speech, Klarman praised his team for remaining clear-headed amid exceptional market volatility and positioning the firm’s portfolio to deliver superior long-term performance for its investors.

Unfortunately, Klarman said, clear, long-term goals are not the norm throughout the industry. Before detailing the most attractive opportunities created by the crisis, Klarman first addressed a fundamental conflict within the investment management industry that he said is at odds with investor objectives.

Investment managers, such as pensions and endowments, exist in perpetuity and should be focused on long-term wealth creation. Yet performance is almost universally evaluated using short-term results – managers are compared using quarterly, monthly, or even daily returns, creating extreme short-term pressures. “Managers who do well in the short term are rewarded with more assets,” he said. “Those who do not do well in the short term often don’t survive to see the long term.”

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Seth Klarman's interview

Seth Klarman is nobody's idea of a fast-buck, quick-change investor. Since helping to found Boston-based Baupost Group in 1982 with $27 million pooled from four families, he has emulated prototypical value-investment role models like Warren Buffett and the late Benjamin Graham. He buys underpriced equities and securities of bankrupt or distressed companies and usually steers clear of leverage and shorting, though last year he made very profitable investments in credit protection and recorded his best-ever annual return (52 percent). Klarman credits his "very strong team" and stresses that he doesn't even consider himself a hedge fund manager in the traditional sense (though he accepts only legally qualified investors and charges a 20 percent performance fee). Yet his nearly 20 percent annualized returns rival those of larger peers who take more risks. A professorial 51-year-old who manages $12 billion today, Klarman has an economics degree from Cornell University and an MBA from Harvard Business School but traces much of his success to two Wall Street mentors, Max Heine and Michael Price.

How did you decide value investing was for you?

I was fortunate enough when I was a junior in college — and then when I graduated from college — to work for Max Heine and Michael Price at Mutual Shares [a mutual fund founded in 1949]. Their value philosophy is very similar to the value philosophy we follow at Baupost. So I learned the business from two of the best, which was better than anything you could ever get from a textbook or a classroom. Warren Buffett once wrote that the concept of value investing is like an inoculation- — it either takes or it doesn't — and when you explain to somebody what it is and how it works and why it works and show them the returns, either they get it or they don't. Ultimately, it needs to fit your character. If you have a need for action, if you want to be involved in the new and exciting technological breakthroughs of our time, that's great, but you're not a value investor and you shouldn't be one. If you are predisposed to be patient and disciplined, and you psychologically like the idea of buying bargains, then you're likely to be good at it.

What traits in Heine and Price influenced you?

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.

Michael Price was 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.

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Seth Klarman: Manager Frets Over the Market, but Still Outdoes It

EARNING 22 percent on your investments while holding half of your portfolio in cash is no easy trick, but last year Seth A. Klarman pulled it off, and it was not the first time.

Mr. Klarman’s record has generated intense loyalty from investors. Since he began Baupost in 1983, it has posted an average annual total return of 19.55 percent, according to data provided by the hedge fund group. Declines have been posted in only 11 of the total 97 quarters since Baupost’s debut.

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Seth Klarman's Portfolio Holdings

Please visit: BusinessWeek

Happy learning,
Dah Hui Lau (David)

Seth Klarman's Lecture at Harvard May 3, 2006

Seth Klarman's Lecture at Harvard

http://my.harvard.edu/icb/icb.do?course=fas-soc186&pageid=tk.page.soc186.video

All the best,
Dah Hui Lau (David)
dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html