Tastylunch (99.53)

Wisdom from Seth Klarman

October 23, 2009 – Comments (7) | RELATED TICKERS: FACT , BBEP

Distressed Debt Investing has been running an awesome series of investor letters from Baupost group (run by value investing legend Seth Klarman)

You can read them here (and donate if so inclined)

 http://www.distressed-debt-investing.com/2009/10/wisdom-from-seth-klarman-part-4.html

Heres my favorite quotes (all the below are Seth Klarman's thoughts not mine)

2004

 We prefer the risk of lost opportunity to that of lost capital, and agree wholeheartedly with the sentiment espoused by respected value investor Jean-Marie Eveillard, when he said, "I would rather lose half our shareholder...than lose half our shareholder's money..."

...we believe market efficiency is a fine academic theory that is unlikely ever to bear meaningful resemblance to the real world of investing.

2005

 We are confident that our success has not been the result of a favorable spin of a roulette wheel or a timely roll of the dice. It has been truncated, not heightened, risk...Can gains be lost? Of course they can, through laziness, sloppiness or hubris. Buck such a reversal is hardly inevitable, especially when one is aware of these risks. We work assiduously to maintain our gains, emphasizing as always the preservation of capital and, only when attractive opportunities become available, its enhancement.

... Our investments can be remarkably contrary; we regularly search the "new low" list for investment ideas, while shunning names on the "new high" list. We purchase what the crowd is dumping. We typically buy stocks in the face of Wall Street "sell" recommendations, and reduce positions in their "buys" We eagerly assess financially distressed companies for opportunity while the world experiences revulsion. For us, analytically complex, litigious, stigmatized, and shunned situations bought at the right price form the backbone of a limited risk portfolio of opportunity."

"Rather than ratchet up risk, our approach has been to hold cash in the absence of opportunity, ...

"We believe that while investors need to focus great attention on the fundamentals, they must simultaneously answer the question: What's your edge? To succeed in today's overcrowded environment, investors need an edge, an advantage over the competition, to help them allocate their scarce time. Since most everyone has access to complete and accurate databases, powerful computers, and well-trained analytical talent, these resource provide less and less of a competitive edge; they are necessary but not sufficient. You cannot have an edge doing what everyone else is doing; to add value you must stand apart from the crowd. And when you do, you benefit from watching the competition at work."

...Investors operate within what is for the most part a zero-sum game.. Consequently, you keenly watch your competitors to see not only what they are doing right, but what they are doing wrong. You observe carefully to identify their investment constraints and limitations, their time horizon and liquidity requirements, areas that they ignore and areas that they avoid. It is in these areas that opportunity is often greatest; that is where bargains regularly surface, with your best competitors not only failing to compete but sometimes serving as the seller. It is here, where others panic, sell mindlessly, neglect, or fear to tread that investors have a chance to develop and sustain an edge....

"The single greatest edge an investor can have is a long-term orientation. ...

2006

Investing is mean reverting. What has outperformed lately will not, and cannot, grow to the sky...

Investment come in the following varieties: undervalued, fairly valued, and overvalued. Price is everything, and every investment is undervalued at one price, fairly valued at a higher price, and overvalued at some still higher price. You buy the first, avoid the second, and sell the third. Having a goal of diversification, rather than owning value, causes investors to take their eye off the ball. It is a refuge of investment wimps, owning a little bit of everything to avoid being wrong, but thereby ensuring never being really right either."

...Risk control to us is a careful aligning of interests, a proper balance in our investing between greed and fear, experienced and collaborative senior management and investment teams that have worked together for quite some time, a consistent and disciplined investment approach where every opportunity is individually and meticulously evaluated on its fundamentals, a strict sell discipline, a willingness to hold cash when opportunity is scarce, a complete avoidance of recourse leverage, and a healthy level of fear."

Our best ideas sometimes look a lot like other firms' best ideas and, at times, may even be identical. Yet our approach, if successfully executed, may enable us to outperform the crowd even if we have the exact same idea flow as everyone else...

One way to do this, as mentioned earlier, is to avoid over-diversifying. Talking full advantage of our best ideas is a real no-brainer. The search for new opportunity is often times quite challenging; buying more of what we already know and like requires minimal additional effort...

"Selling, in particular can be a challenge; many investors are tempted to become more optimistic when a security is performing well. This temptation must be resisted; tax considerations aside, when a security reaches full valuation, there is no longer a reason to own it.

Tasty Here again-

Distressed Debt isn't done yet so you might want to check their blog in the coming weeks for more updates. As I believe they intend to publish the 2007 and 2008 letters as well.