Notes from Seth Klarman’s speech at Columbia Business School is, interestingly, the most popular clicked-on link from here, coming from The Baupost Story post. So let’s do a round up of coverage, find some more reading on the Baupost story and see what we can learn about how Baupost’s approach pays off for investors during tough times.
First here’s an excerpt from Seth Klarman’s wildly expensive “Margin of Safety” book – talking about liquidation value. I’m not so sure that it is entirely obeying copyright rules, so read it while you can.
Next have a read of some early Baupost Group letters (recently uploaded by Noise Free Investing and found through Valueplays) to great insight to how Baupost operates. The letters refer to a smaller fund that is run alongside the main fund for friends and family of the main fund investors. It is remarkable to see the foresight in the commentary leading up to and through the dot com boom and bust and to see the letter series end in mid 2001 with the fund holding 48.6% cash. That no doubt set them up well for the post September 11 crash, and so I guess they continued to do well. I would dearly like to see the rest of the series of letters – in particular the returns over the last two years would be fascinating.
As it happens another letter has leaked out from the main fund from September last year. The comments are pretty telling, again showing Baupost’s foresight* and providing vindication for their cautious approach to investing. (I first miss-typed that as “goresight” which I thought was appropriate)
Market Folly has a good summary of Baupost’s recent behaviour – mentioning that Baupost has $14 billion in assets, which was mostly 50% cash in recent years and that over 25 years the compound annual return was 20%. It seems that Baupost is starting to spend that cash now as they see bargains that meet their rigourous requirements. It takes real discipline to sit on a hoard of cash and not invest it, and while you may miss out on the next dot com or housing boom by doing so, you’ll also miss out on the potential to lose everything when those bubbles burst.
A more recent interview with HBS on Market Folly and via Valueplays again lets us know that Klarman started with just $27m in the fund in 1982, and was paid a salary of a princely $35,000. The new news is that the writer also mentions that Baupost had cut their cash hoard in half – to about 25% – by December last year.
Compare that 25% cash figure to April 20 last year when Baupost had 45% cash, 20% equities, 17% distressed debt, 11% real estate and an amazing 6% in South Korean equities.
45% cash in April 2008 was an astonishingly smart move – and Seth Klarman even mentioned that they would have gone to 100% cash if it made sense. That let them go on the gradually accelerating shopping spree.
The Korean move was interesting, as the market there hasn’t fared too well since then in USD terms – down 44%. However the Korean Won is also down 25%, so overall the market was down only 18% in Korean Won terms, and I imagine there was a currency hedge. That’s much better than the S&P500’s 35% loss in the same period, but still tough given Baupost’s “Rule 1: don’t lose money” philosophy. Baupost would have picked decent securities in the Korean market and probably had some interesting hedges against the high volatility events that happened.
The Korean market in US Dollar terms
The Korean Won versus the USD
The Korean Market in Korean Won terms
On the other hand Baupost may have simply closed out their Korean positions early.