Baupost’s Culture/Principles – Seth Klarman Interview (2008)

After years of compounding at a great rate of return, Klarman definitely and deservedly is considered one of the best investors of all times. In spite of Baupost’s historical return, the main subject one would need to understand/study before judging a firm’s performance, is the company’s culture/principles. That’s how one may achieve long term success.

Bottom line: do what you love in the first place, not for money, cultivate a strong culture, value long-tenured people you can trust and pay them well, so you hang out with them the longest time possible, be willing to delegate tasks, investing is more of an art than anything so be curious and open since we never know everything. Below, I have highlighted a couple quotes from this interview with him, by TIFF.
On needed skills:

“We want people who want to be part of a team. We also place huge empashis on values and ethics.”

“We try to identify people with broad ideational fluency. Just plain common sense is also important.”

“I think to take the next step and be a portfolio manager you need both a sense of history and a vivid sense of risk.(…) A broad curiosity blended with some contrarianism and a sense of what makes you money is the right combination of traits. Also, understanding the value of optionality is important.” 

On turnover:

“I hate turnover; I really hate value long-tenured people. So I’d rather pay up for the people that I might be able to attract to make their entire careers at our firm rather than try to be cheap about it and hire bargains but ultimately pay the price for that in turnover or other things.” 

“I think turnover is terrible not just because you’ve taken the time to train people and not necessarily gotten a lot of value out of them. It’s really bad because there’s something about the facility of communication with longstanding partners.”

“When that knowledge walks out the door, and even more dangerously, when new knowledge that you’re not familiar with walks in the door, it’s very hard to think about where the trust is. Trust has to be earned, not just given.” 

On investing:

“I would say (it is) art first and foremost, craft second, science third. (…) the nuances I was talking about – the ability to distill two or three major themes out of an investment and get right to the heart of the matter – is truly an art.”

“(…)we think more value is added by being generalists and seeing opportunities from  a broader perspective. If you have silos, you’re going to own things only within those silos.”

On compensation/meritocracy:

“(…)we have evolved to a system where the partners would strive for equality with each other. (…) let’s do this together, let’s make it work. There are huge advantages to not keeping track of each person’s individual contribution in terms of letting capital slosh back and forth so that no one person hogs the capital. (…) The problem is, if over time the contributions aren’t equal, equal compensation will adversely select the people who are contributing less.”

“What’s great about our team is that I think most people feel like the firm is bigger than themselves. (…) Also, I think by bending over backwards to be fair and to not hog the money myself, I think everybody feels pretty good about a system that gives them a lot of compensation, even if it’s not exactly the right amount.”

On time allocation, an scarce item:

“We don’t spend a lot of time in client meetings – I think, historically, that’s probably 1% or 2% of our time, at most. That let me focus the great majority of my time on investing. I think that I do a good job of delegating, so that as we’ve grown, I’ve been able to bring other people into the loop and to give them serious responsibility.” 

On explaining the firm’s investment philosophy:

“The truth is, some of our clients don’t understand, but we’ve worked really hard over time to explain it and to educate them to our way of thinking. It isn’t the only way of thinking, but it;s how we approach it.” 

On the best job ever:

“You know, I’ve said over and over, I have the best job in the world. I get to do something that is interesting and ever-changing and therefore ever-interesting, working with great people in a great culture. I get to do things like this from time to time. I get to teach from time to time. I get to write a book and communicate frequently to my clients. So I have the best deal possible.” 

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Darwin’s Mind: The Evolutionary Foundations of Heuristics and Biases (James Montier)

In this old (2002) article, Montier discusses our minds’ tricks. It suggests mistakes we make have four common causes, namely:

(i) Self-deception: makes us believe we are better than average. The thing is that we lie to ourselves! It’s common to ask to a group “Do you guys think yourselves are a better than average investor?” and get 80% of positive answers. Naturally this number isn’t feasible. Framing is also important. Quoting Montier, “We find it incredibly hard to see through the way in which information is presented to us. The brain is effectively modular, if a problem is presented to us in a family fashion we can solve it, but in another guise we fall flat on our faces.”

(ii) Simplification: our brain is composed by system one (intuitive, emotional, dreamier, right side of the brain) and system two (reflective, analytical, logical, left side of the brain). Tasks may perhaps start out as the subject of system two but when they become familiar, they are processed in system one. The trick here is try to be more analytical, i.e., use our system two way more than system one.

(iii) Emotion/Affect: emotions are important to our survival. Sentiments like fear are key to living longer, i.e., taking less risks. Hence we have become evolutionarily tuned to listen to our system one (intuitive) responses. Naturally this leads to a couple errors in day to day analytical tasks. Watch out so you do not deceive yourself.

(iv) Social Interaction: information serves to transmit information vertically and horizontally in the social group. Also, social learning is much faster than natural selection. Once we have speech and imitation skills, the possible role of a second replicator emerges as a major evolutionary force. Remember group think is something to avoid.

Think critically and debias yourself!