According to Klarman, the hard thing about hard things is that
“As long as I’ve been alive, there are structural imbalances. Most of the time they don’t matter. Once in a while they really matter. That’s what hard, that if you run a portfolio to to be fine in an upward market, if you’re in the game, you will have exposures that you wish you didn’t have in a worse market.” – from The Graham + Dodd Luncheon Symposium Transcript from Oct. 2008
I suppose a little bit more of Klarman is never enough. So here is an excerpt of his 2012 year end letter. The first part is composed by macroeconomic bearish tidbits. In my view, the best part is the last one, in which he rapidly mention what to focus on. Easy to say, hard to do – that’s why we need processes.
“Investing today may well be harder than it has been at any time in our three decades of existence, not because markets are falling but because they are rising; not because governments have failed to act but because they chronically overreact; not because we lack acumen or analytical tools, but because the range of possible outcomes remains enormously wide; and not because there are no opportunities, but because the underpinnings of our economy and financial system are so precarious that the unabating risks of collapse dwarf all other factors.”
For those who haven’t read the book from Seth Klarman which is still being sold from US$ 999 to US$ 2.000 at Amazon, here is a short list of the main ideas from the book. Hope it helps!
In 1992, Seth Klarman worte an article to Forbes called “Don’t be a yield pig”. As current market participants complacency has risen to amazing levels, it seems this 21-year old article is from last week. Definitely it’s worth to dedicate 5 minutes to read it.
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.”
“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.”
“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.”
“(…)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.”