Seth Klarman

Seth Klarman
Born Seth Andrew Klarman
(1957-05-21) May 21, 1957
New York City, New York, U.S.
Residence Chestnut Hill, Massachusetts, U.S.
Nationality American
Alma mater Cornell University
Harvard University
Occupation Investor, hedge fund manager, and philanthropist
Known for Founding and leading the Baupost Group
Net worth US$1.55 billion (February 2017)[1]
Spouse(s) Beth Schultz Klarman (m. 1982)

Seth Andrew Klarman (born May 21, 1957)[2][3] is an American investor, hedge fund manager, and philanthropist. He is known as a value investor and is currently the chief executive and portfolio manager of the Baupost Group, a Boston-based private investment partnership he founded in 1982.

He closely follows the investment philosophy of Benjamin Graham and is known for buying unpopular assets while they are undervalued, seeking a margin of safety and profiting off of their rise in price. Since his fund's $27 million-dollar inception to 2008 he has realized a 20 percent compound return-on-investment and as of 2016 manages $31 billion in assets.

In February 2017, Forbes Magazine listed his personal fortune at US$1.55 billion. In 2015, Klarman was listed as the 15th highest earning hedge fund manager in the world.[1] In 2008, he was inducted into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame.[4] He has drawn numerous comparisons to fellow value investor Warren Buffett, and akin to Buffett's notation as the "Oracle of Omaha," he is known as the "Oracle of Boston."[5]

Early life and education

Seth Andrew Klarman was born on May 21, 1957 in New York City.[6][2] When he was six he moved to the Mt. Washington area of Baltimore, Maryland near the Pimlico Race Track,[7] and grew up in a traditional Jewish family.[8][9] His father was a public health economist at Johns Hopkins University and his mother taught high school English.[10][11] His parents divorced shorty after their moving to Baltimore.[7]

When he was four years old he redecorated his room to match a retail store putting price tags on all of his belongings and gave an oral presentation to his fifth grade class about the logistics of buying a stock. As he grew older had a variety of small time business ventures including a paper route, a snow cone stand, a snow shoveling business, and sold stamp-coin collections on the weekends.[6] When he was 10 years old he purchased his first stock, one share of Johnson & Johnson (the stock split three-for-one and over time tripled his initial investment). At age 12 he was regularly calling his broker to get stock quotes, his reasoning behind buying a share of Johnson & Johnson was the fact that he has used a lot of band-aids (a product of the company) during his earlier years.[6]

Klarman attended Cornell University in Ithaca, New York, and was interested in majoring in mathematics but instead chose to pursue economics.[7] He graduated magna cum laude in economics with a minor in history in 1979.[12] In the summer of his junior year he interned at the Mutual Shares fund and was introduced to Max Heine and Michael Price. After graduating from college he went back to the company to work for 18 months before deciding to go to business school.[7] He went on to attend Harvard Business School where he was a Baker Scholar and was classmates with Jeffrey Immelt, Steve Burke, Stephen Mandel, James Long and Jamie Dimon.[13]

Investment career

After graduating from business school in 1982, he founded the Baupost Group with Harvard Professor William Poorvu and partners Howard Stevenson, Jordan Baruch and Isaac Auerbach. The name is an acronym based on the founders' names (the name was decided on before Klarman joined the project).[7] Poorvu asked Klarman and his associates to manage some money he had raised from the selling of his share in a local television station and the fund was started with US$27 million in start up capital.[7] His starting salary was $35,000 a year, considered low to alternative job offers,[14] and he later recalled that the other founders "were taking a big risk on a relatively inexperienced person."[7] Early on in his investment career, he used to badger Goldman Sachs salesmen with questions regarding their options and thoughts on the markets that they were afraid to pick up the phone if they saw that Baupost was calling.[7]

In February 2008, Klarman was alerted that a London-based hedge fund, Peloton Partners, were forced to liquidate more than a billion dollars worth of their assets, he decided to open up his fund to new investors subsequently raising $4 billion in capital, mainly from large foundations and Ivy League endowments. He believed that there was serious market opportunity for value investors in the coming months and after the collapse of AIG and Lehman Brothers, he invested heavily in the equity markets, sometimes throwing $100 million into stocks a day. While the market was down due to the aftermath of the crisis he purchased many distressed securities and bonds. By early 2009, after J.P. Morgan Chase acquired Washington Mutual as a part of their deal with the U.S. Treasury, and SallieMae's bonds were returning double digit figures he would see serious returns. Overall, Klarman's bond position appreciated 25%, however, during the financial crisis, his fund returned -7% to -13%. Although many hedge funds faced negative returns and low performance during the crisis and its aftermath, Klarman saw increased equity positions and described it as a "fortuitous time" for the fund's capital gains.[7] The same year he would go on to buy a minority share in the Boston Red Sox, via a stake in Ed Eskandarian.[7]

In 2009, Klarman began buying distressed credits in the wake of the financial crisis of 2007–2008. He purchased the bonds of CIT Group, a financial holding company based in New York City at 65 cents on the dollar with a yield rate of 15%. After the company went into prepared bankruptcy, as Baupost began lending it money via a loan, Carl Icahn gave a loan of $6 billion to the CIT Group but backed out of the deal a week later. This caused the bonds to speed into prepared bankruptcy and gave the Baupost group securities valued at 80 cents to the dollar for their debt in CIT Group.[7] Shortly after the CIT deal was finalized, Klarman amassed a stake in a new bio-tech company called FacetBiotech, at an average cost a $9 a share. At the time, FacetBiotech had $17 a share in net cash. Klarman noted that when stocks are spun off of their larger parent companies they become "cheap and ignored."[7] When Biogen eventually tried a hostile takeover of the company bidding up the price to $14 a share, Abbott Laboratories asked for a $27 per share settlement for acquisition. Klarman's fund finished that year up +27%.[7]

As of fiscal year 2016, the fund has US$31 billion in assets under management.[15][16]

Investment philosophy

Klarman is a known value investor, and has stated that he has known he was one since junior year of college at age 25. During an interview at Harvard Business School, he stated: "It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic."[14]

When asked what drives his fund's overall investment strategy and how value investing fits into the hedge fund market he replied:

Firstly, Value investing is intellectually elegant. You’re basically buying bargains. It also appeals because all the studies demonstrate that it works. People who chase growth, who chase high fliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. Third, it’s easy to talk in the abstract, but in real life you see situations that are just plain mispriced, where an ignored, neglected, or abhorred company may be just as attractive as others in the same industry. In time, the discount will be corrected, and you will have the wind at your back as a holder of the stock.[14]

Klarman has been an avid supporter of the teachings of Benjamin Graham, and during the 2008 financial crisis criticized the short-term thinking of other fund managers, he believes that the "this-time-is-different" mindset will give a false sense of security to investors and they ought to look at the bigger picture. He stresses the utility in the economy's business cycles and their predestined and perpetual self-corrective tendency.[14] Klarman is known to sit on 30% to 50% of his funds in cash as to avoid unfavorable market conditions and only buys stocks he thinks have a suitable mispricing.[7]

He makes unusual investments, buying unpopular assets while they are undervalued, using complex derivatives, and buying put options. During his first years running Baupost he made it a point to only invest in companies that were not widely accepted by the Wall Street community; he stressed managing risk and using the margin of safety.[7] He is a very conservative investor, and often holds a significant amount of cash in his investment portfolios, sometimes in excess of 50% of the total.[17] Despite his unconventional strategies, he has consistently achieved high returns.[18] Klarman looks for companies that are traded at a discount (so he can assume shares with a margin of safety). Klarman and his fund usually go "bargain hunting," when companies are distressed or face low growth or declining years. It was reported by The Boston Globe in 2015 that when energy stocks were declining, his firm "started looking for deals."[19] According to Institutional Investor, "[Klarman] has succeeded by deftly exploiting under-valued markets whether they are in equities, junk bonds, bankruptcies, foreign bonds or real estate."[7]

Horse Racing

Klarman (second from left) and William Lawrence pose with the Governor of Maryland after winning the Preakness Stakes.

Klarman owns Klaravich Stables Inc. and has been racing horses with William Lawrence since 2006. Their horse Cloud Computing won the 2017 Preakness Stakes.[20]

Personal life

Klarman typically keeps a low profile, rarely speaking in public or granting interviews.[21] He lives in Chestnut Hill, Massachusetts with his wife, Beth Schultz Klarman, who he met on a Boston Harbor cruise in 1982; they have three children.[1][22][23][24] His brother, Michael Klarman, is a professor at Harvard Law School.[11]

Political and economic views

Klarman has donated to both Democrat and Republican groups and candidates while being registered an independent.[23][25] Klarman is a major backer of political non-profits such as the Ending Spending Fund[26] and the pro-same-sex marriage American Unity Fund.[27] He has stated: "I’m a complicated guy, I’m fairly nuanced in my views. I’m trying to do what I think is the right thing for the country."[28]

In the 2016 Presidential election he gave the maximum donation of $5,400 to Hillary Clinton's campaign, stating that "Donald Trump is completely unqualified for the highest office in the land.”[25]

After the installation of U.S. President Donald Trump, he released a highly circulated (but internal) letter to members of his fund that denounced the upcoming investing climate.[29][30][31] The letter states:

Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers. President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces.[32]

Wealth and philanthropy

In February 2017, Forbes Magazine listed his personal fortune at US$1.55 billion. In 2015, he was listed as the 15th highest earning hedge fund manager in the world.[1]

Klarman started The Klarman Family Foundation ($255 million in assets as of 2010) which donates to medical causes, Jewish organizations (such as the American Jewish Committee, Boston’s Combined Jewish Philanthropies and Gann Academy), and Israeli causes. Klarman is the chairman of Facing History and Ourselves which develops classroom programs to combat anti-Semitism and bigotry.[23] Klarman also is active with the The Israel Project, a pro-Israel advocacy group that collects and provides information on Israel for journalists. He donated $4 million to the organization between 2008 and 2010.[23] He is the key U.S. investor behind The Times of Israel, an online English-language newspaper which reports on Israel, the region and the Jewish world.[33][34]

In 2013, Klarman donated the lead capital to fund the $61 million building at Cornell University named the Seth ’79 and Beth Klarman Humanities Building, more simply known as Klarman Hall.[35] A year later, he donated money to Harvard Business School to construct a "conference center/auditorium and performance space," named Klarman Hall. In an official statement he recalled his time at the school as "an important and ongoing role in my life," later noting it an honor "to able to give back to a school that has given us so much."[36]

Awards

Klarman has been called a "hedge fund Titan,"[7] and "quiet giant of investing,"[37] for his slow accumulation of fund capital over his career (in 2008, his hedge fund was the 6th largest in the world) and low profile.[7] It was reported by Andrew Ross Sorkin, of The New York Times, that "[Klarman] is the most successful and influential investor you have probably never heard of."[37] His Investopedia entry has him listed as "an enigma in the investing world."[38]

He is sometimes called "the Warren Buffett of his generation,"[3] and the "Oracle of Boston."[5] It has even been speculated that his investment philosophy is so similar to Buffett's that he is considered a dark horse option to assume Berkshire Hathaway in the event of Buffett's death.[39][40] According to an article by The New York Times, Buffett has publicly praised Klarman's investing,[37] and it has been reported that Buffett keeps a copy of his book on his bookshelf.[12]

In 2008, he was inducted into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame along with David Swensen, Louis Bacon, Steven Cohen, Kenneth Griffin, Paul Tudor Jones, George Soros, Michael Steinhardt, Jack Nash, James Simons, Alfred Jones, Leon Levy, Julian Robertson, and Bruce Kovner.[4]

Publications and works

Klarman has written many annual letters to shareholders but has kept a limited role in writing articles, opinion editorials or books. In an interview with Charlie Rose, he discussed the popularity of his shareholder's letters and a request on behalf of HarperCollins to write and publish a book on investing.[41] He followed up on this request by publishing his first and as of February 2017, his only book, Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, a reflection of value investing found in his hedge fund. In the book he outlines the various issues with retail investing, and critiques small time investors getting into the market purely using metrics such as price momentum and losing money in the long run. He issues that this is speculation and at times gambling, and should be discouraged in the market place. The book asserts that more people should become value investors or people who invest in stocks that trade below their underlying value so as to purchase them at a discount.[42]

The book had amassed a cult following among retail investors, professional and institutional investors as well as Wall Street as a whole.[43][39][44] Due to "only 5,000 copies [being sold],"[41] the book has gone out of print and has become a relic in the finance community. Originally the book was priced at $25 a copy, however, due to it being out of print it has a market price of $700 for used versions with newer copies going for $2,500 to $4,000.[42][1] University libraries report the book as "one of their most wait-listed titles as well as one most claimed as lost."[42] He has stated that he would be interested in holding a charity event where he bids his book to Wall Street executives.[41]

He edited the 6th edition of Benjamin Graham and David Dodd's Security Analysis in 2008.[45][46]

Klarman's published books and substantial writings are listed below:

See also

References

  1. 1 2 3 4 5 Forbes: The World's Billionaires: Seth Klarman April 2014
  2. 1 2 "The Baupost Group, LLC: Private Company Information - Bloomberg". www.bloomberg.com. Retrieved 2017-02-24.
  3. 1 2 The Oracle of Boston; Seth Klarman. The Economist (US) July 7, 2012
  4. 1 2 "The Alpha Hedge Fund Hall of Fame | Institutional Investor's Alpha". www.institutionalinvestorsalpha.com. Retrieved 2017-02-24.
  5. 1 2 Liang, David (2017-02-20). "What This Legendary Value Investor Thinks About the Markets Right Now - The Motley Fool". The Motley Fool. Retrieved 2017-02-20.
  6. 1 2 3 valueinvestingpro (2010-01-30), Interview with Seth Klarman, MBA 1982 - Born to be an Entrepreneur - Harvard Business School.flv, retrieved 2017-02-24
  7. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 "The value of Seth Klarman | Institutional Investor's Alpha". www.institutionalinvestorsalpha.com. Retrieved 2017-02-24.
  8. ↑ Forbes Israel: Jewish Billionaires - Profile of Seth Klarman April 14, 2013 (in Hebrew)
  9. ↑ Times of Israel: "The Jewish Origins of Value investing" by Gabriele Grego December 8, 2014
  10. ↑ Scott Cendrowski (February 15, 2012). "A hedge fund bets big on a Canadian mega quarry". CNN Money. Retrieved 2012-02-15.
  11. 1 2 "Herbert Klarman, 82, professor, health economist", The Baltimore Sun, June 19, 1999.
  12. 1 2 "Seth Klarman Resource Page". ValueWalk. Retrieved 2017-02-02.
  13. ↑ Fabrikant, Geraldine. (2007, May 13). Manager Frets Over the Market, but Still Outdoes It. New York Times, Investment section. Accessed on 10-25-2008.
  14. 1 2 3 4 "Seth Klarman - Alumni - Harvard Business School". Retrieved 2017-02-24.
  15. ↑ "The Baupost Group, LLC". investment-advisors.credio.com. Retrieved 2017-02-23.
  16. ↑ "Klarman's Baupost fund posts 2015 losses due to energy firms". Reuters. 2017-01-29. Retrieved 2017-02-24.
  17. ↑ The Wharton Journal Archived June 6, 2008, at the Wayback Machine. 12/5/05
  18. ↑ Baupost's Klarman sees poor outlook for stocks Reuters, Aaron Pressman and Matthew Lewis. May 18, 2010
  19. ↑ "For hedge fund managers, modest returns produce big paychecks - The Boston Globe". BostonGlobe.com. Retrieved 2017-02-23.
  20. ↑ "Rested and ready: 13-1 shot Cloud Computing wins Preakness". May 20, 2017.
  21. ↑ Brett Arends (May 19, 2010). "Klarman: Why Investing Is Like Chess". Wall Street Journal.
  22. ↑ "Seth Klarman, MBA 1982 - Alumni - Harvard Business School". Retrieved 2017-02-24.
  23. 1 2 3 4 Jewish Daily Forward: "The Softspoken Man Behind Times of Israel - Famed Investor Seth Klarman Says Site Won't Pull Punches" By Josh Nathan-Kazis February 29, 2012
  24. ↑ Boston Globe: "George Schultz, glue gun inventor; at 82" By J.M. Lawrence December 15, 2008
  25. 1 2 Viser, Matt and Jan, Tracy (20 July 2016). "Donald Trump is at the wheel, and road looks rocky". Boston Globe. Cleveland. Retrieved 21 July 2016.
  26. ↑ Sullivan, Sean (16 April 2014). "Who funded the super PAC hitting Dem and GOP candidates? These three billionaires.". Washington Post. Retrieved 7 July 2014.
  27. ↑ Confessore, Nicholas (26 April 2013). "Pushing the G.O.P. to Support Gay Rights". New York Times. Retrieved 7 July 2014.
  28. ↑ "New England’s top GOP donor isn’t a Republican - The Boston Globe". BostonGlobe.com. Retrieved 2017-02-24.
  29. ↑ Tuchman, Mitch. "Could index investing become too risky?". MarketWatch. Retrieved 2017-02-20.
  30. ↑ Kimelman, John. "A Tale of Two Trumps". Retrieved 2017-02-20.
  31. ↑ Melloy, John (2017-02-08). "Hedge fund manager Klarman to Trump: Stop tweeting...doesn't make sense for a 'serious' president". CNBC. Retrieved 2017-02-20.
  32. ↑ Liang, David (2017-02-20). "What This Legendary Value Investor Thinks About the Markets Right Now -- The Motley Fool". The Motley Fool. Retrieved 2017-02-20.
  33. ↑ http://blogs.timesofisrael.com/a-note-from-the-chairman/
  34. ↑ Nathan-Kazis, Josh (29 February 2012). "The Softspoken Man Behind Times of Israel". The Forward. Retrieved 17 March 2012.
  35. ↑ "Klarman Hall project begins; scheduled to open in 2015 | Cornell Chronicle". news.cornell.edu. Retrieved 2017-02-02.
  36. ↑ "Harvard Business School Announces Major Conference Center". Harvard Magazine. 2014-06-05. Retrieved 2017-02-24.
  37. 1 2 3 Sorkin, Andrew Ross (2017-02-06). "A Quiet Giant of Investing Weighs In on Trump". The New York Times. ISSN 0362-4331. Retrieved 2017-02-24.
  38. ↑ Reiff, Nathan (2017-02-07). "Who is Seth Klarman?". Investopedia. Retrieved 2017-02-24.
  39. 1 2 "Seth Klarman’s Margin Of Safety: The Most Legendary Book In Personal Finance | The Conservative Income Investor". Retrieved 2017-02-22.
  40. ↑ "Invest Like Warren Buffett and Seth Klarman". Real Money. Retrieved 2017-02-23.
  41. 1 2 3 Belair2000 (2011-11-27), Seth Klarman Interview by Charlie Rose 2011 (Value Investing), retrieved 2017-02-22
  42. 1 2 3 "The $700 Used Book". Bloomberg.com. 2006-08-07. Retrieved 2017-02-22.
  43. ↑ "[Archives] Detailed Notes To Seth Klarman's Book "Margin Of Safety"". ValueWalk. 2015-07-23. Retrieved 2017-02-22.
  44. ↑ Staff, AOL. "Little-Known Billionaire's Book is the Holy Grail for Investors". AOL.com. Retrieved 2017-02-22.
  45. ↑ The Manual of Ideas (2009-04-29), Seth Klarman Introduces Ben Graham's Security Analysis, Sixth Edition, 2008, retrieved 2017-02-23
  46. ↑ Insight, Value Investor (2008-10-29). "Channeling Graham and Dodd: A Conversation with Seth Klarman". Seeking Alpha. Retrieved 2017-02-23.
  47. ↑ The $700 Used Book. (2006-08-07). BusinessWeek, Personal Finance section. Accessed 11-11-2008.

Further reading

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