Institutional Investor's Alpha Magazine - June 2008 - (Page 54)

ALPHA HALL OF FAME SETH KLARMAN Business School but traces much of his success to two Wall Street mentors, Max Heine and Michael Price. How did you decide value investing was for you? “We’re not the stereotypical hedge fund in terms of an idea a minute. We come in with a view that a security is trading for less than it’s SETH worth, and KLARMAN we buy it.” Photographed by Mike McGregor for Alpha on May 20, 2008, in Boston. eth Klarman is nobody’s idea of a fastbuck, quick-change investor. Since helping to found Boston-based Baupost Group in 1982 with $27 million pooled from four families, he has emulated prototypical value-investment role models like Warren Buffett and the late Benjamin Graham. He buys underpriced equities and securities of bankrupt or distressed companies and usually steers clear of leverage and shorting, though last year he made very proﬁtable investments in credit protection and recorded his best-ever annual return (52 percent). Klarman credits his “very strong team” and stresses that he doesn’t even consider himself a hedge fund manager in the traditional sense (though he accepts only legally qualiﬁed investors and charges a 20 percent performance fee). Yet his nearly 20 percent annualized returns rival those of larger peers who take more risks. A professorial 51-year-old who manages $12 billion today, Klarman has an economics degree from Cornell University and an MBA from Harvard I was fortunate enough when I was a junior in college — and then when I graduated from college — to work for Max Heine and Michael Price at Mutual Shares [a mutual fund founded in 1949]. Their value philosophy is very similar to the value philosophy we follow at Baupost. So I learned the business from two of the best, which was better than anything you could ever get from a textbook or a classroom. Warren Buffett once wrote that the concept of value investing is like an inoculation — it either takes or it doesn’t — and when you explain to somebody what it is and how it works and why it works and show them the returns, either they get it or they don’t. Ultimately, it needs to ﬁt your character. If you have a need for action, if you want to be involved in the new and exciting technological breakthroughs of our time, that’s great, but you’re not a value investor and you shouldn’t be one. If you are predisposed to be patient and disciplined, and you psychologically like the idea of buying bargains, then you’re likely to be good at it. What traits in Heine and Price inﬂuenced you? Max Heine was great at not looking at what something was called, what its label was. He looked at what it actually was. For example, back in the late ’70s, Mutual Shares was buying the bonds of bankrupt railroads, and I think a lot of people would have said, “They’re bankrupt,” and “Who needs railroads?” Max and one of his partners knew how many miles of track the railroad had, what the scrap steel on the track could have been sold for and which railroads might have wanted pieces of those networks. They also knew what the real estate rights above the terminals were worth. Michael Price was fabulous at pulling threads. He would notice something, and then he would get curious and ask questions. And one thing would lead to another thing, and that would lead to another thing. I remember a chart that Michael made of interlocking ownership of mining companies that was an extension of a thought where one good idea led to another and had the potential to lead to many more if the threads kept being pulled. That was a great lesson — to never be satisﬁed. Always be curious. Value is your mantra. We don’t even think of ourselves as a hedge fund. We see ourselves as basically long-only investors. Unlike hedge funds, we don’t leverage the portfolio — never a nickel of portfolio leverage. We have a minimal amount of shorts, currently less than 1 percent of the total assets. We’re not the stereotypical hedge fund in terms of an idea a minute. We’re very bottom up, not top down. We don’t come into the ofﬁce with a view that interest rates, the dollar or the economy are going to do this or that. We come in with a view that this particular asset or security is trading for less than it’s worth and we want to buy it. We have a different approach than a lot of, quote, “hedge funds.” 54 • INSTITUTIONAL INVESTOR’S ALPHA • JUNE 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - June 2008

Investor's Alpha Magazine - June 2008 Contents Letter From the Editor Longs & Shorts Cover Story: Alpha Hall of Fame Bruce Kovner Michael Steinhardt Kenneth Griffin Louis Bacon Steven Cohen George Soros James Simons Seth Klarman Julian Robertson Jr. Jack Nash Leon Levy Paul Tudor Jones II Alfred Winslow Jones David Swensen Looking Ahead: Back to the Future Research Center: Europe Hedge Fund 50 Unhedged: Let the Sunshine In

Institutional Investor's Alpha Magazine - June 2008

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