Seth Klarman

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

Seth Klarman
Born (1957-05-21) May 21, 1957
New York City, U.S.
NationalityAmerican
Alma materCornell University (BA)
Harvard Business School (MBA)
OccupationHedge fund manager
Known forFounding and leading the Baupost Group
Net worthUS$1.50 billion (May 2020)[1]
TitleCEO, Baupost Group
Spouse(s)
Beth Schultz Klarman
​
​
(m. 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 from any rise in price. Since his fund's $27 million-dollar inception in 2008, he has realized a 20% compounded return on investment. He manages $27 billion in assets.[1]

Forbes lists his personal fortune at US$1.50 billion and he is the 15th highest earning hedge fund manager in the world.[1] In 2008, he was inducted into Institutional Investor 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."[3][5][6]

Early life

Klarman was born on May 21, 1957 in New York City.[7][2] When he was six, he moved to the Mt. Washington area of Baltimore, Maryland near the Pimlico Race Course.[8] His father was a public health economist at Johns Hopkins University and his mother was a psychiatric social worker [9][10] His parents divorced shortly after their moving to Baltimore.[8]

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, he 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.[7] 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). His reasoning behind buying a share of Johnson & Johnson that he had used a lot of band-aids (a product of the company) during his earlier years.[7] At age 12 he was regularly calling his broker to get stock quotes.

Education

Klarman attended Cornell University in Ithaca, New York, and was interested in majoring in mathematics but instead chose to pursue economics.[8] He graduated magna cum laude in economics with a minor in history in 1979.[11] He was a member of the Delta Chi fraternity.[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.[8] 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]

Career

Investment
Further information on Seth Klarman's leadership of the Baupost Group: Baupost Group

After graduating from business school in 1982, he founded The Baupost Group with Harvard Professor William J. Poorvu and partners Howard H. 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).[8] 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.[8] 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."[8] Early on in his investment career, he used to badger Goldman Sachs salesmen with so many 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.[8]

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 buying $100 million in stocks and other assets per day. While the market was down due to the aftermath of the crisis he purchased many distressed securities and bonds. By early 2009, after JPMorgan Chase acquired Washington Mutual as a part of their deal with the United States Department of the Treasury, Sallie Mae bonds were returning double digit figures for Baupost. 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.[8] The same year he would go on to buy a minority share in the Boston Red Sox, via a stake in Ed Eskandarian.[8]

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.[8] Shortly after the CIT deal was finalized, Klarman amassed a stake in a new bio-tech company called FacetBiotech, at an average cost of $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."[8] 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%.[8]

As of 2016, the fund had US$31 billion in assets under management.[15][16] In 2020 Seth Klarman's largest holding is eBay with a value of US$1.48 billion.[17]

Investment philosophy

Klarman is a known proponent of value investing, 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 capital markets 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 Financial crisis of 2007–2008 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.[8]

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.[8] 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.[18][19] Despite his unconventional strategies, he has consistently achieved high returns.[20] 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. In 2015, when energy stocks were declining, his firm "started looking for deals."[21] 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."[8]

In a 2011 interview with Charlie Rose, Klarman states he does not use a Bloomberg Terminal (an almost ubiquitous computer system used in major U.S. financial companies to track market data). Klarman stated due to his long-term strategy he is mostly uninterested in daily price fluctuations.[22]

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.[23][24]

Personal life

Klarman typically keeps a low profile, rarely speaking in public or granting interviews.[25] He lives in Chestnut Hill, Massachusetts with his wife, Beth Schultz Klarman, whom he met on a Boston Harbor cruise in 1982; they have three children.[1][26][27][28] His brother, Michael Klarman, is a professor at Harvard Law School.[10]

Political and economic views

Klarman has donated to both Democratic and Republican groups and candidates while being registered an independent voter.[27][29] However, since the election of Donald Trump in 2016, he has donated almost exclusively to Democrats.[30] He has also given extensively to philanthropic causes through the Klarman Family Foundation, which he runs with his wife. The foundation has $700 million in assets as of 2018 and gave away $40 million in 2016. It focuses on pro-democracy initiatives, such as supporting groups that protect journalists, fight against bigotry, and advocate for LGBT rights.[30]

Klarman is a major backer of political non-profits such as the Ending Spending Fund[31] and the pro-same-sex marriage American Unity Fund.[32] 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."[33]

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."[29]

After the inauguration 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.[34][35][36] 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.[37]

Although Klarman gave $2.9 million to Republican candidates in 2016, he told The New York Times in September 2018, "One of the reasons I’m willing to come out of my shell and talk to you is because I think democracy is at stake, and maybe I’ll be able to convince some other people of that, and get them to support Democrats in 2018." Klarman, who was previously one of the biggest donors to the Republican Party in New England, told the Times in September, 2018, that he had already contributed almost $5 million to nearly 150 candidates, including Representative Joe Kennedy III, Senate candidate Representative Beto O’Rourke and Senator Kirsten Gillibrand. Klarman is a registered Independent who reasoned, "We need to turn the House and Senate as a check on Donald Trump and his runaway presidency." He commented that he feels "betrayed" by "spineless" Republicans who have been "profiles in cowardice," and believes the only option is to "act as a check and balance."[38]

Pro-Israel affiliation

Klarman is co-founder and chairman of Israel-based The Times of Israel.[39]

According to the Mondoweiss website, Klarman has supported many neoconservative Israel lobby organizations, including the Foundation for Defense of Democracies, the Israel Project, Birthright Israel and Middle East Forum.[40]

Wealth

Forbes lists his personal fortune at US$1.5 billion and is the 15th highest earning hedge fund manager in the world.[1]

Philanthropy

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.[27] Klarman also is active with 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.[27] 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.[41][42]

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.[43] A year later, he donated money to Harvard Business School to construct a "conference center/auditorium and performance space," named Klarman Hall.[44] It opened in 2018.[45] In 2019, Cornell University announced that Klarman had donated significant funds to help establish a new postdoctoral fellowship program at the school, the Klarman Fellowships.[46]

Awards

Klarman has been called a "hedge fund titan,"[8] and a "quiet giant of investing,"[47] 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.[8] 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."[47] His Investopedia entry has him listed as "an enigma in the investing world."[48]

He is sometimes called "the Warren Buffett of his generation,"[3] and the "Oracle of Boston."[5] According to The New York Times, Buffett has publicly praised Klarman's investing,[47] and it has been reported that Buffett keeps a copy of his book on his bookshelf.[11]

In 2008, he was inducted into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame along with Alfred Jones, Bruce Kovner, David Swensen, George Soros, Jack Nash, James Simons, Julian Roberston, Kenneth Griffin, Leon Levy, Louis Bacon, Michael Steinhardt, Paul Tudor Jones and Steven A. Cohen.[49]

Publications and works

Klarman has written many annual letters to shareholders but has kept a limited role in writing articles, op-eds or books. In 1991, Klarman published his only book, Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor (1991), 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 share 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 follow the principles of value investing or people who invest in stocks that trade below their underlying value so as to purchase them at a discount.[50]

The book had amassed a cult following.[51][52][53] Due to "only 5,000 copies [being sold],"[54] the book is 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.[50][1] University libraries report the book as "one of their most wait-listed titles as well as one most claimed as lost."[50] Klarman has thought of bringing the book back, but only for a charity event.[54]

He edited the 6th edition of Benjamin Graham and David Dodd's Security Analysis in 2008.[55][56]

See also

References
  1. "Forbes profile: Seth Klarman". Forbes. Retrieved May 22, 2020.
  2. "The Baupost Group, LLC: Private Company Information - Bloomberg". Bloomberg L.P.
  3. "The Oracle of Boston". The Economist. July 7, 2012.
  4. "Alpha Magazine Introduces the Alpha Hedge Fund Hall of Fame" (Press release). Marketwired. May 19, 2008.
  5. Liang, David (February 20, 2017). "What This Legendary Value Investor Thinks About the Markets Right Now". The Motley Fool.
  6. Kollmeyer, Barbara (January 22, 2019). "The investor known as the 'Warren Buffett of Boston' rattles Davos crowd with this warning". Marketwatch.
  7. valueinvestingpro (January 30, 2010), Interview with Seth Klarman, MBA 1982 - Born to be an Entrepreneur - Harvard Business School.flv, retrieved February 24, 2017
  8. "The value of Seth Klarman | Institutional Investor's Alpha". www.institutionalinvestorsalpha.com. Retrieved February 24, 2017.
  9. Cendrowski, Scott (February 15, 2012). "A hedge fund bets big on a Canadian mega quarry". Fortune.
  10. "Herbert Klarman, 82, professor, health economist". The Baltimore Sun. June 19, 1999.
  11. "Seth Klarman Resource Page". ValueWalk. Retrieved February 2, 2017.
  12. https://www.businessinsider.com/wall-street-frats-2013-2#delta-chi--4
  13. Fabrikant, Geraldine (May 13, 2007). "Manager Frets Over the Market, but Still Outdoes It". The New York Times.
  14. Thompson, Roger (December 1, 2008). "Seth Klarman - Alumni". Harvard Business School.
  15. "The Baupost Group, LLC". investment-advisors.credio.com. Retrieved February 23, 2017.
  16. Delevingne, Lawrence; Herbst-Bayliss, Svea (January 29, 2016). "Klarman's Baupost fund posts 2015 losses due to energy firms7". Reuters.
  17. "$11 Billion Seth Klarman Portfolio / The Baupost Group Holdings". cheaperthanguru.com. Retrieved December 21, 2020.
  18. Hargreaves, Rupert (October 23, 2018). "Seth Klarman: Why You Need to Get Used to Holding Cash". Guru Focus.
  19. Raza, Sheeraz (January 29, 2014). "Klarman returns cash". Value Walk.
  20. Baupost's Klarman sees poor outlook for stocks Reuters, Aaron Pressman and Matthew Lewis. May 18, 2010
  21. "For hedge fund managers, modest returns produce big paychecks". The Boston Globe. May 7, 2015.
  22. https://m.youtube.com/watch?v=sz9f5uVEaEg
  23. Almasy, Steve (May 20, 2017). "Cloud Computing takes Preakness as Derby winner Always Dreaming fades". CNN.
  24. "Rested and ready: 13-1 shot Cloud Computing wins Preakness". Associated Press. May 20, 2017.
  25. Arends, Brett (May 19, 2010). "Klarman: Why Investing Is Like Chess". The Wall Street Journal.
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  27. Nathan-Kazis, Josh (February 29, 2012). "Jewish Daily Forward: "The Softspoken Man Behind Times of Israel - Famed Investor Seth Klarman Says Site Won't Pull Punches"". The Forward.
  28. Lawrence, J.M. (December 15, 2008). "George Schultz, glue gun inventor; at 82". The Boston Globe.
  29. Viser, Matt; Jan, Tracy (July 20, 2016). "Donald Trump is at the wheel, and road looks rocky". The Boston Globe.
  30. Weiss, Bari (September 15, 2018). "Money Talks. Will the G.O.P. Listen?". The New York Times.
  31. Sullivan, Sean (April 16, 2014). "Who funded the super PAC hitting Dem and GOP candidates? These three billionaires". The Washington Post.
  32. Confessore, Nicholas (April 26, 2013). "Pushing the G.O.P. to Support Gay Rights". The New York Times.
  33. "New England's top GOP donor isn't a Republican". The Boston Globe. June 1, 2015.
  34. Tuchman, Mitch. "Could index investing become too risky?". MarketWatch. Retrieved February 20, 2017.
  35. Kimelman, John. "A Tale of Two Trumps". Retrieved February 20, 2017.
  36. Melloy, John (February 8, 2017). "Hedge fund manager Klarman to Trump: Stop tweeting...doesn't make sense for a 'serious' president". CNBC. Retrieved February 20, 2017.
  37. Liang, David (February 20, 2017). "What This Legendary Value Investor Thinks About the Markets Right Now -- The Motley Fool". The Motley Fool. Retrieved February 20, 2017.
  38. Folley, Aris (September 15, 2018). "Ex-GOP donor urges support for Dems in midterms: 'Democracy is at stake'". The Hill.
  39. "'NYT' story on Seth Klarman abandoning GOP leaves out his prominent role in Israel lobby". Militarist Monitor. Retrieved February 5, 2020.
  40. "Billionaire pro-Israel Buttigieg backer Seth Klarman funds group behind Iowa's disastrous voting app". Mondoweiss. Retrieved February 5, 2020.
  41. http://blogs.timesofisrael.com/a-note-from-the-chairman/
  42. Nathan-Kazis, Josh (February 29, 2012). "The Softspoken Man Behind Times of Israel". The Forward.
  43. Aloi, Daniel (May 23, 2013). "Klarman Hall project begins; scheduled to open in 2015". Cornell Chronicle.
  44. "Harvard Business School Announces Major Conference Center". Harvard Magazine. June 5, 2014.
  45. "Klarman Hall Opens with Fanfare and Substance". Harvard Business School. October 3, 2018.
  46. Glaser, Linda (May 6, 2019). "Klarman postdoctoral fellowship program announced". Cornell Chronicle.
  47. Sorkin, Andrew Ross (February 6, 2017). "A Quiet Giant of Investing Weighs In on Trump". The New York Times. ISSN 0362-4331.
  48. Reiff, Nathan (February 7, 2017). "Who is Seth Klarman?". Investopedia.
  49. "Cohen, Simons, 12 Others Enter Hedge Fund Hall". Institutional Investor. Institutional Investor LLC. September 23, 2008. Retrieved June 16, 2019.
  50. "The $700 Used Book". Bloomberg.com. August 7, 2006. Retrieved February 22, 2017.
  51. "[Archives] Detailed Notes To Seth Klarman's Book "Margin Of Safety"". ValueWalk. July 23, 2015. Retrieved February 22, 2017.
  52. "Seth Klarman's Margin Of Safety: The Most Legendary Book In Personal Finance | The Conservative Income Investor". Retrieved February 22, 2017.
  53. LUND, BRIAN (April 16, 2014). "Little-Known Billionaire's Book is the Holy Grail for Investors". AOL.
  54. Belair2000 (November 27, 2011), Seth Klarman Interview by Charlie Rose 2011 (Value Investing), retrieved February 22, 2017
  55. The Manual of Ideas (April 29, 2009), Seth Klarman Introduces Ben Graham's Security Analysis, Sixth Edition, 2008, retrieved February 23, 2017
  56. Insight, Value Investor (October 29, 2008). "Channeling Graham and Dodd: A Conversation with Seth Klarman". Seeking Alpha. Retrieved February 23, 2017.

Further reading
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