Seth Klarman Background

Seth Klarman is best known for his rare book Margin of Safety. But he is also the head of Baupost Group, a successful hedge fund.

Lessons from Seth Klarman:

• Buy companies for a price less than their liquidation value.
• The best company to buy is the one that is completely predictable and you understand its future perfectly
• Examples of the above are: Subscription (Saas) companies and companies with long-term sales contracts.
• Different industries are popular at the moment. No industry is popular all the time (that’s why concepts like “Sector Rotation” exist).
• It’s easier to identify a company’s biggest sources of growth than to forecast them.
• Seth Klarman believes that there is always room for new small businesses when it comes to distressed debt buyouts. The reason for this is that those who are successful in the field, get a lot of money and thus cannot look at the smallest objects. It is quite similar to Warren Buffett’s and Charlie Munger’s Berkshire Hathaway. They got too big to buy smaller, good companies, and had to look at big companies – like Apple and Li Lu’s company BYD.
• Don’t use the DDM (Dividend Discount Model) when checking stocks, because dividends are not interesting. Why not? Because, as Joel Greenblatt noted, it’s about a company’s ability to reinvest its cash flows. Dividends are taxed at 30% (in Sweden), reinvestments don’t have to be taxed, because the money stays in the company as an expense. This was the genius of cable entrepreneur John Malone, and it made him a billionaire.
• If you read a company’s annual report and it’s too difficult and complicated, it could be a sign that you shouldn’t invest in the company. After all, if you don’t understand it, you won’t know if it goes bad later! Be careful! It might be better to avoid losses in the first place. (Keep in mind Seth Klarman is in the top 0.01% of people at accounting and reading company reports, and you may not be.)
• Use ranges: It is difficult to know what a stock is worth. A value investor should therefore (start by) guessing at a BIG overprice, or an underprice. Then it will be easier to find an approximately correct value.
• The fewer stocks you research, the more likely you are to find one that is undervalued. This may sound counter-intuitive, but it’s true – because it takes some time to research each stock.

Read about 20 other renowned value investors and their investing strategies.