While other money managers scrambled to survive the financial market meltdown, value investor extraordinaire Seth Klarman (MBA ’82), president of The Baupost Group in Boston, cautiously pursued buying opportunities. After sitting patiently on the sidelines with a mountain of cash — 40 to 50 percent of Baupost’s $14 billion plus in assets — for several years, the firm’s recent investments have cut its cash stash in half. Distress selling, it seems, breeds the kind of bargains Klarman lives for.
...What gave you the resolve to say no to all the other investment approaches?
There are several answers. First, 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 highfliers, 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.
Do you set an annual return target?
We think it’s madness to target a return. Return lies in some relationship to risk, albeit there are moments when it’s out of whack, when you can make a high return with very limited risk. My view is that you can target risk versus return. So you can say, I’ll take the very safe 6 percent, I’ll take the somewhat risky 12, or I’ll take the enormously risky 20, knowing that 20 might actually be minus 20 by the time the actual results are known. We just don’t think targeting a return is smart.
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