WEBVTT - Value Investing Legend and Charlie Munger Disciple Seth Klarman 0:00:02.520 --> 0:00:11.880 Bloomberg Audio Studios, Podcasts, radio news. This is Masters in 0:00:11.960 --> 0:00:15.400 Business with Barry Ritholt on Bloomberg Radio. 0:00:16.680 --> 0:00:20.720 What can I tell you about this week's banger? Seth Klarman, 0:00:21.000 --> 0:00:26.080 legendary value investor out of Boston at the bow Post Group. 0:00:26.520 --> 0:00:31.120 What a fascinating discussion about risk, about the current environment, 0:00:31.680 --> 0:00:35.879 about the Boston Red Sox, about just about anything that 0:00:35.960 --> 0:00:41.960 affects portfolios, distress assets, stocks, bonds, real estate. I thought 0:00:42.040 --> 0:00:45.159 this was fascinating and I know you will also with 0:00:45.320 --> 0:01:01.280 no further ado, my conversation with Seth Klarman. Flarman, Welcome 0:01:01.360 --> 0:01:02.000 to Bloomberg. 0:01:02.400 --> 0:01:03.240 So great to be here. 0:01:03.280 --> 0:01:05.720 Thank you, Berry, Thank you so much. I've been looking 0:01:05.760 --> 0:01:10.120 forward to this for forever. Before we get into your 0:01:10.160 --> 0:01:14.280 investment philosophy and the development of baopost, I have to 0:01:14.400 --> 0:01:19.000 roll back a little bit to your early days economics 0:01:19.400 --> 0:01:24.480 from Cornell, an MBA from Harvard. What was the original 0:01:24.480 --> 0:01:25.080 career plan? 0:01:27.360 --> 0:01:30.520 So I was always drawn to investing, even when I 0:01:30.600 --> 0:01:34.000 was a very young kid. I was interested in the 0:01:34.040 --> 0:01:37.440 baseball statistics. I became aware that there were these other 0:01:37.520 --> 0:01:41.360 columns of numbers in the newspaper and asked my neighbor 0:01:41.800 --> 0:01:44.720 what those were and started to understand and follow the 0:01:44.760 --> 0:01:46.880 stock market a little bit. So, of course I had 0:01:46.880 --> 0:01:48.960 no idea what I was doing, but I was paying 0:01:49.000 --> 0:01:52.720 attention from quite early age. I didn't really ever develop 0:01:52.760 --> 0:01:55.640 a career plan, but I was drawn to the stock market. 0:01:56.320 --> 0:01:58.240 I think I'm drawn to puzzles. 0:01:58.280 --> 0:01:58.600 Berry. 0:01:59.120 --> 0:02:03.640 I like doing word puzzles every day, like solving math puzzles. 0:02:03.840 --> 0:02:07.920 I subscribed still to something called a math puzzle book 0:02:07.960 --> 0:02:12.080 published by Dell. And stock market's a big puzzle. The 0:02:12.120 --> 0:02:15.040 financial markets are a big puzzle. How does it all work? 0:02:15.560 --> 0:02:18.880 And how does the performance of the companies get reflected 0:02:18.919 --> 0:02:23.760 in stock prices? And how can an investor outperform everybody else? 0:02:23.919 --> 0:02:26.600 And so all of that is a piece of what 0:02:26.680 --> 0:02:27.200 drew me in. 0:02:27.680 --> 0:02:32.600 So I'm interested in how you first found that beyond 0:02:32.600 --> 0:02:36.720 the newspaper stock price pages. You grow up in Baltimore, 0:02:36.840 --> 0:02:39.880 your parents divorce when you were relatively young. Mom was 0:02:39.919 --> 0:02:43.880 an English teacher, later a psychiatric social worker. Dad was 0:02:43.919 --> 0:02:48.600 a health economist at John Hopkins and NYU. Was it 0:02:49.000 --> 0:02:53.040 just simply thumbing through the sports pages literally to the 0:02:53.080 --> 0:02:56.480 next set of pages were the stock pages. 0:02:56.800 --> 0:03:00.800 That's literally the numbers on the page attract my attention. 0:03:02.360 --> 0:03:04.640 I would say, you know, I think my origin story 0:03:04.720 --> 0:03:08.400 is a lot like other people in who ended up 0:03:08.440 --> 0:03:11.079 in the investing business, like Warren Buffett, like I think 0:03:11.120 --> 0:03:16.359 Todd Combs, like many others drawn to small businesses wanted 0:03:16.400 --> 0:03:19.640 to make money. So I was delivering newspaper route for 0:03:19.680 --> 0:03:23.640 the Baltimore Sun Papers. I had a snow cone stand 0:03:23.720 --> 0:03:28.000 in my driveway. One summer. I mode lawns, I rake leaves, 0:03:28.000 --> 0:03:31.440 I shoveled snow, I did little carnivals for the neighborhood 0:03:31.520 --> 0:03:37.600 kids whatever. I sold candy at religious school on Tuesdays 0:03:37.600 --> 0:03:41.360 and Thursdays because the kids were starving after school, and 0:03:41.480 --> 0:03:43.440 I would buy it up over the weekend and bring 0:03:43.440 --> 0:03:46.040 it to school and sell it for an arbitrage profit. 0:03:46.920 --> 0:03:50.480 So it was just a pattern of being drawn to 0:03:50.720 --> 0:03:54.920 small business and make money, and over time that led 0:03:54.920 --> 0:03:57.360 to an interest in stock market. About my first stock 0:03:57.800 --> 0:04:00.520 with some barmuts for money when I was around ten years. 0:04:00.640 --> 0:04:02.119 Well, it couldn't have been bar Mitz for money. 0:04:02.120 --> 0:04:04.320 If it wasn't bar Mitz money, then it was a present. 0:04:04.600 --> 0:04:06.440 But then bar Mitz money continued to be. 0:04:06.600 --> 0:04:09.000 So really well then ten years old and. 0:04:08.960 --> 0:04:10.920 I bought a shriff Johnson and Johnson. 0:04:11.080 --> 0:04:12.080 Uh huh, still have it? 0:04:12.840 --> 0:04:13.839 Do not still have it? 0:04:13.840 --> 0:04:17.400 It split three for one, but ultimately I presumably have 0:04:17.480 --> 0:04:19.880 traded that in for something else that I that I 0:04:19.960 --> 0:04:20.360 like better. 0:04:20.680 --> 0:04:24.039 So let's fast forward a little bit to the bow 0:04:24.200 --> 0:04:28.919 Post origin story, which isn't that far ahead. You're only 0:04:29.040 --> 0:04:32.320 twenty five. The urban legends you co found bow Post, 0:04:32.440 --> 0:04:36.599 but reality you were brought in to manage money for 0:04:36.680 --> 0:04:41.599 the four founding families. Still at twenty five, that's a 0:04:41.760 --> 0:04:45.159 kind of shocking thing. Oh, we have all this wealth, 0:04:45.240 --> 0:04:47.800 let's bring in this kid to run our portfolio. 0:04:48.120 --> 0:04:48.360 Right? 0:04:48.400 --> 0:04:50.760 And I would say the same thing if I were, 0:04:50.880 --> 0:04:53.039 if I were in their seats, I would wonder, how 0:04:53.040 --> 0:04:57.000 does this kid know how to do that? So I 0:04:57.040 --> 0:04:59.800 don't think people should generally be starting investment firms at 0:04:59.800 --> 0:05:02.479 age twenty five. And of course I really didn't start 0:05:02.520 --> 0:05:05.600 the firm. The firm was in the process of being created. 0:05:06.240 --> 0:05:08.919 The four clients of the firm that came together. The 0:05:08.960 --> 0:05:12.880 founders had the idea that they would build a firm 0:05:13.000 --> 0:05:16.960 that might go and make investments itself, might hand money 0:05:17.000 --> 0:05:20.240 to others who were in the business already of making investments. 0:05:20.440 --> 0:05:22.920 So I think they wanted to build kind of an 0:05:23.080 --> 0:05:26.839 institutional structure or framework for how to make sure the 0:05:26.839 --> 0:05:30.080 money got managed well given what was then back in 0:05:30.120 --> 0:05:32.760 the early eighties a highly fraught time as you know 0:05:32.839 --> 0:05:38.440 from history, the volatile markets, long history of underperformance of 0:05:38.520 --> 0:05:43.400 the stock market, and real economic uncertainty, stagflation at some 0:05:43.480 --> 0:05:46.840 point and getting worse. Treasury bond yields were getting higher 0:05:46.839 --> 0:05:49.640 and higher. So it was a really fraught moment, and 0:05:49.680 --> 0:05:52.200 I think they wanted to make sure that the money 0:05:52.240 --> 0:05:56.520 they had not only was kept intact, but was accounted 0:05:56.560 --> 0:06:00.880 for clip the coupons and collected ends and all of that. 0:06:01.839 --> 0:06:05.880 The founders were all selling businesses around that time, So 0:06:05.960 --> 0:06:08.680 the serendipity was I was a student at business school. 0:06:09.440 --> 0:06:14.320 Bill Porvu, the PO of Bowpost, was my real estate professor, 0:06:14.880 --> 0:06:18.320 and he and some friends were selling Channel five. He 0:06:18.360 --> 0:06:22.279 was a big investor in that the Metromedia largest sale 0:06:22.320 --> 0:06:24.919 at the time of a TV station to Metromedia. It 0:06:24.960 --> 0:06:28.680 was the ABC affiliate in Boston. A third friend had 0:06:28.680 --> 0:06:32.760 a computer publishing and consulting business. All that was getting sold, 0:06:33.240 --> 0:06:35.599 so they had this pile of twenty seven million dollars 0:06:35.960 --> 0:06:38.280 and the basic job offer I got wasn't come run 0:06:38.320 --> 0:06:41.400 a fund. It was come join us, and let's figure 0:06:41.400 --> 0:06:42.920 out smart things to do with the money. 0:06:43.360 --> 0:06:48.400 So eventually you become the lead partner there. I don't 0:06:48.400 --> 0:06:50.320 know if CEO is the right term. 0:06:50.760 --> 0:06:53.120 I wasn't CEO for the first seven or so years, 0:06:53.360 --> 0:06:56.919 and then it became CEO and effectively got control of 0:06:56.960 --> 0:07:01.120 the firm as sort of a handshake deal where we 0:07:01.200 --> 0:07:03.760 agreed that if I worked hard and did well for 0:07:03.880 --> 0:07:06.920 the clients, that they would recognize that with a stake 0:07:06.960 --> 0:07:09.000 in the business. So I had no stake the day 0:07:09.000 --> 0:07:11.400 it was formed, and ended up with over half. 0:07:12.480 --> 0:07:16.880 Ended up with over half. That's amazing forty something years later. 0:07:16.680 --> 0:07:19.960 And now much less because I'm a big believer in 0:07:20.000 --> 0:07:21.400 sharing the pie with my team. 0:07:22.240 --> 0:07:24.360 Makes a lot of sense. Let's talk a little bit 0:07:24.360 --> 0:07:27.320 about the timing you mentioned. There was a lot of 0:07:27.360 --> 0:07:31.960 turmoil and stagflation the previous sixteen years. I want to 0:07:32.000 --> 0:07:36.320 say the inflation adjusted returns for something like down seventy 0:07:36.320 --> 0:07:39.920 five percent, sixty six to eighty two, something along those lines. 0:07:40.360 --> 0:07:44.520 Eighty two was the beginning of a historic bull market. 0:07:44.960 --> 0:07:47.480 How did that affect how you thought about risk, how 0:07:47.520 --> 0:07:52.080 you thought about opportunities, what were you. What did the 0:07:52.160 --> 0:07:56.080 markets look and feel like in eighty two, when I 0:07:56.080 --> 0:07:58.080 imagine most people were still pretty bearish. 0:07:59.160 --> 0:08:02.400 Yeah, so I think Malcolm Gladwell would look and say, 0:08:02.480 --> 0:08:04.840 nineteen eighty two, what an interesting time to start an 0:08:04.840 --> 0:08:07.760 investment firm. That certainly was a wind at your back 0:08:07.800 --> 0:08:11.280 in terms of being successful the challenges. And you know 0:08:11.360 --> 0:08:14.240 this how it works in the markets is you had 0:08:14.280 --> 0:08:15.840 no idea that you were at the beginning of a 0:08:15.880 --> 0:08:18.800 long bowl market. What you felt was the market hasn't 0:08:18.800 --> 0:08:21.280 done that well, you know, for a long period of time, 0:08:21.800 --> 0:08:24.280 and people were very skeptical about it, and you could 0:08:24.280 --> 0:08:27.520 always point to I think this is probably valuable insight 0:08:27.680 --> 0:08:30.360 is you could always point to things at any moment 0:08:30.680 --> 0:08:33.760 that don't add up, that seem overvalued, that seemed risky, 0:08:34.679 --> 0:08:37.160 and yet we get through most of those things. So 0:08:37.280 --> 0:08:39.600 at the time it didn't feel like a gimme, It 0:08:39.600 --> 0:08:43.800 didn't feel like a lay up hand. But what ended 0:08:43.840 --> 0:08:46.440 up happening was, you know, we tried to make money 0:08:46.520 --> 0:08:49.760 apart from the market. We weren't buying an index. Indexes 0:08:49.800 --> 0:08:52.320 weren't big then anyway, we weren't buying the market. We 0:08:52.360 --> 0:08:56.480 were buying idiosyncratic situations, looking for situation bottom up by 0:08:56.480 --> 0:08:59.960 bottom up miss pricings and that led to us build 0:09:00.200 --> 0:09:04.000 a record. So while it looks just okay compared to 0:09:04.040 --> 0:09:06.520 the market over that period of time, I think we 0:09:06.520 --> 0:09:08.960 would have done okay whether the market had been up 0:09:09.000 --> 0:09:09.360 down our. 0:09:09.360 --> 0:09:14.959 Sideways really interesting. So given you coming off of what 0:09:15.080 --> 0:09:17.920 was an epic bear market and just a whole lot 0:09:17.960 --> 0:09:24.680 of cross current stagflation, super high rates under Vulker, you're 0:09:24.720 --> 0:09:27.400 not that far away in eighty two from the end 0:09:27.440 --> 0:09:32.760 of Vietnam, Watergate, all that malaise. How did that environment 0:09:32.800 --> 0:09:36.320 affect you as a professional investor? How did that change 0:09:36.360 --> 0:09:40.280 how you looked at the world, and what lessons did 0:09:40.320 --> 0:09:40.960 you take from it? 0:09:41.559 --> 0:09:43.880 I would tell you I think every investor needs to 0:09:43.920 --> 0:09:48.800 be a student of history. That it may not repeat exactly, 0:09:48.880 --> 0:09:52.640 but it certainly rhymes and it is very valuable to understand, 0:09:52.640 --> 0:09:56.280 and I think especially financial history for an investor. So 0:09:56.400 --> 0:09:59.760 what are the worst moments? How did we go through 0:09:59.760 --> 0:10:03.560 a market crash in nineteen twenty nine to nineteen thirty 0:10:03.600 --> 0:10:07.240 three and a great depression that lasted close to a decade. 0:10:08.040 --> 0:10:10.400 What must that have been like for the people at 0:10:10.440 --> 0:10:14.080 the time? How would one handle oneself. If you're going 0:10:14.080 --> 0:10:16.320 into a period like that that we know that even 0:10:16.360 --> 0:10:19.800 the greatest acclaim value investor of all time, Benjamin Graham, 0:10:20.160 --> 0:10:24.920 nearly went broke twice during that era. So it's I 0:10:24.960 --> 0:10:30.319 think incumbent on all investors to be thinking and maybe 0:10:30.360 --> 0:10:33.440 holding multiple inconsistent thoughts in their head at the same 0:10:33.480 --> 0:10:37.679 time that I found this interesting opportunity today, this bargain 0:10:37.760 --> 0:10:41.600 price stock for whatever reason, it's out of favor. They 0:10:41.640 --> 0:10:44.800 cut their dividend, it's a spin off, it's a bankrupt 0:10:45.200 --> 0:10:49.080 security that's converting into a new equity. These things tend 0:10:49.080 --> 0:10:53.520 to get mispriced, but you've got a backdrop of from 0:10:53.520 --> 0:10:56.040 time to time, as today, we have a backdrop of 0:10:56.400 --> 0:10:59.000 very expensive market and a bit of you for a 0:10:59.120 --> 0:11:02.760 conditions is that dangerous? It's dangerous, But we're also at 0:11:02.760 --> 0:11:06.080 the cusp of maybe a groundbreaking new technology. So I 0:11:06.080 --> 0:11:08.920 think over the forty years, it's always been some of 0:11:09.000 --> 0:11:13.400 both that you've got a backdrop of something sometimes very depressed, 0:11:13.440 --> 0:11:17.320 sometimes very optimistic, but you've also got individual securities that 0:11:17.360 --> 0:11:21.320 are fluctuating around, maybe creating bottom up opportunity. What I 0:11:21.400 --> 0:11:25.120 deeply believe is that value investors make money staying in 0:11:25.160 --> 0:11:27.680 the bottom up that you might have a top down view, 0:11:27.760 --> 0:11:29.480 you might say, yeah, it could be a bubble, it 0:11:29.480 --> 0:11:32.440 could be a problem. But bottom up is where you're 0:11:32.480 --> 0:11:35.360 going to devote your time. It keeps you anchored that 0:11:35.440 --> 0:11:37.880 if you have a portfolio of bargains, you're probably going to. 0:11:37.840 --> 0:11:40.480 Do okay if you've stress tested. 0:11:40.160 --> 0:11:42.320 Them and if you've been intellectually honest about them and 0:11:42.320 --> 0:11:43.400 they really are bargains. 0:11:43.760 --> 0:11:46.719 So you mentioned Ben Graham, I'm curious as to who 0:11:46.800 --> 0:11:52.000 else were important influences on the development of your investment philosophy. 0:11:52.600 --> 0:11:57.320 I've read about Michael Price and Max Hein, Who affected 0:11:57.360 --> 0:12:01.880 you the most over the years? Who still affects you right? 0:12:02.000 --> 0:12:07.400 So I think reading Ben Graham was certainly a major 0:12:07.440 --> 0:12:10.040 influence on me. I think as he has been on 0:12:10.480 --> 0:12:14.200 essentially everybody in the value investing community. And then Warren Buffett, 0:12:14.200 --> 0:12:17.839 the real life practitioner of Graham as well, And it 0:12:17.920 --> 0:12:22.520 was always heartening to know that somebody like Buffett, who 0:12:22.559 --> 0:12:26.040 seemed to think similarly to how I thought, thought about 0:12:26.080 --> 0:12:29.719 downside risk, thought about the need to stay focused in 0:12:29.720 --> 0:12:32.880 individual companies and not worry so much about the overall market. 0:12:33.240 --> 0:12:38.079 The willingness to hold cash and concurrently like the willingness 0:12:38.120 --> 0:12:40.920 to not have an opinion on everything. I have a 0:12:40.960 --> 0:12:43.640 lot of ideas and I end up with no opinion, 0:12:43.760 --> 0:12:46.520 no position. But once in a while we find something 0:12:46.559 --> 0:12:49.040 that seems way off the beaten path that's really interesting. 0:12:49.440 --> 0:12:53.520 So to watch Warren Buffett do that, I've realized now 0:12:53.720 --> 0:12:58.640 that Warren probably had a certainty of the idea that 0:12:58.679 --> 0:13:01.760 he would compound capital over a long period of time, 0:13:02.280 --> 0:13:06.680 and I think that that is something that Graham probably gave. 0:13:07.080 --> 0:13:10.160 Warren gave me as well, the idea that if you 0:13:10.200 --> 0:13:13.400 protect on the downside, if you don't find yourself getting 0:13:13.440 --> 0:13:18.880 margin calls, frozen in place because you're too exposed, or 0:13:20.520 --> 0:13:23.560 getting massive redemptions because you're down so much, if you 0:13:23.559 --> 0:13:26.240 can position yourself that way, it can leave in a 0:13:26.280 --> 0:13:29.439 position to play offense when even your best competitors might 0:13:29.480 --> 0:13:32.439 be not on the playing field. And that's a huge advantage. 0:13:32.480 --> 0:13:37.120 So I think that Graham a dot is kind of 0:13:37.120 --> 0:13:39.480 a north star. It kind of is a place where 0:13:39.880 --> 0:13:42.920 you can stay focused on what's something worth. You can 0:13:43.000 --> 0:13:46.839 ignore the herd, you can ignore the siren song of 0:13:47.559 --> 0:13:52.360 growth at any price, and of exciting new technologies and 0:13:52.400 --> 0:13:55.880 exciting IPOs and you could ignore all that because you 0:13:55.880 --> 0:13:58.199 have a confidence that I own something that's going to 0:13:58.240 --> 0:14:00.240 be worth more a year or two from now than 0:14:00.280 --> 0:14:03.800 it is today. And that's I think the that's an 0:14:03.920 --> 0:14:07.880 underpinning that lets you follow a value investment strategy. 0:14:07.720 --> 0:14:12.680 So you mentioned downside risk and that we referred to 0:14:12.760 --> 0:14:16.440 before you began in nineteen eighty two. Less than a 0:14:16.480 --> 0:14:20.440 decade later, you publish Margin of Safety nineteen ninety one. 0:14:21.280 --> 0:14:23.920 What led to you, at the ripe old age of 0:14:23.920 --> 0:14:28.000 thirty four to write a book on risk management? What 0:14:28.160 --> 0:14:33.080 was the motivation? How was it initially received, because it's 0:14:33.160 --> 0:14:38.040 become so sought after these days, what was the initial reception? Like? 0:14:38.800 --> 0:14:43.080 Yeah, so I think in retrospect that looks pretty darn presumptuous. 0:14:44.080 --> 0:14:46.680 I got asked to write it by a classmate from 0:14:46.720 --> 0:14:50.480 business school who worked at Harper Collins at the time 0:14:50.560 --> 0:14:56.000 or Harper and Roe, maybe before Harper Collins, and she 0:14:56.160 --> 0:14:58.760 had seen some of my client letters. She said, you know, 0:14:58.760 --> 0:15:00.840 you seem like you'd be a good writer, and you're 0:15:00.840 --> 0:15:03.240 a smart guy. Maybe you'll have something to tell the audience. 0:15:04.760 --> 0:15:08.640 What I really thought was, I'm just updating intelligent investor 0:15:09.120 --> 0:15:15.960 for modern examples and contemporary market. That's decades since that 0:15:16.040 --> 0:15:19.520 book was written, and I thought maybe i'd make it 0:15:19.560 --> 0:15:24.320 a little bit more accessible for the average Joe. I 0:15:24.320 --> 0:15:26.400 don't know whether it accomplished that, but that's what I 0:15:26.440 --> 0:15:29.680 was trying to do. I had no idea if I 0:15:29.760 --> 0:15:32.400 didn't think I would make money from writing the book. 0:15:32.480 --> 0:15:34.640 I mean, as you as an author, you know, we 0:15:34.680 --> 0:15:37.920 get like a buck fifty an hour. But it's a 0:15:37.960 --> 0:15:41.560 great feeling and it's a ton of work, but I 0:15:41.560 --> 0:15:44.240 think ultimately worth it, and you get smarter from the 0:15:44.280 --> 0:15:45.240 act of writing. 0:15:44.960 --> 0:15:45.720 About what you do. 0:15:45.880 --> 0:15:48.240 You can do what you do all day long without 0:15:48.920 --> 0:15:51.320 maybe fully forming the philosophy, but if you want to 0:15:51.320 --> 0:15:53.840 share it with anybody else, it makes you think more 0:15:53.880 --> 0:15:55.000 clearly about what you do. 0:15:55.400 --> 0:15:59.840 Yeah. The former Librarian of Congress, Daniel Borston used to say, 0:16:00.240 --> 0:16:02.360 I write to figure out what I think, And there's 0:16:02.400 --> 0:16:05.040 a lot of truth to that. What was the initial reception, like, 0:16:05.120 --> 0:16:09.120 did people respond or did it kind of land in 0:16:09.480 --> 0:16:13.560 a handful of value? Geeks bought it, but no one else, so. 0:16:13.680 --> 0:16:14.760 It's somewhere in between. 0:16:14.880 --> 0:16:18.160 What happened first was I think my editor got fired 0:16:18.200 --> 0:16:21.640 three different times, so I kept getting new editors. They 0:16:21.640 --> 0:16:24.840 had promised to back the book with advertising, and they didn't, 0:16:25.080 --> 0:16:27.160 so the book landed with a bit of a thud. 0:16:27.240 --> 0:16:30.080 I think it had maybe a very tiny second printing, 0:16:30.440 --> 0:16:34.680 so I think they printed maybe seven thousand copies. I 0:16:34.760 --> 0:16:37.280 ended up buying a bunch of them back from HarperCollins 0:16:37.960 --> 0:16:40.160 by the time they took it off the market and 0:16:40.200 --> 0:16:42.000 the rights somehow reverted back to me. 0:16:43.040 --> 0:16:43.920 What it did do. 0:16:44.040 --> 0:16:49.160 Though, it was bought I think significantly by competitors who 0:16:49.280 --> 0:16:52.280 used it to train their teams. And that was also like, 0:16:52.400 --> 0:16:55.240 is that what I wrote it for? Because I don't mind, 0:16:55.640 --> 0:16:58.600 but it wasn't maybe the starting goal. The starting goal was, 0:16:58.880 --> 0:17:01.840 if you go back to the book, the first half 0:17:01.920 --> 0:17:05.240 of it was about the street and about how they 0:17:05.320 --> 0:17:09.879 treat the average investor and maybe the challenge of whether 0:17:09.920 --> 0:17:12.320 the investor is getting a good deal. And the second 0:17:12.320 --> 0:17:15.360 half is maybe an investment approach, a value oriented approach, 0:17:15.600 --> 0:17:18.320 and how an investor might think about doing that, even 0:17:18.320 --> 0:17:23.560 if they're not a professional investor. So it was successful 0:17:25.080 --> 0:17:27.120 in a weird way. It's sort of because it didn't 0:17:27.119 --> 0:17:30.000 get republished, it developed a bit of a cult following, 0:17:30.440 --> 0:17:34.320 and that's kind of amusing and interesting to me, and 0:17:34.520 --> 0:17:37.520 of course we've reprinted some on our own, so we've 0:17:37.520 --> 0:17:40.639 made it available to our clients and to summer interns 0:17:40.680 --> 0:17:43.240 and to anybody that's connected to the firm. 0:17:44.000 --> 0:17:49.360 So in twenty twenty three, the seventh edition of Security Analysis, 0:17:49.400 --> 0:17:54.719 Ben Graham's Framework for Investing was edited by you and 0:17:54.760 --> 0:17:59.240 in a lot of ways substantially rejiggered. How different is 0:17:59.280 --> 0:18:04.960 this version then Ben Graham's, I mean, obviously the markets changed, 0:18:05.000 --> 0:18:07.639 the economy is so much is different than when he 0:18:07.760 --> 0:18:09.439 was writing. How did you approach this? 0:18:10.160 --> 0:18:14.800 So the earlier edition, the sixth edition, I was co 0:18:15.000 --> 0:18:18.720 editor with Jim Grant and Bruce Greenwald, and the seventh 0:18:18.800 --> 0:18:22.639 edition they asked me to just edit that one. As editor, 0:18:23.160 --> 0:18:27.440 we didn't follow the process that you might follow, because 0:18:27.480 --> 0:18:30.200 we kind of thought of Security Analysis as the Bible 0:18:30.640 --> 0:18:32.800 and we thought we should leave it alone, and what 0:18:32.800 --> 0:18:36.159 we should do is have modern day expert investors right 0:18:36.280 --> 0:18:40.320 commentary about the different chapters, different sections of the book. 0:18:40.720 --> 0:18:41.640 So that's what we did. 0:18:42.160 --> 0:18:45.000 So I think the sixth edition and the seventh both 0:18:45.080 --> 0:18:48.520 have some really great selections by investors. Some of them 0:18:48.560 --> 0:18:51.040 are well known, but some of whom aren't known at all. 0:18:51.600 --> 0:18:54.480 And you know, my former colleague David Abrams is one 0:18:54.520 --> 0:18:58.600 of them. David's contribution in the sixth edition is one 0:18:58.600 --> 0:19:02.040 of the most brilliant things I've ever read, and so 0:19:02.119 --> 0:19:06.840 I felt like we were making we're moving Gramma DoD 0:19:06.960 --> 0:19:10.520 into a different era. The thing that's beautiful about Gramma 0:19:10.560 --> 0:19:13.120 DoD it was written a hundred years ago, give or take, 0:19:13.520 --> 0:19:15.560 and it was written during the depression, and things that 0:19:15.640 --> 0:19:19.040 made sense in a depression haven't made sense every day 0:19:19.160 --> 0:19:21.280 since then because we haven't been a depression most of 0:19:21.320 --> 0:19:22.400 the time since then. 0:19:22.760 --> 0:19:23.879 If at all. 0:19:24.080 --> 0:19:28.480 So it was an update, taking what's valuable why people 0:19:28.560 --> 0:19:31.560 revere the book as a bible, but also making it 0:19:31.600 --> 0:19:36.800 more accessible at more relevant modern day. We expanded it 0:19:36.840 --> 0:19:39.719 to cover some topics that were uncovered. It certainly has 0:19:39.840 --> 0:19:43.240 more international investing, which wasn't really focused on by Graham. 0:19:43.560 --> 0:19:46.520 It talks about some other private investments. It talks about 0:19:48.200 --> 0:19:52.159 some of the changes in financial markets, the latest manias 0:19:52.200 --> 0:19:54.920 and fads and all of that, but also the changes 0:19:54.960 --> 0:19:59.280 in market structure, the changes in asset classes that have 0:19:59.359 --> 0:20:02.000 come into exac distance and all of that. I think 0:20:02.080 --> 0:20:05.960 is a valuable updating of the literature and helps keep 0:20:06.040 --> 0:20:10.960 something relevant that deserves to be relevant while updated because 0:20:11.080 --> 0:20:14.879 in its original Graham and Dodd nineteen thirty four form 0:20:15.359 --> 0:20:16.840 wouldn't be very useful to people. 0:20:17.280 --> 0:20:21.440 Coming up, we continue our conversation with Seth Clarman, CEO 0:20:21.520 --> 0:20:25.439 and portfolio manager at the bow Post Group, discussing the 0:20:25.480 --> 0:20:30.280 firms evolution and philosophy. I'm Barry Ridults. You're listening to 0:20:30.400 --> 0:20:44.040 Masters in Business on Bloomberg Radio. I'm Barry Riddults. You're 0:20:44.080 --> 0:20:47.720 listening to Masters in Business on Bloomberg Radio. Our extra 0:20:47.800 --> 0:20:51.000 special guest this week is Seth Klarman. He's CEO and 0:20:51.080 --> 0:20:55.880 portfolio manager at the bow Post Group, a legendary value 0:20:55.960 --> 0:21:00.639 and distressed investment shop out of Boston, running over twenty 0:21:00.640 --> 0:21:05.240 two billion dollars in assets. So let's talk a little 0:21:05.280 --> 0:21:10.480 bit about the way you think of opportunities and risks. 0:21:11.160 --> 0:21:16.600 During the eight or nine financial crisis, you raised about 0:21:16.640 --> 0:21:21.280 four billion dollars and the research I read you're deploying 0:21:21.320 --> 0:21:24.919 one hundred million dollars a day into distress assets. That 0:21:25.160 --> 0:21:28.320 seems like a big chunk of money. First of all, 0:21:28.880 --> 0:21:32.080 are those numbers remotely accurate? Is that ballpark? 0:21:32.720 --> 0:21:33.440 It's ballpark? 0:21:33.880 --> 0:21:36.080 What I would tell you first of all is we 0:21:36.200 --> 0:21:39.120 had been closed for new clients much of our history, 0:21:39.600 --> 0:21:42.560 but we kept a list in case. And so when 0:21:42.600 --> 0:21:45.399 the market started to fall apart after bear Stearns and 0:21:45.440 --> 0:21:49.439 then after Liman, there were all kinds of things going on, 0:21:49.800 --> 0:21:54.680 and people were in great stress as we entered the 0:21:55.320 --> 0:21:59.720 uncertainty of an economic decline that could have pretty epic proportions. 0:21:59.760 --> 0:22:02.280 As it turned out, it probably was. It certainly was 0:22:02.280 --> 0:22:07.760 the worst decline since the Great Depression, and it stands 0:22:07.760 --> 0:22:11.280 out as kind of the mother of all bear markets 0:22:11.000 --> 0:22:15.840 for anybody in the last hundred years. So the challenge was, 0:22:16.800 --> 0:22:19.280 maybe it's time to take some capital, and the odds 0:22:19.280 --> 0:22:21.120 are increasing every day that we're going to be able 0:22:21.160 --> 0:22:22.200 to deploy it fruitfully. 0:22:22.600 --> 0:22:24.000 So what you said is about right. 0:22:24.600 --> 0:22:29.440 So bear Stearns, if I'm remembering correctly, was spring of 0:22:30.080 --> 0:22:34.520 two thousand and seven. Lehman was September of eight. That's 0:22:34.640 --> 0:22:38.120 not a lot of time from there until March on nine, 0:22:38.160 --> 0:22:44.240 when everything really bottoms. I have three questions about this. 0:22:44.359 --> 0:22:48.640 The first is how quickly were you able to raise capital, 0:22:48.720 --> 0:22:52.159 get the docks signed, and be prepared to deploy that 0:22:52.480 --> 0:22:55.480 as opportunities arose. Doesn't seem like there's a lot of time. 0:22:56.359 --> 0:22:58.960 The team worked heroically and we were able to raise 0:22:59.359 --> 0:23:04.000 about We were able to raise very significant capital within 0:23:04.040 --> 0:23:04.480 a quarter. 0:23:04.960 --> 0:23:07.840 Wow, that's really quickly. Now you mentioned the team, I 0:23:07.880 --> 0:23:12.600 have heard some really interesting rumors and legends. How did 0:23:12.600 --> 0:23:16.439 you put this team together? What was their marching orders? 0:23:16.480 --> 0:23:21.080 How did everybody operate in that period of absolute turmoil 0:23:21.160 --> 0:23:22.000 in Mayhew. 0:23:22.880 --> 0:23:26.520 So we already were an established firm. We've been up 0:23:26.520 --> 0:23:30.000 and running for a couple of decades by then. So 0:23:30.160 --> 0:23:37.560 I had a team in place, and they were deeply knowledgeable, experienced. 0:23:37.680 --> 0:23:40.280 Distressed asset expertise in the group. 0:23:41.520 --> 0:23:43.920 Not everybody on the team has that, but a very 0:23:44.000 --> 0:23:46.639 high percentage of the team has that. And people at 0:23:46.640 --> 0:23:50.520 balpos like being versatile athletes. So we're nimble, we're agile, 0:23:51.000 --> 0:23:54.240 and we cross train just kind of like baseball teams 0:23:54.240 --> 0:23:56.159