Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Speaker 1: Business with Barry Ritholt on Bloomberg Radio.
Speaker 2: What can I tell you about this week's banger? Seth Klarman,
Speaker 2: legendary value investor out of Boston at the bow Post Group.
Speaker 2: What a fascinating discussion about risk, about the current environment,
Speaker 2: about the Boston Red Sox, about just about anything that
Speaker 2: affects portfolios, distress assets, stocks, bonds, real estate. I thought
Speaker 2: this was fascinating and I know you will also with
Speaker 2: no further ado, my conversation with Seth Klarman. Flarman, Welcome
Speaker 2: to Bloomberg.
Speaker 3: So great to be here.
Speaker 2: Thank you, Berry, Thank you so much. I've been looking
Speaker 2: forward to this for forever. Before we get into your
Speaker 2: investment philosophy and the development of baopost, I have to
Speaker 2: roll back a little bit to your early days economics
Speaker 2: from Cornell, an MBA from Harvard. What was the original
Speaker 2: career plan?
Speaker 4: So I was always drawn to investing, even when I
Speaker 4: was a very young kid. I was interested in the
Speaker 4: baseball statistics. I became aware that there were these other
Speaker 4: columns of numbers in the newspaper and asked my neighbor
Speaker 4: what those were and started to understand and follow the
Speaker 4: stock market a little bit. So, of course I had
Speaker 4: no idea what I was doing, but I was paying
Speaker 4: attention from quite early age. I didn't really ever develop
Speaker 4: a career plan, but I was drawn to the stock market.
Speaker 4: I think I'm drawn to puzzles.
Speaker 3: Berry.
Speaker 4: I like doing word puzzles every day, like solving math puzzles.
Speaker 4: I subscribed still to something called a math puzzle book
Speaker 4: published by Dell. And stock market's a big puzzle. The
Speaker 4: financial markets are a big puzzle. How does it all work?
Speaker 4: And how does the performance of the companies get reflected
Speaker 4: in stock prices? And how can an investor outperform everybody else?
Speaker 4: And so all of that is a piece of what
Speaker 4: drew me in.
Speaker 2: So I'm interested in how you first found that beyond
Speaker 2: the newspaper stock price pages. You grow up in Baltimore,
Speaker 2: your parents divorce when you were relatively young. Mom was
Speaker 2: an English teacher, later a psychiatric social worker. Dad was
Speaker 2: a health economist at John Hopkins and NYU. Was it
Speaker 2: just simply thumbing through the sports pages literally to the
Speaker 2: next set of pages were the stock pages.
Speaker 4: That's literally the numbers on the page attract my attention.
Speaker 4: I would say, you know, I think my origin story
Speaker 4: is a lot like other people in who ended up
Speaker 4: in the investing business, like Warren Buffett, like I think
Speaker 4: Todd Combs, like many others drawn to small businesses wanted
Speaker 4: to make money. So I was delivering newspaper route for
Speaker 4: the Baltimore Sun Papers. I had a snow cone stand
Speaker 4: in my driveway. One summer. I mode lawns, I rake leaves,
Speaker 4: I shoveled snow, I did little carnivals for the neighborhood
Speaker 4: kids whatever. I sold candy at religious school on Tuesdays
Speaker 4: and Thursdays because the kids were starving after school, and
Speaker 4: I would buy it up over the weekend and bring
Speaker 4: it to school and sell it for an arbitrage profit.
Speaker 4: So it was just a pattern of being drawn to
Speaker 4: small business and make money, and over time that led
Speaker 4: to an interest in stock market. About my first stock
Speaker 4: with some barmuts for money when I was around ten years.
Speaker 2: Well, it couldn't have been bar Mitz for money.
Speaker 4: If it wasn't bar Mitz money, then it was a present.
Speaker 4: But then bar Mitz money continued to be.
Speaker 2: So really well then ten years old and.
Speaker 3: I bought a shriff Johnson and Johnson.
Speaker 2: Uh huh, still have it?
Speaker 3: Do not still have it?
Speaker 4: It split three for one, but ultimately I presumably have
Speaker 4: traded that in for something else that I that I
Speaker 4: like better.
Speaker 2: So let's fast forward a little bit to the bow
Speaker 2: Post origin story, which isn't that far ahead. You're only
Speaker 2: twenty five. The urban legends you co found bow Post,
Speaker 2: but reality you were brought in to manage money for
Speaker 2: the four founding families. Still at twenty five, that's a
Speaker 2: kind of shocking thing. Oh, we have all this wealth,
Speaker 2: let's bring in this kid to run our portfolio.
Speaker 3: Right?
Speaker 4: And I would say the same thing if I were,
Speaker 4: if I were in their seats, I would wonder, how
Speaker 4: does this kid know how to do that? So I
Speaker 4: don't think people should generally be starting investment firms at
Speaker 4: age twenty five. And of course I really didn't start
Speaker 4: the firm. The firm was in the process of being created.
Speaker 4: The four clients of the firm that came together. The
Speaker 4: founders had the idea that they would build a firm
Speaker 4: that might go and make investments itself, might hand money
Speaker 4: to others who were in the business already of making investments.
Speaker 4: So I think they wanted to build kind of an
Speaker 4: institutional structure or framework for how to make sure the
Speaker 4: money got managed well given what was then back in
Speaker 4: the early eighties a highly fraught time as you know
Speaker 4: from history, the volatile markets, long history of underperformance of
Speaker 4: the stock market, and real economic uncertainty, stagflation at some
Speaker 4: point and getting worse. Treasury bond yields were getting higher
Speaker 4: and higher. So it was a really fraught moment, and
Speaker 4: I think they wanted to make sure that the money
Speaker 4: they had not only was kept intact, but was accounted
Speaker 4: for clip the coupons and collected ends and all of that.
Speaker 4: The founders were all selling businesses around that time, So
Speaker 4: the serendipity was I was a student at business school.
Speaker 4: Bill Porvu, the PO of Bowpost, was my real estate professor,
Speaker 4: and he and some friends were selling Channel five. He
Speaker 4: was a big investor in that the Metromedia largest sale
Speaker 4: at the time of a TV station to Metromedia. It
Speaker 4: was the ABC affiliate in Boston. A third friend had
Speaker 4: a computer publishing and consulting business. All that was getting sold,
Speaker 4: so they had this pile of twenty seven million dollars
Speaker 4: and the basic job offer I got wasn't come run
Speaker 4: a fund. It was come join us, and let's figure
Speaker 4: out smart things to do with the money.
Speaker 2: So eventually you become the lead partner there. I don't
Speaker 2: know if CEO is the right term.
Speaker 4: I wasn't CEO for the first seven or so years,
Speaker 4: and then it became CEO and effectively got control of
Speaker 4: the firm as sort of a handshake deal where we
Speaker 4: agreed that if I worked hard and did well for
Speaker 4: the clients, that they would recognize that with a stake
Speaker 4: in the business. So I had no stake the day
Speaker 4: it was formed, and ended up with over half.
Speaker 2: Ended up with over half. That's amazing forty something years later.
Speaker 4: And now much less because I'm a big believer in
Speaker 4: sharing the pie with my team.
Speaker 2: Makes a lot of sense. Let's talk a little bit
Speaker 2: about the timing you mentioned. There was a lot of
Speaker 2: turmoil and stagflation the previous sixteen years. I want to
Speaker 2: say the inflation adjusted returns for something like down seventy
Speaker 2: five percent, sixty six to eighty two, something along those lines.
Speaker 2: Eighty two was the beginning of a historic bull market.
Speaker 2: How did that affect how you thought about risk, how
Speaker 2: you thought about opportunities, what were you. What did the
Speaker 2: markets look and feel like in eighty two, when I
Speaker 2: imagine most people were still pretty bearish.
Speaker 4: Yeah, so I think Malcolm Gladwell would look and say,
Speaker 4: nineteen eighty two, what an interesting time to start an
Speaker 4: investment firm. That certainly was a wind at your back
Speaker 4: in terms of being successful the challenges. And you know
Speaker 4: this how it works in the markets is you had
Speaker 4: no idea that you were at the beginning of a
Speaker 4: long bowl market. What you felt was the market hasn't
Speaker 4: done that well, you know, for a long period of time,
Speaker 4: and people were very skeptical about it, and you could
Speaker 4: always point to I think this is probably valuable insight
Speaker 4: is you could always point to things at any moment
Speaker 4: that don't add up, that seem overvalued, that seemed risky,
Speaker 4: and yet we get through most of those things. So
Speaker 4: at the time it didn't feel like a gimme, It
Speaker 4: didn't feel like a lay up hand. But what ended
Speaker 4: up happening was, you know, we tried to make money
Speaker 4: apart from the market. We weren't buying an index. Indexes
Speaker 4: weren't big then anyway, we weren't buying the market. We
Speaker 4: were buying idiosyncratic situations, looking for situation bottom up by
Speaker 4: bottom up miss pricings and that led to us build
Speaker 4: a record. So while it looks just okay compared to
Speaker 4: the market over that period of time, I think we
Speaker 4: would have done okay whether the market had been up
Speaker 4: down our.
Speaker 2: Sideways really interesting. So given you coming off of what
Speaker 2: was an epic bear market and just a whole lot
Speaker 2: of cross current stagflation, super high rates under Vulker, you're
Speaker 2: not that far away in eighty two from the end
Speaker 2: of Vietnam, Watergate, all that malaise. How did that environment
Speaker 2: affect you as a professional investor? How did that change
Speaker 2: how you looked at the world, and what lessons did
Speaker 2: you take from it?
Speaker 4: I would tell you I think every investor needs to
Speaker 4: be a student of history. That it may not repeat exactly,
Speaker 4: but it certainly rhymes and it is very valuable to understand,
Speaker 4: and I think especially financial history for an investor. So
Speaker 4: what are the worst moments? How did we go through
Speaker 4: a market crash in nineteen twenty nine to nineteen thirty
Speaker 4: three and a great depression that lasted close to a decade.
Speaker 4: What must that have been like for the people at
Speaker 4: the time? How would one handle oneself. If you're going
Speaker 4: into a period like that that we know that even
Speaker 4: the greatest acclaim value investor of all time, Benjamin Graham,
Speaker 4: nearly went broke twice during that era. So it's I
Speaker 4: think incumbent on all investors to be thinking and maybe
Speaker 4: holding multiple inconsistent thoughts in their head at the same
Speaker 4: time that I found this interesting opportunity today, this bargain
Speaker 4: price stock for whatever reason, it's out of favor. They
Speaker 4: cut their dividend, it's a spin off, it's a bankrupt
Speaker 4: security that's converting into a new equity. These things tend
Speaker 4: to get mispriced, but you've got a backdrop of from
Speaker 4: time to time, as today, we have a backdrop of
Speaker 4: very expensive market and a bit of you for a
Speaker 4: conditions is that dangerous? It's dangerous, But we're also at
Speaker 4: the cusp of maybe a groundbreaking new technology. So I
Speaker 4: think over the forty years, it's always been some of
Speaker 4: both that you've got a backdrop of something sometimes very depressed,
Speaker 4: sometimes very optimistic, but you've also got individual securities that
Speaker 4: are fluctuating around, maybe creating bottom up opportunity. What I
Speaker 4: deeply believe is that value investors make money staying in
Speaker 4: the bottom up that you might have a top down view,
Speaker 4: you might say, yeah, it could be a bubble, it
Speaker 4: could be a problem. But bottom up is where you're
Speaker 4: going to devote your time. It keeps you anchored that
Speaker 4: if you have a portfolio of bargains, you're probably going to.
Speaker 3: Do okay if you've stress tested.
Speaker 4: Them and if you've been intellectually honest about them and
Speaker 4: they really are bargains.
Speaker 2: So you mentioned Ben Graham, I'm curious as to who
Speaker 2: else were important influences on the development of your investment philosophy.
Speaker 2: I've read about Michael Price and Max Hein, Who affected
Speaker 2: you the most over the years? Who still affects you right?
Speaker 4: So I think reading Ben Graham was certainly a major
Speaker 4: influence on me. I think as he has been on
Speaker 4: essentially everybody in the value investing community. And then Warren Buffett,
Speaker 4: the real life practitioner of Graham as well, And it
Speaker 4: was always heartening to know that somebody like Buffett, who
Speaker 4: seemed to think similarly to how I thought, thought about
Speaker 4: downside risk, thought about the need to stay focused in
Speaker 4: individual companies and not worry so much about the overall market.
Speaker 4: The willingness to hold cash and concurrently like the willingness
Speaker 4: to not have an opinion on everything. I have a
Speaker 4: lot of ideas and I end up with no opinion,
Speaker 4: no position. But once in a while we find something
Speaker 4: that seems way off the beaten path that's really interesting.
Speaker 4: So to watch Warren Buffett do that, I've realized now
Speaker 4: that Warren probably had a certainty of the idea that
Speaker 4: he would compound capital over a long period of time,
Speaker 4: and I think that that is something that Graham probably gave.
Speaker 4: Warren gave me as well, the idea that if you
Speaker 4: protect on the downside, if you don't find yourself getting
Speaker 4: margin calls, frozen in place because you're too exposed, or
Speaker 4: getting massive redemptions because you're down so much, if you
Speaker 4: can position yourself that way, it can leave in a
Speaker 4: position to play offense when even your best competitors might
Speaker 4: be not on the playing field. And that's a huge advantage.
Speaker 4: So I think that Graham a dot is kind of
Speaker 4: a north star. It kind of is a place where
Speaker 4: you can stay focused on what's something worth. You can
Speaker 4: ignore the herd, you can ignore the siren song of
Speaker 4: growth at any price, and of exciting new technologies and
Speaker 4: exciting IPOs and you could ignore all that because you
Speaker 4: have a confidence that I own something that's going to
Speaker 4: be worth more a year or two from now than
Speaker 4: it is today. And that's I think the that's an
Speaker 4: underpinning that lets you follow a value investment strategy.
Speaker 2: So you mentioned downside risk and that we referred to
Speaker 2: before you began in nineteen eighty two. Less than a
Speaker 2: decade later, you publish Margin of Safety nineteen ninety one.
Speaker 2: What led to you, at the ripe old age of
Speaker 2: thirty four to write a book on risk management? What
Speaker 2: was the motivation? How was it initially received, because it's
Speaker 2: become so sought after these days, what was the initial reception? Like?
Speaker 4: Yeah, so I think in retrospect that looks pretty darn presumptuous.
Speaker 4: I got asked to write it by a classmate from
Speaker 4: business school who worked at Harper Collins at the time
Speaker 4: or Harper and Roe, maybe before Harper Collins, and she
Speaker 4: had seen some of my client letters. She said, you know,
Speaker 4: you seem like you'd be a good writer, and you're
Speaker 4: a smart guy. Maybe you'll have something to tell the audience.
Speaker 4: What I really thought was, I'm just updating intelligent investor
Speaker 4: for modern examples and contemporary market. That's decades since that
Speaker 4: book was written, and I thought maybe i'd make it
Speaker 4: a little bit more accessible for the average Joe. I
Speaker 4: don't know whether it accomplished that, but that's what I
Speaker 4: was trying to do. I had no idea if I
Speaker 4: didn't think I would make money from writing the book.
Speaker 4: I mean, as you as an author, you know, we
Speaker 4: get like a buck fifty an hour. But it's a
Speaker 4: great feeling and it's a ton of work, but I
Speaker 4: think ultimately worth it, and you get smarter from the
Speaker 4: act of writing.
Speaker 3: About what you do.
Speaker 4: You can do what you do all day long without
Speaker 4: maybe fully forming the philosophy, but if you want to
Speaker 4: share it with anybody else, it makes you think more
Speaker 4: clearly about what you do.
Speaker 2: Yeah. The former Librarian of Congress, Daniel Borston used to say,
Speaker 2: I write to figure out what I think, And there's
Speaker 2: a lot of truth to that. What was the initial reception, like,
Speaker 2: did people respond or did it kind of land in
Speaker 2: a handful of value? Geeks bought it, but no one else, so.
Speaker 3: It's somewhere in between.
Speaker 4: What happened first was I think my editor got fired
Speaker 4: three different times, so I kept getting new editors. They
Speaker 4: had promised to back the book with advertising, and they didn't,
Speaker 4: so the book landed with a bit of a thud.
Speaker 4: I think it had maybe a very tiny second printing,
Speaker 4: so I think they printed maybe seven thousand copies. I
Speaker 4: ended up buying a bunch of them back from HarperCollins
Speaker 4: by the time they took it off the market and
Speaker 4: the rights somehow reverted back to me.
Speaker 3: What it did do.
Speaker 4: Though, it was bought I think significantly by competitors who
Speaker 4: used it to train their teams. And that was also like,
Speaker 4: is that what I wrote it for? Because I don't mind,
Speaker 4: but it wasn't maybe the starting goal. The starting goal was,
Speaker 4: if you go back to the book, the first half
Speaker 4: of it was about the street and about how they
Speaker 4: treat the average investor and maybe the challenge of whether
Speaker 4: the investor is getting a good deal. And the second
Speaker 4: half is maybe an investment approach, a value oriented approach,
Speaker 4: and how an investor might think about doing that, even
Speaker 4: if they're not a professional investor. So it was successful
Speaker 4: in a weird way. It's sort of because it didn't
Speaker 4: get republished, it developed a bit of a cult following,
Speaker 4: and that's kind of amusing and interesting to me, and
Speaker 4: of course we've reprinted some on our own, so we've
Speaker 4: made it available to our clients and to summer interns
Speaker 4: and to anybody that's connected to the firm.
Speaker 2: So in twenty twenty three, the seventh edition of Security Analysis,
Speaker 2: Ben Graham's Framework for Investing was edited by you and
Speaker 2: in a lot of ways substantially rejiggered. How different is
Speaker 2: this version then Ben Graham's, I mean, obviously the markets changed,
Speaker 2: the economy is so much is different than when he
Speaker 2: was writing. How did you approach this?
Speaker 4: So the earlier edition, the sixth edition, I was co
Speaker 4: editor with Jim Grant and Bruce Greenwald, and the seventh
Speaker 4: edition they asked me to just edit that one. As editor,
Speaker 4: we didn't follow the process that you might follow, because
Speaker 4: we kind of thought of Security Analysis as the Bible
Speaker 4: and we thought we should leave it alone, and what
Speaker 4: we should do is have modern day expert investors right
Speaker 4: commentary about the different chapters, different sections of the book.
Speaker 3: So that's what we did.
Speaker 4: So I think the sixth edition and the seventh both
Speaker 4: have some really great selections by investors. Some of them
Speaker 4: are well known, but some of whom aren't known at all.
Speaker 4: And you know, my former colleague David Abrams is one
Speaker 4: of them. David's contribution in the sixth edition is one
Speaker 4: of the most brilliant things I've ever read, and so
Speaker 4: I felt like we were making we're moving Gramma DoD
Speaker 4: into a different era. The thing that's beautiful about Gramma
Speaker 4: DoD it was written a hundred years ago, give or take,
Speaker 4: and it was written during the depression, and things that
Speaker 4: made sense in a depression haven't made sense every day
Speaker 4: since then because we haven't been a depression most of
Speaker 4: the time since then.
Speaker 3: If at all.
Speaker 4: So it was an update, taking what's valuable why people
Speaker 4: revere the book as a bible, but also making it
Speaker 4: more accessible at more relevant modern day. We expanded it
Speaker 4: to cover some topics that were uncovered. It certainly has
Speaker 4: more international investing, which wasn't really focused on by Graham.
Speaker 4: It talks about some other private investments. It talks about
Speaker 4: some of the changes in financial markets, the latest manias
Speaker 4: and fads and all of that, but also the changes
Speaker 4: in market structure, the changes in asset classes that have
Speaker 4: come into exac distance and all of that. I think
Speaker 4: is a valuable updating of the literature and helps keep
Speaker 4: something relevant that deserves to be relevant while updated because
Speaker 4: in its original Graham and Dodd nineteen thirty four form
Speaker 4: wouldn't be very useful to people.
Speaker 2: Coming up, we continue our conversation with Seth Clarman, CEO
Speaker 2: and portfolio manager at the bow Post Group, discussing the
Speaker 2: firms evolution and philosophy. I'm Barry Ridults. You're listening to
Speaker 2: Masters in Business on Bloomberg Radio. I'm Barry Riddults. You're
Speaker 2: listening to Masters in Business on Bloomberg Radio. Our extra
Speaker 2: special guest this week is Seth Klarman. He's CEO and
Speaker 2: portfolio manager at the bow Post Group, a legendary value
Speaker 2: and distressed investment shop out of Boston, running over twenty
Speaker 2: two billion dollars in assets. So let's talk a little
Speaker 2: bit about the way you think of opportunities and risks.
Speaker 2: During the eight or nine financial crisis, you raised about
Speaker 2: four billion dollars and the research I read you're deploying
Speaker 2: one hundred million dollars a day into distress assets. That
Speaker 2: seems like a big chunk of money. First of all,
Speaker 2: are those numbers remotely accurate? Is that ballpark?
Speaker 3: It's ballpark?
Speaker 4: What I would tell you first of all is we
Speaker 4: had been closed for new clients much of our history,
Speaker 4: but we kept a list in case. And so when
Speaker 4: the market started to fall apart after bear Stearns and
Speaker 4: then after Liman, there were all kinds of things going on,
Speaker 4: and people were in great stress as we entered the
Speaker 4: uncertainty of an economic decline that could have pretty epic proportions.
Speaker 4: As it turned out, it probably was. It certainly was
Speaker 4: the worst decline since the Great Depression, and it stands
Speaker 4: out as kind of the mother of all bear markets
Speaker 4: for anybody in the last hundred years. So the challenge was,
Speaker 4: maybe it's time to take some capital, and the odds
Speaker 4: are increasing every day that we're going to be able
Speaker 4: to deploy it fruitfully.
Speaker 3: So what you said is about right.
Speaker 2: So bear Stearns, if I'm remembering correctly, was spring of
Speaker 2: two thousand and seven. Lehman was September of eight. That's
Speaker 2: not a lot of time from there until March on nine,
Speaker 2: when everything really bottoms. I have three questions about this.
Speaker 2: The first is how quickly were you able to raise capital,
Speaker 2: get the docks signed, and be prepared to deploy that
Speaker 2: as opportunities arose. Doesn't seem like there's a lot of time.
Speaker 4: The team worked heroically and we were able to raise
Speaker 4: about We were able to raise very significant capital within
Speaker 4: a quarter.
Speaker 2: Wow, that's really quickly. Now you mentioned the team, I
Speaker 2: have heard some really interesting rumors and legends. How did
Speaker 2: you put this team together? What was their marching orders?
Speaker 2: How did everybody operate in that period of absolute turmoil
Speaker 2: in Mayhew.
Speaker 4: So we already were an established firm. We've been up
Speaker 4: and running for a couple of decades by then. So
Speaker 4: I had a team in place, and they were deeply knowledgeable, experienced.
Speaker 2: Distressed asset expertise in the group.
Speaker 4: Not everybody on the team has that, but a very
Speaker 4: high percentage of the team has that. And people at
Speaker 4: balpos like being versatile athletes. So we're nimble, we're agile,
Speaker 4: and we cross train just kind of like baseball teams
Speaker 4: are doing now in the minor leagues. They don't want
Speaker 4: you to just be a third basement. They also want
Speaker 4: you to play out field and maybe second if need be,
Speaker 4: And so the same with us that we have people
Speaker 4: that sit in four different groups, as you mentioned, but
Speaker 4: all of them can work on distressed situations. And people
Speaker 4: in the private investments especially love when we're super busy
Speaker 4: in the public markets and we call them in to
Speaker 4: work on a distress credit.
Speaker 2: So big chunk of capital, very aggressively deployed in a
Speaker 2: moment in time when so many people seem to be
Speaker 2: just paralyzed and frozen with fear. Was it just the
Speaker 2: value analytical framework or was it a little broader and
Speaker 2: deeper than that.
Speaker 4: Yeah, I think Barry that the way you're conveying it
Speaker 4: probably comes across as we come in with giant satchels
Speaker 4: of money and handover fists deploy it. It wasn't like
Speaker 4: that at all. It was the same cerebral, methodical, painstaking
Speaker 4: environment that we do every day. So we see things
Speaker 4: trading at lower prices, and we notice that, and we
Speaker 4: look at the fundamentals, and every thing we do at
Speaker 4: Bawtpost is bottom up. Nothing's top down. We're not saying
Speaker 4: probably a good time to be a contray and none
Speaker 4: of that. We're saying, oh, I can buy this bond
Speaker 4: at seventy that I think is covered at par. I
Speaker 4: think people are worried maybe it could have a blip
Speaker 4: or have a problem for a while, but people aren't
Speaker 4: really doubting that there's something there. I think as the
Speaker 4: economy got worse, people may have started to doubt more
Speaker 4: and more. Prices come in more and more, and so
Speaker 4: we're literally able to buy mortgage securities, residential mortgage securities.
Speaker 4: We're able to buy corporate debt, especially of the auto fincos,
Speaker 4: the financial arm of General Motors and Chrysler and Ford,
Speaker 4: and that Lehman goes broke, and that had pieces within
Speaker 4: its capital structure that got very interesting. So we're seeing
Speaker 4: all kinds of things and we're kind of kids in
Speaker 4: a candy store. Sadly, right, it's a tough time. People
Speaker 4: are hurting. But also so as an investor, you're fiduciary
Speaker 4: and you've got to put money to work where you're
Speaker 4: going to benefit your clients. So we're in every case
Speaker 4: stress testing, Hey, if the world got even worse, Hey
Speaker 4: if this turned out to be nineteen thirty three, will
Speaker 4: this investment be okay?
Speaker 3: And that's the.
Speaker 4: Only place where we're where we're making decisions is if
Speaker 4: the downside is protected, and if we can see lots
Speaker 4: of paths to winning, then we're very interested. So we
Speaker 4: found a lot to do in distressed. We also owned equities.
Speaker 4: We also found private investments, and there were just all
Speaker 4: kinds of things worth doing in that era. The challenge
Speaker 4: in investing, I think for everybody is you want to
Speaker 4: make sure that you know those environments are going to
Speaker 4: happen once in a while, and you need to make
Speaker 4: sure you don't blow up during them. And if possible,
Speaker 4: you need to make sure that you'll have capacity to
Speaker 4: buy when the best opportunities become available and maybe your
Speaker 4: competitors are sidelined. And so that's the moment that I
Speaker 4: think investors need to at least have in their heads,
Speaker 4: how are you going to handle that environment? Because if
Speaker 4: you're too exposed, if you're getting margin calls, if you're
Speaker 4: getting massively redeemed because you took the wrong clients and
Speaker 4: they're short term oriented, then you're going to be out
Speaker 4: of commission on that day. So to be around on
Speaker 4: that day and be able to do what we do,
Speaker 4: we just did the same thing we do every day.
Speaker 4: We did a little bigger size.
Speaker 2: So I'm kind of fascinated by the dynamic tension between
Speaker 2: fundamental bottoms up research on a credit or equity by
Speaker 2: credit or equity basis versus the top down. I know
Speaker 2: you've said that you really don't think about markets or
Speaker 2: investing from a top down perspective. But it seems that
Speaker 2: everybody who panicked, everybody who helped create those distressed assets,
Speaker 2: were either responding or overresponding to the top down environment.
Speaker 2: How do you look at that sort of environment.
Speaker 4: Yeah, there are several layers to that. First of all,
Speaker 4: I think I think people were responding to all kinds
Speaker 4: of things. They were responding to redemption requests by their
Speaker 4: mutual fund shareholders, they were responding to credit downgrades, so
Speaker 4: that it wasn't just I'm nervous that things are going
Speaker 4: to be bad. This bond is no longer investment grade,
Speaker 4: and maybe my mandate is I can only own investment
Speaker 4: grade bonds, or this bond has defaulted and I can
Speaker 4: no longer hold this bond. So you have for selling
Speaker 4: all over the place and force selling. You never want
Speaker 4: to be a foreseller, and you especially want to be
Speaker 4: able to buy from force sellers in any asset class
Speaker 4: if that comes along. What I would say is I
Speaker 4: think that, like, I'm not a mountain climber or big hiker,
Speaker 4: but if you're going to climb a mountain, you want
Speaker 4: to look bottom up.
Speaker 3: You want to understand is this the right trail?
Speaker 4: Is this safe? Do I have my equipment? Am I prepared?
Speaker 4: And then you also want to have the top down view.
Speaker 4: What's the weather and what if it suddenly gets snowy
Speaker 4: up there? If the winds sixty miles an hour, how
Speaker 4: am I going to handle that? And so you kind
Speaker 4: of want to have in your head the weather forecast,
Speaker 4: and I think I know that I'm always thinking about
Speaker 4: is this environment safe? In today's market, it feels stretched,
Speaker 4: but it also feels like we're on the brink of
Speaker 4: an incredibly an unprecedented technology and an era that might
Speaker 4: be one of very substantial prosperity, but also one of
Speaker 4: risk to society and great change. So bottom up still
Speaker 4: feels like the right way to invest, but it feels
Speaker 4: like you still need your eye on the weather.
Speaker 3: In the financial.
Speaker 4: Markets, that means where it's the GDP going, and what's
Speaker 4: the national debt and where's inflation going to take us?
Speaker 4: So I always have an eye on that stuff, but
Speaker 4: we're not We're not investing our portfolio based on that,
Speaker 4: the same way we don't invest based on a macro
Speaker 4: view that this country would be a good place to invest.
Speaker 4: In rather, we notice a security bottom up and say, wow,
Speaker 4: that seems egregiously mispriced. I wonder if there are more mispricings.
Speaker 4: Maybe we should look at that market a little bit closer.
Speaker 2: So let's talk a little bit about cash. I think
Speaker 2: a lot of investors look at cash as a drag
Speaker 2: on their performance. The net return is usually zero or
Speaker 2: close to zero relative to inflation. How do you think
Speaker 2: of cash? It's always been such a historically important part
Speaker 2: of your toolkit. What sort of optionality does it create
Speaker 2: versus the career pressure of staying fully invested at all times.
Speaker 4: So you're nailing it with your question. You've covered all
Speaker 4: the parts of holding cash. I think that cash can
Speaker 4: be valuable optionality, especially just imagine you have a reasonably
Speaker 4: concentrated portfolio. A large position or two comes off the books.
Speaker 4: Should you put it to work in a nanosecond or
Speaker 4: can you wait till something really interesting comes along. So
Speaker 4: that's the origin of us holding cash. Positions would come
Speaker 4: off and we'd hold some cash until something great came along, but.
Speaker 2: Not just a couple of percent you've hold out history.
Speaker 4: But with concentrated positions, we have five and ten percent
Speaker 4: positions in the portfolio. When two or three of them
Speaker 4: come off, cash goes from next to nothing to fifteen
Speaker 4: or twenty percent. So that's the origin. That's how we
Speaker 4: got started with the idea that we would hold some
Speaker 4: cash from time to time. I think, though I would
Speaker 4: accept that I almost certainly made a mistake in that
Speaker 4: holding cash to that extent. There were times when we
Speaker 4: thirty percent cash and even higher, and I viewed it
Speaker 4: as valuable optionality. The problem is the optionality didn't pay
Speaker 4: off very well for big swaths of time, especially since
Speaker 4: so eight that with suppression of interest rates and the
Speaker 4: FED printing a lot of money in the US running
Speaker 4: large deficits that we really haven't had a serious downturn
Speaker 4: in almost two decades, and that amount of cash became painful.
Speaker 4: I think that the argument for holding cash. When a
Speaker 4: client says, I'm not paying you to hold cash, my
Speaker 4: answer would be, I'm not getting paid to hold cash.
Speaker 4: I'm getting paid to use my judgment on when to
Speaker 4: deploy the money and in what to deploy it.
Speaker 3: So I feel like that's right, But I felt like
Speaker 3: I was.
Speaker 4: Not optimizing for our clients in an environment that stopped
Speaker 4: being as volatile as the one I had grown up in.
Speaker 4: So we changed our strategies somewhat. We made our liquid
Speaker 4: books more liquid, especially our public equity book, where we
Speaker 4: used to own companies with five hundred million or billion
Speaker 4: dollar market cap. Now we own much bigger market cap
Speaker 4: holdings on average. That liquidity in the public equity book
Speaker 4: has made us feel better that we can pivot on
Speaker 4: a dime with a large percentage of our book, so
Speaker 4: we don't need as much cash to be able to
Speaker 4: take advantage of a sudden opportunity that shows up.
Speaker 2: A lot of larger equity font when they're sitting in cash,
Speaker 2: they use the spiderydfs, they'll roll into spy so they're
Speaker 2: not falling behind a benchmark, and then it's deep and
Speaker 2: liquid if they want to deploy that in a momentum market.
Speaker 2: Is that a bad strategy or are you just adding
Speaker 2: risk to avoid the cash risk.
Speaker 4: We think about our benchmark as an absolute return, not
Speaker 4: a relative return, So we're not very interested in keeping
Speaker 4: up with the market. Market's going to do what it does,
Speaker 4: and especially a market this concentrated and a handful of names,
Speaker 4: and it's really been that way for a number of
Speaker 4: years with the fang stocks and the handful of names
Speaker 4: that carry the market often not always, but often or
Speaker 4: expensive overpriced. So we just think that's not the right
Speaker 4: way to think about it. We want our an absolute return.
Speaker 4: We want to beat inflation by hundreds of basis points,
Speaker 4: and if we're doing that, we're not going to worry
Speaker 4: about whether that's ahead of the market or behind. I think,
Speaker 4: over the fullness of time, a good absolute return strategy
Speaker 4: is going to beat the market to.
Speaker 2: So let's talk about some of the opportunity sets that
Speaker 2: you look at. You mentioned equities, We talked about distress debt.
Speaker 2: You also make real estate investments, other private investments. How
Speaker 2: do you think about capital alocreation across these buckets? Are
Speaker 2: you using percentage terms or are you just purely opportunistic.
Speaker 4: So we came about these through our experiences. We didn't
Speaker 4: just wake up one day and said let's be in
Speaker 4: four different areas. Rather, we noticed that over the transom,
Speaker 4: interesting private investments were coming into the portfolio. We're getting
Speaker 4: phone calls, Hey, would you ever would you inject capital
Speaker 4: into this business? Or would you buy this portfolio of
Speaker 4: venture investments from a failed company that needed to sell them,
Speaker 4: or would you buy twenty two percent of a company
Speaker 4: owned by largely seventy eight percent by a large Middle
Speaker 4: Eastern company, and twenty two percent up for sale. Would
Speaker 4: you buy that well at three times ebitdah, maybe you would.
Speaker 3: So.
Speaker 4: Literally, by seeing examples one at a time, bottom up,
Speaker 4: we started to figure out that there were more things
Speaker 4: to focus on than just the public equity markets, and
Speaker 4: so we got drawn. One of our specialties I think
Speaker 4: is distressed credit, and we became really good at it.
Speaker 4: We've got smart people, We're very patient. Sometimes there's nothing
Speaker 4: to do, there's nothing distressed. Other times there's an avalanche
Speaker 4: of opportunity, and so we wait patiently. In all of
Speaker 4: our areas, we built teams of versatile people, so that
Speaker 4: a team is basically a generalist team, and the same
Speaker 4: person can work on a private investment, can work on
Speaker 4: a credit investment, can work on an equity investment. Real
Speaker 4: estate is a bit more specialized than that, but even
Speaker 4: within real estate, many people have a land person and
Speaker 4: a hotel person.
Speaker 3: We don't do that. Everybody works on everything.
Speaker 4: So we have the team in place and we're able
Speaker 4: to respond bottom up. That the bottom up approach to
Speaker 4: opportunity I think lets us allocate capital better than if
Speaker 4: we were doing a top down that. I think a
Speaker 4: lot of people will look at historic returns will say
Speaker 4: the expected return from owning private equity will be mid
Speaker 4: teens or upper teens. The expected return from venture capital
Speaker 4: will be better than that. And we don't do that.
Speaker 4: We really don't know what an asset class is going
Speaker 4: to do because we think that's very time specific and
Speaker 4: very valuation dependent. Rather, we see what's available right this second,
Speaker 4: and by looking bottom up opportunity after opportunity, I think
Speaker 4: we can paint a really clear picture. So right the second,
Speaker 4: real estate has been in tough shape since COVID, especially
Speaker 4: commercial office and people started working from home, and that
Speaker 4: hasn't fully returned. And in certain markets especially there's too
Speaker 4: much space and a lot of people that have been
Speaker 4: in real estate have not done that well. A lot
Speaker 4: of people got into the wrong vintage and a lot
Speaker 4: of properties have become structurally obsolete. So that sounds like
Speaker 4: a mess, why would you touch it? But it also
Speaker 4: means that competition is hardly looking and so we think
Speaker 4: they're opportunities right now. For example, in assisted living, which
Speaker 4: is population is aging, you can make a very strong
Speaker 4: case for fundamentals. Rents haven't moved up in years, and
Speaker 4: I think there's probably pent up growth in reds to come.
Speaker 4: And COVID was obviously a giant problem because any facility
Speaker 4: tended to empty out as people pulled their relatives out
Speaker 4: to save their lives during COVID understandably, and a lot
Speaker 4: of newly built facilities from that era from twenty twenty
Speaker 4: one to twenty twenty two never got filled and a
Speaker 4: lot of them have run into bankruptcy or financial distress.
Speaker 4: So it's been an opportunity to build a position an
Speaker 4: area with strong fundamentals. The past is the past, but
Speaker 4: moving forward, it looks like they're going to have real
Speaker 4: ramp for rents and for occupancy, and we're seeing opportunity
Speaker 4: here and there to add to a portfolio of assisted living. Similarly,
Speaker 4: we like certain parts of the real estate office market,
Speaker 4: especially some outside the major cities in a few select
Speaker 4: markets though, and we're seeing more in other sub markets
Speaker 4: within real estate. It's a real estate, as you know,
Speaker 4: is a giant market. It's probably got a market cap
Speaker 4: around as big as a public equity market and so,
Speaker 4: but it has a very different capital structure in terms
Speaker 4: of who are the players and how much capital can
Speaker 4: they tap and the opportunity set. So real estate's interesting.
Speaker 4: We like looking at it, and we have a team
Speaker 4: that's agile and could deploy capital quickly when something comes along.
Speaker 4: In private investments, it's opportunistic, and there have been some
Speaker 4: things to do lately as capitals pulled back from private investments,
Speaker 4: for example and energy and midstream. That's led to some
Speaker 4: things that have trickled down to us that we've been
Speaker 4: very excited, very high return and well hedged, so downside protected.
Speaker 4: So we're just opportunistic investors. I would say, though, using
Speaker 4: my top down lens that you mentioned, we are certainly nervous.
Speaker 4: We're in a bit of an economic boom, possibly an
Speaker 4: inflationary boom. Who knows what's going to happen with the
Speaker 4: Strait of Hormuz and the end result of that, and
Speaker 4: the demand for AI is an AI related investments is
Speaker 4: so all encompassing. It's almost as if the market has
Speaker 4: said we want the AI winners. We're going to dump
Speaker 4: anything that looks like an AI loser, and maybe we'll
Speaker 4: throw out some babies with the bathwater, and we don't care.
Speaker 4: And AI agnostic, we're not looking at that either. So
Speaker 4: we think there's opportunity even in some larger cap high
Speaker 4: quality equities that are being thrown out as people want
Speaker 4: to make the high returns from speculating an AI.
Speaker 3: Right now, we're going to.
Speaker 2: Talk a little bit about the current environment in greater details. Shortly,
Speaker 2: I just have to ask one more question about contrarian
Speaker 2: approach as an opportunity for value investors. The risk is
Speaker 2: always a value trap. Sometimes the market's negative judgment is
Speaker 2: actually right. How do you prevent something that's cheap from
Speaker 2: suckering you into something that's on the way to becoming
Speaker 2: much much cheaper.
Speaker 4: Yeah, you're asking something that we've had a bit of
Speaker 4: a painful lesson in over time, which is cheap is
Speaker 4: not really a strategy. We tend to look at our
Speaker 4: investments not as are they at a discount from what
Speaker 4: we think they could be worth, but rather what is
Speaker 4: our expected go forward return from here? And we tend
Speaker 4: to also ask that our investments have catalysts, and that
Speaker 4: when we lay out a thesis in an investment conversation,
Speaker 4: it's very clear not just how undervalued is it, but
Speaker 4: why is this going to work? What's going to drive it?
Speaker 4: And if we can't make an argument for why it's
Speaker 4: turn around in the next year or two. It might
Speaker 4: be nice that it's trading at a five year low,
Speaker 4: but that doesn't mean it's not going to be at
Speaker 4: a seven year low and a ten year low. And
Speaker 4: so our time horizon is not that long. We can't
Speaker 4: just hold things that don't perform for five or ten years.
Speaker 4: I think very very few people can do it today,
Speaker 4: and we think that's not holding our feet to the fire.
Speaker 4: All organizations need to demand accountability from their teams, so
Speaker 4: we always are asking ourselves and really I think changed
Speaker 4: our approach a little bit, where we're asking a different
Speaker 4: question about what is going to drive the success of
Speaker 4: this investment rather than just letting it cheap being enough,
Speaker 4: it's not enough.
Speaker 2: Very very interesting. Coming up, we continue our conversation with
Speaker 2: Seth Klarman's CEO and portfolio manager at the Bowpost Group,
Speaker 2: discussing the state of investing in today's environment. I'm Barry Results.
Speaker 2: You're listening to Masters of Business on Bloomberg Radio. I'm
Speaker 2: very Results. You're listening to Masters in Business on Bloomberg Radio.
Speaker 2: My extra special guest today is Seth Klarman. He is
Speaker 2: the CEO and portfolio manager of Value Investing, really legend
Speaker 2: the Bowpost Group. The firm managers about twenty two billion
Speaker 2: dollars in client assets. We've touched briefly on things affecting
Speaker 2: today's environment, price of oil, inflation, we have a Middle
Speaker 2: East war, We're still dealing with a new set of tariffs.
Speaker 2: It seems like every week there's a different mac grow headache.
Speaker 2: How do you think about the current environment. Is it
Speaker 2: something that has to be dealt with but sort of compartmentalized.
Speaker 2: Is something that have to be dealt with and compartmentalized
Speaker 2: or do you just look at it as yet another
Speaker 2: input into fundamental values?
Speaker 4: So I think AI is a sea change, and that
Speaker 4: I'm not a tech guy, and I'm not a personal
Speaker 4: user at the cutting edge of technology, but I've spent
Speaker 4: a huge amount of time. I think that the advent
Speaker 4: of AI has forced me and probably everyone to just
Speaker 4: add more time to their day to stay current. That
Speaker 4: I've never seen a technology with this kind of importance
Speaker 4: and potential game changing magnitude. So I read everything I
Speaker 4: get my hands on. I listen to a lot of
Speaker 4: podcast as well. I read a lot of books and
Speaker 4: magazine articles as well. I'm consumed because even though I
Speaker 4: don't think Baopost as a value firm is going to
Speaker 4: find too many ways to get long AI exposure, I
Speaker 4: think that we don't want to. We don't want to
Speaker 4: be behind the curve. We don't want to not know
Speaker 4: what we don't know, and so the team is doing
Speaker 4: a fabulous job thinking about AI, thinking about ways to
Speaker 4: incorporate it into our processes, but also especially thinking about
Speaker 4: the implications of AI on our portfolio companies. So I
Speaker 4: think we have found ways to have a little bit
Speaker 4: of long exposure in things, for example, like data centers,
Speaker 4: where we own a few private investments at what we
Speaker 4: think is a very considerable discount to where data centers
Speaker 4: tend to trade. We're not sure what the right discount is,
Speaker 4: or we're not really sure what the right long term
Speaker 4: cap rate is, but we think owning it a significant
Speaker 4: discount is a good thing.
Speaker 3: So we have some exposure.
Speaker 4: But mostly we're trying to own a portfoli where we
Speaker 4: have avoided AI losers and maybe occasionally we've found something
Speaker 4: that market thinks is an AI loser that we think
Speaker 4: isn't and to otherwise have things with ancillary exposure to
Speaker 4: AI where we can turn into AI winners but not
Speaker 4: pay much for the privilege. So it's it's a piece
Speaker 4: of what we do in the meantime. Obviously you refer
Speaker 4: to tariffs and the president, the volatility of the president
Speaker 4: and this administration. There are things coming out of left
Speaker 4: field all the time. Some of it is policy, some
Speaker 4: of it is distraction, I think, maybe deliberate distraction, and
Speaker 4: it's very hard to deal with that. I think most
Speaker 4: investors and I too have said I need to make
Speaker 4: a mental note of it. I need to think about
Speaker 4: who I want to vote for next time there's an election.
Speaker 4: But I also need to not get distracted by this.
Speaker 4: And most of it doesn't end up mattering on an
Speaker 4: investment by investment basis. So it is a time of
Speaker 4: tremendous change, high degrees of volatility, and you see the volatility.
Speaker 4: The stock by stock volatility is unbelievable that when they
Speaker 4: love a stock, they can't get enough of it and
Speaker 4: it goes through the roof, and when they turn on
Speaker 4: a stock, it gets clobbered, and so the individual stock
Speaker 4: dispersion is very high. Well, the overall market volatility is
Speaker 4: actually quite low.
Speaker 2: Huh, really interesting. Let's talk about another distraction and what
Speaker 2: it might might mean. We're recording this a couple of
Speaker 2: days before the SpaceX ipo, it'll broadcast a couple of
Speaker 2: days after the SpaceX ipo. This is not only a
Speaker 2: giant trillion dollar valuation, but it's got a lot of
Speaker 2: hair on the deal with this tiny float and the
Speaker 2: Nasdaq waving the rules to put an end to the cues.
Speaker 2: How do you look at an event like this in
Speaker 2: terms of the overall gestalt of the market is I
Speaker 2: know the old line is they don't ring a bell
Speaker 2: at the top, But at a certain point, how do
Speaker 2: you perceive something like this? Does it trouble you?
Speaker 4: So my compliance team is very clear that I can't
Speaker 4: talk about individual securities and we own We own no
Speaker 4: SpaceX privately or in any other form. What I would
Speaker 4: say to you is I share your sense that this
Speaker 4: is the kind of bell that might ring at the top.
Speaker 4: It is an unprofitable company, and aggregate it is an
Speaker 4: enormous valuation. I think we all we both read in
Speaker 4: the paper this morning the Goldman estimates of what growth
Speaker 4: would have to be in some parts of their business,
Speaker 4: like one hundred x in order to justify the current
Speaker 4: price a long period of time, and those projections have
Speaker 4: a way of not happening. Is it's not impossible, but
Speaker 4: it's hard. I think that that it is. I think
Speaker 4: investors might be missing just how much money is being
Speaker 4: sucked out of the system between large IPOs. This won't
Speaker 4: be the last one. Open AI Onanthropic are coming, and
Speaker 4: there's a ton of other IPOs that are stuck in
Speaker 4: institutional investors' portfolios that also they'd love if they could
Speaker 4: get them off at any point. Then the float might
Speaker 4: be tiny today, but you have a large number of
Speaker 4: shareholders private investments. We write again this morning that ten
Speaker 4: or fifteen percent of some endowments entire endowment is in
Speaker 4: the one name SpaceX.
Speaker 3: So they're going to want to sell.
Speaker 4: Employees are going to want to monetize and go from
Speaker 4: being wealthy on paper to wealthy in a bank deposit.
Speaker 4: And so that's a lot of stock for sale and
Speaker 4: we have to sell that stock. While apparently Google and
Speaker 4: Facebook need more money, and where open AI and Anthropic
Speaker 4: need more money, and utilities need more money to power
Speaker 4: and chip companies need to build new factories. In America,
Speaker 4: there's so much demand for money. And I think we're
Speaker 4: in a vulnerable place where ultimately supply and demand for
Speaker 4: money determines the cost of capital. And that's true in
Speaker 4: a bond market, and it's in effect true in the
Speaker 4: stock market. So we might be looking some supply demand
Speaker 4: excess where prices soften just because there's so much supplier
Speaker 4: of securities and the need to monetize is so great
Speaker 4: by these private companies.
Speaker 2: So let's talk about another imbalance between supply and demands
Speaker 2: through history. Because Bowpost has been around for over four decades,
Speaker 2: You've traded and invested through and survived all sorts of
Speaker 2: different market regimes, inflation, disinflation, the dot com bubble, the
Speaker 2: financial crisis, QE and ZUP, COVID, and and more recently
Speaker 2: the return to let's just call it normalized interest rates.
Speaker 2: Has anything changed since nineteen eighty two? Is it just
Speaker 2: the same careening from one crisis to another or do
Speaker 2: things eventually sort of moderate? Sort of do we learn
Speaker 2: from these experiences, what's the same, what's different.
Speaker 4: I think that all investors should be students of history,
Speaker 4: as we talked about, and I think we know that
Speaker 4: over the course of history, they're cycles that you're going
Speaker 4: to have a cycle where you're at war, and then
Speaker 4: another cycle where people are tired of war and you
Speaker 4: have peace for a while. At some point you have
Speaker 4: peace long enough that people forget how bad war is,
Speaker 4: and you end up in another war, and you have
Speaker 4: those similar cycles. Whether it's the government spending and inflation
Speaker 4: and deflation, that sort of thing. Even the nature of debt.
Speaker 4: That debt feels great when nobody's asking you to pay
Speaker 4: it back and an interest rates are low. At some
Speaker 4: point that becomes pernicious and a giant problem. So I
Speaker 4: think we're likely to always see those cycles, at least
Speaker 4: as long as humans are in charge of markets. How
Speaker 4: do you navigate it? I think you navigate it by
Speaker 4: realizing that you may not see the cycle with clarity
Speaker 4: while you're in it, but you know there are cycles.
Speaker 4: You know that what seems to be true today for
Speaker 4: all time probably won't be true for all time, and
Speaker 4: hold on to that. So again it goes to the
Speaker 4: idea of holding inconsistent ideas in your head. At the
Speaker 4: same time. This is both true and likely at some
Speaker 4: point to become less true or untrue, and you don't
Speaker 4: know exactly how So how do you hold the portfolio,
Speaker 4: you diversify. When things are up a lot and become
Speaker 4: more expensive and the go forward return is low, you
Speaker 4: take profits. You trade out when things are out of
Speaker 4: favor so badly that the returns look high. Maybe there's
Speaker 4: a time to step in and buy during a period
Speaker 4: when others are dumping. So I think it's that stay
Speaker 4: focused on the bottom up. Remember broadly the weather, so
Speaker 4: when you go camping, you don't not prepare appropriately for
Speaker 4: stormy days, not just in the mountains but in the
Speaker 4: financial markets. And look, Bowpost protects on the downside as
Speaker 4: best we can by doing deep fundamental analysis, by knowing
Speaker 4: our names unbelievably well, by not being afraid to sell
Speaker 4: them when the price is up and the same as
Speaker 4: we buy more when the price is down. By finding
Speaker 4: securities that are maybe more senior in nature, whether in
Speaker 4: public or private markets, and by macro hedging the portfolio
Speaker 4: to an extent, because we know that those rainy days
Speaker 4: are going to happen, and so we're buying macro protection
Speaker 4: when volves are low and people think nothing bad is
Speaker 4: going to happen, so we can sell that at a gain,
Speaker 4: both because the price moved in bec has val moved
Speaker 4: up during a stormier moment in the markets.
Speaker 2: So we now have a new FED chair and that's
Speaker 2: a great leaping off point to talk about a lot
Speaker 2: of skillicism broadly. But you've been pretty skeptical about FED
Speaker 2: policy since the financial crisis. How do you think rates
Speaker 2: have affected investors? What's been the impact on behavior and
Speaker 2: are we at a point now where rates have more
Speaker 2: or less normalized. How do you look at the present environment.
Speaker 4: You know, I believe in people taking responsibility for their actions.
Speaker 4: I believe that we are a healthier system when there's
Speaker 4: a reckoning for excess and for you know, egregious speculation
Speaker 4: and for over leverage. So I kind of hated that
Speaker 4: the FED took rate I totally understood why the FED
Speaker 4: took rates down to zero after the Great Financial Crisis,
Speaker 4: and that it was really the only way to hold
Speaker 4: things together give time to heal. But by leaving rates
Speaker 4: there for an extra decade after there was no crisis,
Speaker 4: I think we stoked a problem. We sort of incented
Speaker 4: speculation and maybe dis incentivized responsibility, and so we got
Speaker 4: some of that. We saw that firsthand in twenty twenty two,
Speaker 4: when the market had gone higher and higher and higher.
Speaker 4: You had those SPACs and all kinds of garbage heet
Speaker 4: companies training at very high prices the MEME stocks, and
Speaker 4: then it blew up in twenty twenty two, a lot
Speaker 4: of stocks down, you know, fifty seventy eighty ninety ninety
Speaker 4: five percent. And that's what happens when you get that
Speaker 4: kind of unregulated speculation. I think today we are back speculating.
Speaker 4: We're speculating in an era that in an area that
Speaker 4: feels more legitimate. It's hard to say exactly what's going
Speaker 4: to happen with the continued development of AI, with the
Speaker 4: possibility of AGI coming and what that will mean. We
Speaker 4: don't know whether it's going to lead to massive unemployment,
Speaker 4: when it's going to lead to incredible prosperity, or whether
Speaker 4: it's going to create even more dispersion in the economy
Speaker 4: between the people are doing well and the people are
Speaker 4: not doing well the case shaped economy, and that's a
Speaker 4: real source of concern. So there's always going to be
Speaker 4: that kind of uncertainty. I think what we should agree
Speaker 4: is that there's going to be a path that nobody
Speaker 4: today in twenty twenty six could say with any precision
Speaker 4: what things are going to look like in two or
Speaker 4: four or ten years. And the dilemma with that is
Speaker 4: people are paying very high prices, so the future is
Speaker 4: extremely predictable and clear when obviously, given what's going on,
Speaker 4: it is anything but that.
Speaker 2: So you're a big Boston guy, and you mentioned you
Speaker 2: were a big fan of the sports pages and all
Speaker 2: the statistics. What do you think of what's going on
Speaker 2: in sports these days? The Celtics didn't go as far
Speaker 2: as some people thought. We're now Knicks are up to
Speaker 2: one in the finals. How are you looking at basketball?
Speaker 2: What do you like in sports these days?
Speaker 4: So, my two biggest sports passions are baseball and I'm
Speaker 4: a small owner in the Red Sox and horse racing,
Speaker 4: and I've been fortunate to have some really high quality
Speaker 4: thoroughbreds over the years, and we want a few races
Speaker 4: Belmont Steakes weekend, not the Belmont, but a few other
Speaker 4: stakes races this past weekend. So those are my favorite sports.
Speaker 4: I thought the Celtics season was disappointing. They played so
Speaker 4: well the first three quarters of the season, and sadly,
Speaker 4: when their superstar Jason Tatum came back, I think it
Speaker 4: got them out of their game where they were introducing
Speaker 4: younger players into the mix, they were passing the ball
Speaker 4: a lot and really winning in an exciting way. So
Speaker 4: maybe the chemistry just didn't go as well as they
Speaker 4: had hoped, and then when Tatum got hurt right at
Speaker 4: the end of the playoffs, we bowed out.
Speaker 3: I think sports is great.
Speaker 4: It's a place where Americans of Blue Americans and independent
Speaker 4: Americans and Red Americans kind all root for the same
Speaker 4: team and can be excited about a sport and could
Speaker 4: do it in a way that's gracious and accept winning
Speaker 4: but also except losing. Sports is a great equalizer and
Speaker 4: a great unifier. So I love sports. It serves a
Speaker 4: lot of positive purposes in a society. It's a little
Speaker 4: crazy because we're rooting for strangers we've never met who
Speaker 4: represent our city, but it is a powerful way that
Speaker 4: I think also can unite a city.
Speaker 2: So baseball this year just seems to be so odd
Speaker 2: that the Mets are having a hard time the Red Sox.
Speaker 2: I don't have no idea what's going to happen with
Speaker 2: them this year. What do you think about what's happening
Speaker 2: in baseball in twenty twenty six.
Speaker 4: Yeah, I think that it is partly as small numbers
Speaker 4: that we've only played sixty or sixty five or seventy games,
Speaker 4: so there's still a lot of season to go.
Speaker 2: But that's a third of a season.
Speaker 3: It's a third of a season. But statistics, you know, things.
Speaker 2: Can mean reversional eventually cast.
Speaker 4: In the same way that I mean, all of us
Speaker 4: have to decide whether we believe on hot streaks or not. Right,
Speaker 4: it looks like a thing, but in fact, is there
Speaker 4: really a shooting streak or is it simply And and
Speaker 4: to every good shooter, you you get a little overconfident,
Speaker 4: start taking worse shots.
Speaker 2: It's when you when you.
Speaker 4: Take high percentage shots and you take them consistently. So
Speaker 4: I think that that baseball will always surprise you. It's
Speaker 4: a perplexing game that what you draw up on paper
Speaker 4: doesn't happen. But it's also doesn't happen in the locker room.
Speaker 4: That the players can't understand. I could hit last year
Speaker 4: and now I can't hit. And part of it is
Speaker 4: that the opponents adjust that if you're a rookie and
Speaker 4: you know Roman Anthony and you come up and you
Speaker 4: hit three hundred for two months, he's hurt. But the
Speaker 4: pitching figures out your weak spots and they make you
Speaker 4: look bad. And then you were you adjust and you
Speaker 4: make the pitchers look bad. So I think there's that
Speaker 4: perpetual back and forth between defense adjusting and then offense adjusting,
Speaker 4: and where it ends up determines who goes in the
Speaker 4: Hall of Fame.
Speaker 2: Huh really interesting. You very famously kept a low profile
Speaker 2: in a business that has historically rewarded publicity. Was that
Speaker 2: a conscious decision? Was that a strategic approach? And why
Speaker 2: be a little more public these days?
Speaker 4: So I'm probably a little bit more introvert than extrovert,
Speaker 4: so I'm not looking to be on TV or in
Speaker 4: the papers. I also think a lot of the work
Speaker 4: we do is better off when everybody isn't looking to
Speaker 4: copy our investments. That if you want to accumulate a stock,
Speaker 4: you're better off. If everybody doesn't know that you're trying
Speaker 4: to do that, you're going to get a better price,
Speaker 4: Like in any business transaction that said, We've never been
Speaker 4: We're not a recluse. You know, everybody knows where we are,
Speaker 4: Everybody knows members of our team. We're very very well
Speaker 4: known on the street. You just don't see me on TV.
Speaker 4: Talking about it all the time. I don't know why
Speaker 4: that's a bad thing. It feels to me like a
Speaker 4: good thing.
Speaker 2: And beyond investing, you and your wife have been very
Speaker 2: active philanthropists the Clarman Cell Observatory. There's been just a
Speaker 2: run of different things. How do you think about philanthropy,
Speaker 2: how do you think about capital allocation? And how do
Speaker 2: you make sure that the money that are going to
Speaker 2: these causes is being well spent.
Speaker 4: On our third date, my wife and I were taking
Speaker 4: a walk on Cape Cod on the beach and she said,
Speaker 4: and we're just getting to know each other obviously, third date,
Speaker 4: she said, what do you hope for in your life?
Speaker 4: I said, I hope that if I'm able to provide
Speaker 4: for my family and there's still resources beyond that, I
Speaker 4: want to get back. And that just comes from my
Speaker 4: fundamental view. I guess it's how I was raised, that
Speaker 4: some of us are going to be fortunate and be
Speaker 4: in that position at a time when not everybody is.
Speaker 4: And it's both it's both a privilege and a responsibility
Speaker 4: to give backs. You can't take it with you, and
Speaker 4: you probably don't want to. I mean, it's not a
Speaker 4: good look to spend it all ostentatiously in your lifetime.
Speaker 3: That's not my nature.
Speaker 4: So I've always, i think, been working to make money
Speaker 4: to give away, and it's what keeps me focused today
Speaker 4: that I love investing as a puzzle, but I love
Speaker 4: knowing that if we do it well, we serve our clients,
Speaker 4: I'm going to have money that I'm going to be
Speaker 4: able to add to what we give to charity. Charity
Speaker 4: is a calling. It feels very very important to me personally.
Speaker 4: I think this is a broken world. There are all
Speaker 4: kinds of problems, from climate change to a poor education system,
Speaker 4: to challenges to democracy that threaten America the way you
Speaker 4: and I have known it our whole lives, and the
Speaker 4: country that I want You probably want future generations to
Speaker 4: grow up. And America has been amazing for me. I
Speaker 4: have been such a beneficiary of growing up in this
Speaker 4: country and having unprecedented opportunities that if I was in
Speaker 4: another country I wouldn't have had. So I'm grateful for that.
Speaker 4: I want to make sure everybody has the same chance,
Speaker 4: but we also have to be realistic. The America dream
Speaker 4: is broken for a lot of people. People are less
Speaker 4: likely today to be able to say that their kids
Speaker 4: and grandkids will be able to eclipse them, and I
Speaker 4: think we need to restore that, and we have a
Speaker 4: lot of hard work to do.
Speaker 3: So.
Speaker 4: Our philanthropy goes into many different areas, some as you said,
Speaker 4: in science, some in terms of thinking about democracy and
Speaker 4: making sure that the system holds, some in terms of healthcare,
Speaker 4: some to the universities that we're going to. Me and
Speaker 4: my wife. We spread it pretty well because we believe
Speaker 4: that a lot of causes will come together to be
Speaker 4: able to lift up people throughout the country. One of
Speaker 4: the things we do is a music instrument fund because
Speaker 4: our son is extremely musical and it reminded us that
Speaker 4: every kid that is passionate about music should have a
Speaker 4: chance to have an instrument. We also do capital gifts
Speaker 4: in institutions throughout Massachusetts. In some of the harder hit
Speaker 4: towns during COVID or just economically depressed areas, there's just
Speaker 4: not a lot of money there, so kind of as
Speaker 4: a value investor, I'm seeing an opportunity to refurbish the
Speaker 4: civic center or this library in a small town in Massachusetts,
Speaker 4: and it just feels great to know that the people
Speaker 4: in Pittsfield will have as good a library as the
Speaker 4: people in Boston really interesting.
Speaker 2: All right, let's jump to our favorite questions ask all
Speaker 2: our guests, starting with who were your mentors who helped
Speaker 2: shape your career?
Speaker 3: So?
Speaker 4: I worked for Max Heine and Michael Price at Mutual
Speaker 4: Shares right out of college, and that was an incredible
Speaker 4: couple of years they and I stayed in close relationship
Speaker 4: with them over the years. They've been great friends and
Speaker 4: mentors to me. I think Warren Buffett, who I didn't
Speaker 4: know until later in my career, but reading about Warren,
Speaker 4: reading his annual reports and reading his old shareholder letters
Speaker 4: was very inspiring and also reminded me of the idea
Speaker 4: of quality companies, which was not something that Graham and
Speaker 4: Dodd talked that much about, but was something that Warren
Speaker 4: taught us all about. I think, so they were the
Speaker 4: people I would list as mentors. And then I also
Speaker 4: developed mentors who were kind of peers that I had
Speaker 4: a tiny firm. I didn't get trained officially at any
Speaker 4: big Wall Street firm, but I was able to form
Speaker 4: friendships with people that ran other funds. And some of
Speaker 4: those people probably you know all of them, but somebody
Speaker 4: like Richard Perry or somebody like Frank Rosen's or somebody
Speaker 4: like Paul Singer have all been mentors in various ways
Speaker 4: over the years, in a way that you know, hopefully
Speaker 4: I've provided something to them as well. But I think
Speaker 4: finding kindred spirits out there makes all of us both
Speaker 4: enriched by the experience but also wiser along the way.
Speaker 2: Good, good answer. Let's talk about books. You mentioned you're
Speaker 2: a big reader. What are you reading now? What are
Speaker 2: some of your favorites.
Speaker 4: So right now, I'm finishing Lloyd Blankfind's memoir. I'm also
Speaker 4: reading Michael Poland's latest book about Consciousness, which is really interesting.
Speaker 4: It's combined some things I'm intrigued by, including the idea
Speaker 4: of what plants are up to. Plants turn out to
Speaker 4: be a lot more conscious and a lot more aware
Speaker 4: of their environment than you might think when you just
Speaker 4: walk by them and think of it as lawn. There's
Speaker 4: a lot more going on with plants. I love history.
Speaker 4: My favorite is probably Battle Cry of Freedom about the
Speaker 4: Civil War. I read a fair amount of everything. I
Speaker 4: love The Red Queen and evolutionary biology. I'm a pretty
Speaker 4: good reader of fiction as well, biography, memoir across the board.
Speaker 2: You mentioned podcasts. What are you listening to or what
Speaker 2: are you watching and streaming these days?
Speaker 4: My favorite streaming I think this was this is maybe
Speaker 4: a golden age of TV streaming. We loved pitt on
Speaker 4: the Pittsburgh General Hospital Emergency Room and it's just a
Speaker 4: remarkable series. Noah Wiley but also a great surrounding cast
Speaker 4: is just off the charts. We also loved Shrinking.
Speaker 2: Yep, that was a lot of fun. Final two questions,
Speaker 2: what sort of advice would you give to a recent
Speaker 2: college grad interested in a career in investing?
Speaker 4: Yeah, first of all, go somewhere that you would want
Speaker 4: your capital invested. If you wouldn't put your money there,
Speaker 4: don't go there, and don't be afraid to go somewhere
Speaker 4: out of favor. You know, if two years ago you
Speaker 4: would ask me, I would have said, well, biotech is
Speaker 4: on it, you know, is hitting lows every day as
Speaker 4: though there's never going to be any new drugs discovered
Speaker 4: or anything good happening in that sector. I would have said,
Speaker 4: I'm not sure. I'm not an expert on that stuff,
Speaker 4: but take a close look. Now it's on fire, a
Speaker 4: lot of takeovers, a lot of people are doing really well.
Speaker 4: I think that it pays to be a little contrarian
Speaker 4: and go somewhere where they're going to be mentors to you,
Speaker 4: where they're willing to be patient with you, where they're
Speaker 4: not going to just expect you to make money the
Speaker 4: first six months you're there. That's where you're going to
Speaker 4: be able to build a career and learn a lot.
Speaker 2: Final question, what do you know about the world of
Speaker 2: markets risk investing today? Would have been useful to know
Speaker 2: forty plus years ago when you were first getting started.
Speaker 4: Yeah, I've thought of that. It's a really good and
Speaker 4: hard question. And what I think is I wish I
Speaker 4: knew the importance of the economic engine that Silicon Valley
Speaker 4: is that American creativity and ingenuity is. It's why I
Speaker 4: worry so much about the bad things happening in our
Speaker 4: country like that are threatening our democracy. The ability to
Speaker 4: try and fail, the ability to innovate, the desire to innovate.
Speaker 4: These startups unleash the passion of brilliant, hard working people
Speaker 4: who want to cause their dream to happen, and that
Speaker 4: is the driver of this economic engine that keeps not
Speaker 4: only winning, but keeps outpacing everywhere else in the world.
Speaker 4: Israel has maybe a mini version of that, but it
Speaker 4: hardly exists in the rest of the world, certainly doesn't
Speaker 4: exist in Europe much. And it's really sad because the
Speaker 4: opportunity that is present for young Americans to help to
Speaker 4: stream and to start something is just an amazing engine
Speaker 4: for their lives, for their communities, for future philanthropy, for
Speaker 4: tax receipts. It's across the board, and I wish I'd
Speaker 4: understood it better. I would have owned some venture capital
Speaker 4: in my foundation. I would have been recommending that institutional
Speaker 4: portfolios diversify into at least a piece.
Speaker 3: Now, venture capital is the.
Speaker 4: Last thing a value person is going to say, it's
Speaker 4: a bargain, you should go long. But I do think
Speaker 4: that as a value investor, maybe too much paint by numbers.
Speaker 4: I wasn't focused enough on the engine that is venture capital.
Speaker 2: Fascinating. Seth, thank you for being so generous with your time.
Speaker 2: We have been speaking with Seth Klarman. If you enjoy
Speaker 2: this conversation, well, be sure and check out any of
Speaker 2: the six hundred and fifty one we've done over the
Speaker 2: previous twelve years. You can find those at Apple, iTunes, Spotify,
Speaker 2: Bloomberg YouTube, wherever you get your favorite podcasts. I would
Speaker 2: be remiss if I didn't thank the correct team that
Speaker 2: helps me put these conversations together each and every week.
Speaker 2: Alexis Noriega is my video producer. Sean Russo is my researcher.
Speaker 2: Anna Luke is my podcast producer. I'm Barry Rdults. You've
Speaker 2: been listening to Masters in Business on Bloomberg Radio