'Oracle of Boston' Seth Klarman has a rabid following that's stuck with him through thick and thin. Here's why fans of the publicity-shy billionaire investor copy his every move.
- Baupost Group founder Seth Klarman, the "Oracle of Boston," has become a billionaire thanks to his value investing ethos.
- The 62-year-old investor, who also has a stake in the Boston Red Sox and owns a horse stable that produced the winner of the 2017 Preakness, has averaged an annual return of nearly 20% since 1983.
- Klarman can be ironclad in his value investing convictions, and it helps to have fans who are not dismayed by a couple of years of underperformance.
- His annual investor letters, which are not released publicly but eventually leak through to his legions of followers, have become a must-read for everyone from grad students to world leaders.
- Klarman, like other long-running, successful managers, has a waiting list to invest in his fund, which further insulates him from bowing to short-term pressures.
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There are dozens of hedge-fund billionaires, hundreds of self-proclaimed value investors, and countless people willing to offer their opinions on, well, every topic possible.
Yet the number of money managers with the dedicated following of Baupost Group founder Seth Klarman, the "Oracle of Boston" and one of the most famous value investors in the world, can be counted on a single hand, and include a who's who of the industry - names like Ray Dalio, Howard Marks, Warren Buffett, and George Soros.
"I consider him one of the giants," said Christopher Choi, an investor at a family office in Australia who follows Baupost news closely.
Klarman's track record speaks for itself, of course - he's become a billionaire thanks to the value investing ethos espoused by Warren Buffett and, originally, Benjamin Graham, and his firm has grown to manage more than $30 billion in assets after starting with less than $30 million.
The 62-year-old investor, who also has a stake in the Boston Red Sox and owns a horse stable that produced the winner of the 2017 Preakness, has averaged an annual return of nearly 20% since launching in 1983, with a banner year in 2007, when the firm made more than 50% for the year.
But unlike Buffett and some of his other contemporaries, he isn't doing CNBC hits constantly, appearing on Davos panels, or writing new books on his firm's culture.
His decades-old, out-of-print "Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor," reads more like an academic text than a New York Times bestseller, but first editions of the book, which was partially edited by his father and his wife, sell for thousands online.
"He is an incredibly thoughtful man, with a profound understanding of financial markets. I have always thought that he is a wonderful expositor of the main ideas behind value investing and could be a terrific teacher should he want to: He can explain the most arcane with beautiful simplicity, which I think is part of his aura," said Tano Santos, a professor at Columbia's business school who runs the school's value investing center.
"The students are obviously in awe of him and he has always left a remarkable impression on them."
The ascent of Klarman and Baupost to the top of industry was slow and methodical, and now he enjoys one of the most important advantages a hedge fund or any kind of money manager can have: an investor base that's long-term and won't flee at the first sign of trouble. It's one of the reasons many think it's unlikely there will ever be another money manager like Baupost.
"He gained his reputation by showing integrity and sticking with the [value-investing] approach" - even when other value investors were straying from the strategy to chase returns, said a member of Grizzly Research, a short-selling research firm that asks to keep its members anonymous so they can investigate companies without outside bias.
"[Baupost] is disciplined, more than other big funds."
The size of Baupost grants the firm certain advantages, but also constrains the manager in some cases, since under-the-radar opportunities in small companies no longer move the needle for an investor with such a sizable asset base.
If Siddharth Singhai, co-founder of Ironhold Capital, a value hedge fund, could ask Klarman one question, he said it'd be how he finds opportunities now that everyone is watching and billions need to be invested.
"How he sources his investments can't be nearly as straightforward as it once was," Singhai said.
Long-term investing base is his 'competitive advantage'
Klarman can be ironclad in his value investing convictions, and it helps to have fans who are not dismayed by a couple of years of underperformance.
During the extended bull run that was only briefly hit with spells of volatility before the novel coronavirus pandemic, many value investors were forced to chase returns and plow into companies that they'd normally view as expensive.
Klarman not only doesn't invest in securities he finds expensive, but also holds a high percentage of his portfolio - more than a third of all assets on many occasions - in cash.
Klarman, however, meant to set up his firm to give him maximum time to let his investing process play out.
In 2008, Klarman told a conference of endowment heads that "friends at other hedge funds say to me, 'You have a better model, but we can't do this with our clients. Our clients just would not understand.'"
"The truth is, some of our clients don't understand, but we've worked really hard over time to explain it and to educate them to our way of thinking. It isn't the only way of thinking, but it's how we approach it," he said.
One of the firm's biggest investors is MIT's endowment. And the school's literature on how it invests reads in some places like an excerpt from Klarman's legendary book.
"Value investors look to purchase investments at a significant discount to intrinsic value to account for the uncertainty inherent in any attempt to predict the future. Determining that a sufficient 'margin of safety' exists between the price paid for an asset and a conservative projection of future value is the primary determinant for potential inclusion in the portfolio," the brochure reads. It warns against "being swayed by emotions, market sentiment, or short-term news" - a particular focus of Klarman in his writings to investors and in his book.
MIT did not respond to requests for comment about its relationship with Klarman.
Klarman, like other long-running, successful managers, has a waiting list to invest in his fund, which further insulates him from bowing to short-term pressures. Baupost, one capital introduction specialist says, may have the most aggressive waiting list in the business.
Andrew Saunders, president of Castle Hill Capital Partners and leads the firm's capital introduction services, said he knows of hedge-fund investors that will leave an allocator and join another, and the first thing they do at their new job is get a spot on Baupost's waiting list.
"That's so rare, but he's a legend," Saunders said.
As one of Grizzly's researchers puts it, his long-term investor base is Baupost's "competitive advantage."
That advantage hasn't yet parlayed into eye-popping gains during the coronavirus sell-off however, even as markets have fallen and other hedge funds dive back into value stocks. Bloomberg reported that he lost 8% in March despite making $1 billion on different hedges against the market - but he has been putting money to work now that valuations have dropped.
A cultivated collection of Klarman's letters
Klarman's annual investor letters, which are not released publicly but eventually leak through to his legions of followers, have become a must-read for everyone from grad students to world leaders.
Moritz Walz, a German business school student, considers Klarman's writings "timeless wisdom." It's why Walz has collected all of his annual letters to investors since 1991 - before he was born. Meanwhile, Klarman's writing on the global divide between haves and have-nots was the talk of Davos in 2019.
The letters offer reporters and disciples a rare chance to get inside Klarman's head and read his thoughts, as he has cut down his already-limited public engagements in recent years. Santos said he hasn't come to Columbia, which frequently hosts big-name investors for closed talks with students, in the last two years.
Walz however said he was able to meet Klarman in-person at a 2019 Harvard Investing Club event. Klarman went to Harvard Business School, where he was famously a classmate with JPMorgan Chase CEO Jamie Dimon.
Klarman told Walz that price is always the most important point when considering an investment, not business fundamentals or anything else.
"A bad business can still be a great investment," Klarman told attendees, according to notes Walz took of the event.
He told attendees that the key to investing success is having some kind of edge that separates you from others - noting that his edge was the patience of his investors. Klarman recommended Daniel Kahneman's book "Thinking, Fast and Slow" to the group, according to Walz.
Baupost and Klarman declined to comment on his writings and following. And there are certainly people who push back against the idea that any investor should try to mimic others, like Cobia Capital CEO Jeff Meyers, who runs a hedge fund focused on small tech companies.
"I think everyone needs to know their own strengths and use them to find the method of investing that is right for them," Meyers said, noting that it "irks" him that people attempt to copy Buffett by using his phrases and trying to clone his success.
But Buffett is in front of the cameras often, letting reporters and followers know his thoughts on the news of the day as well as topics existential and trivial. News on Klarman meanwhile slowly leaks out through connected industry insiders, if at all.
Singhai, of Ironhold Capital, has a simple reason why so many people gravitate to Klarman that has nothing to do with his wealth and relative secrecy.
"He takes really complicated investing concepts and makes it much simpler," he said.
"It's easy to follow."