How billionaire Seth Klarman returned 15% for 40 years

Boston billionaire Seth Klarman is the founder and CEO of the Baupost Group, one of the largest hedge funds in the world. 

Renowned for his prowess in value investing, Klarman has amassed a substantial personal fortune of $1.3 billion by strategically acquiring undervalued stocks and holding onto them for extended periods.

He started investing at a young age and founded Baupost in 1982 when he was only 25.

Over the past four decades, the fund has consistently delivered an impressive annual average return of 15%, amassing $25 billion in assets under management.

Klarman’s investment philosophy is deeply rooted in the principles of Benjamin Graham, the esteemed father of value investing, who also influenced luminaries like Warren Buffett. 

Notably risk-averse, Klarman places a significant emphasis on maintaining a margin of safety.

In 1991, he authored a book titled “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor”. 

This book has attained cult classic status among value investors, gaining popularity since its initial release.

The limited number of copies published has driven its value from the original $25 price to well over $1,000, attracting the attention of successful investors like Buffett.

Klarman is also well-known for his philanthropy through the Klarman Family Foundation, a non-profit organisation with $755 million in assets in 2021. 

Below are five investment principles that have underlined Klarman’s approach to his investment success.

1. You need a margin of safety

A “margin of safety” is the difference between the market price of a security and your estimation of its intrinsic value when the market price is significantly below that value estimation. 

Klarman believes this margin is necessary because “valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes”. 

He adds, “It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss”. 

This margin of safety protects value investors from large losses in declining markets. 

2. Index funds are “mindless investing”

Klarman is known for expressing his distrust of indexing as an investment strategy. 

One of the reasons for this distrust is his belief that few index fund managers have read the financial statements of the companies they invest in and, therefore, treat one stock as essentially similar to another. 

“Although indexing is predicated on efficient markets, the higher the percentage of all investors who index, the more inefficient the markets become as fewer and fewer investors would be performing research and fundamental analysis,” Klarman explains in his book.

3. Invest like an investor, not a speculator

Klarman believes that investors base their decisions on business and investment fundamentals, whereas speculators base theirs on a prediction of the behaviours of other people. 

He explains in his book, “Investors believe that over the long run, security prices tend to reflect fundamental developments involving the underlying businesses”. 

“Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall in price.”

4. Looking for shortcuts will only lead to disappointment

Klarman said many investors look to “investment formulas” and other shortcuts to base their decisions on. 

However, “the financial markets are far too complex to be incorporated into a formula”, he explains. 

Klarman encourages other investors to look to the fundamental analysis of specific investment opportunities rather than look for shortcuts that do not exist.

5. Value investing takes discipline and thinking outside the box

Klarman describes value investing as “the disciplined pursuit of bargains” and maintains that this discipline makes value investing difficult but, ultimately, worth it. 

“Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds,” he says. 

Klarman believes that, while value investors may sometimes experience poor results compared to other types of investors, over the long run, the value approach is more successful. 


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