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The Collected Wisdom of Seth Klarman


giofranchi

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  • 4 weeks later...

Here's part of it, but would love to see the whole thing: http://www.businessinsider.com/brian-spector-leaving-baupost-letter-2015-11

 

I liked this piece:

 

One of the most common misconceptions regarding Baupost is that most outsiders think we have generated good risk-adjusted returns despite holding cash. Most insiders, on the other hand, believe we have generated those returns BECAUSE of that cash. Without that cash, it would be impossible to deploy capital when we enter a tide market and great opportunities become widespread. Seth has said on a number of occasions in both types of markets, 'If you have great ideas, you will have capital to deploy.' This is incredibly motivating to our investment team.

 

I know that board members have done the analysis and that backtesting suggests holding cash detracts from your returns, but that doesn't make as much intuitive sense to me. I feel like once you consider reality of human emotions and etc. that you find that having a cash buffer gives you more confidence to hold onto positions as they're falling AND gives you the resources to buy more of them at those lower prices. If you buy something, it's down 50%, and you have no cash to add not only do you miss an opportunity to average down but you may also have greater aversion to further losses and may pair the position down. I would think that the average investors would fare better with a disciplined cash approach despite what the robotic back-testing suggests.

 

 

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“There will be a day when the world looks very different, so when we rack our brains – how we might protect ourselves – we’re looking for cheap optionality.

 

I always believed that this explained his investment in novagold. Its basically an out of the money option on gold.

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