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Stock market could suffer another lost decade without any gains - Klarman


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ZeroHedge

Seth Klarman was speaking at the CFA Institute earlier, and in typical fashion cut to the chase: in summarizing the current market, the Baupost founder said he "sees few bargains in the current environment and predicted on Tuesday that the stock market could suffer another lost decade without any gains." And the punchline: his description of market conditions which he compared to "a Hostess Twinkie snack cake because everything is being manipulated by the government and appears artificial." Such facility with words, there is a reason the man runs a $22 billion fund and his book "Margin of Safety" has been out of print for years, and sells for a $1000 on ebay.

 

Some more of Klarman's relevant perspectives from Reuters, where we learn that he is neck deep in Constant Maturity Swaps:

 

"Given the recent run-up, I'd be worried that we'll have another 10 years of zero returns," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston.

 

"I'm more worried about the world broadly than I've ever been in my whole career," Klarman said.

 

Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.

 

The puts, which Klarman said he viewed as "cheap insurance," will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.

 

Typically, Baupost focuses on out-of-favor stocks and bonds. Klarman cleaned up in 2007 and 2008 buying distressed debt and mortgage securities that later recovered.

 

One area Klarman said he is currently scouring for potential investments is private commercial real estate below the top quality. Publicly traded real estate investment trusts, however, have "rallied enormously" and are "quite unattractive," he said.

 

And speaking of Baupost's $22 billion, Klarman said he may return cash to investors, as the fund is now 30% in cash and there are few immediately investable opportunities.

 

"We are thinking about actually returning it if it got higher," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston on Tuesday. "We are trying to walk a tightrope."

 

"I've always thought that size was a negative," he said, adding that bigger size often means investors become less nimble.

 

before the financial crisis hit markets, the firm opened up to new investors for the first time in years, Klarman said, deciding that more capital might be helpful to pursue certain investment opportunities. "We went to our wait list for the first time" in years, he recalled.

 

In hindsight, the move proved especially smart, as it would have been extremely difficult to raise new money at the height of the financial crisis, he added.

 

"We'd rather underperform a huge bull market than get clobbered in a bear market," he said.

 

For those who wish to read Klarman's massively popular and out of print Margin of Safety, they can find a pdf version here.

Remarkable statement from Klarman.
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I like the fact that Klarman hewed to his principles throughout the 90s despite underperforming the major indices. It actually impressed upon me the importance of looking beyond the nominal returns to understand an investor. And he also provided one of the best quotes about investing: "Choose your remorse."

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I like the fact that Klarman hewed to his principles throughout the 90s despite underperforming the major indices. It actually impressed upon me the importance of looking beyond the nominal returns to understand an investor. And he also provided one of the best quotes about investing: "Choose your remorse."

 

 

I especially liked his quote, "We make our money when we buy something, not when we sell it."  Meaning that he focuses on the future look through earnings and not the potential price appreciation.  Couple this with his strong discipline to always sell as full value is approached and you've got: Margin of Safety.  :)

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His book, Margin of Safety sells for around $1,000.

I estimate cost in 1991 around $25.

 

x40 times your money! Not bad for a return over 19 years.  ;-)

 

Incidently - anyone read it? Thoughts?

 

 

I got a copy a few years ago when MOS was selling for "only" $600, now at $1,000.  It's well worth the price if for no other reason than getting an appreciation of his obsessive concern for downside protection in the mindset that investors who survived the Great Depression might have had.

 

Klarman avoids "investing" in art, rare coins, or rare books.  He generally avoids buying things that won't deliver value if there isn't a greater fool available to take it off your hands at a higher price than you paid for it.  Therefore, one should not pay $1,000 for the book if it's value is uncertain.  Try getting a copy on an

interlibrary loan.  It used to be available through that service a few years ago.  :)

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There is an ongoing auction for a signed copy of Margin of Safety that has not received a single bid. It is currently set at a minimum $850. Those $1000 quotes might simply be asks or maybe they were settled prices before pirated copies emerged.

 

http://www.charitybuzz.com/auctions/Prize4Life/catalog_items/207125

 

To the contrary, it shows 4 bids, the most recent dated May 10th at $750. The minimum bid increment is $100. That gives a minimum next bid of $850.

 

The auction is open for another 14 days. In most long time period open auctions like this, the bid price prior to the final minutes is of no consequence whatsoever relative to predicting the hammer price.

 

This is a signed first edition, donated by Seth himself, so I presume it is in reasonable condition.  I doubt that this auction will close for less than $1000.

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Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.

 

The puts, which Klarman said he viewed as "cheap insurance," will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.

 

Can someone enlighten me on whether a retail investor has access to such trades?  I assume those put options have long maturity (>1-2 years) too.  TIA

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One way would be to buy out of the money calls on TBT. You can buy Jan 12 75 calls for about 2.  If IRs double (about 10%), then TBT will go to 120 from 40 today and calls will be worth 45 and if IRs go up to 20% then TBT will go to 160 so calls will be worth 85.  These are only 1 yr 7 mo calls vs. Klarman's calls.  The one risk is if the volatility increase above 25%, then TBTs performance degrades.  I wasn't able to find any LEAPs on another LT bond ETF which would remove this risk.  Do you own DD to confirm the numbers above.

 

Packer

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There is an ongoing auction for a signed copy of Margin of Safety that has not received a single bid. It is currently set at a minimum $850. Those $1000 quotes might simply be asks or maybe they were settled prices before pirated copies emerged.

 

http://www.charitybuzz.com/auctions/Prize4Life/catalog_items/207125

 

To the contrary, it shows 4 bids, the most recent dated May 10th at $750. The minimum bid increment is $100. That gives a minimum next bid of $850.

 

The auction is open for another 14 days. In most long time period open auctions like this, the bid price prior to the final minutes is of no consequence whatsoever relative to predicting the hammer price.

 

This is a signed first edition, donated by Seth himself, so I presume it is in reasonable condition.  I doubt that this auction will close for less than $1000.

 

Thanks for the correction, though I note that half of those bids come from a username that matches the charity.

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There is an ongoing auction for a signed copy of Margin of Safety that has not received a single bid. It is currently set at a minimum $850. Those $1000 quotes might simply be asks or maybe they were settled prices before pirated copies emerged.

 

http://www.charitybuzz.com/auctions/Prize4Life/catalog_items/207125

 

To the contrary, it shows 4 bids, the most recent dated May 10th at $750. The minimum bid increment is $100. That gives a minimum next bid of $850.

 

The auction is open for another 14 days. In most long time period open auctions like this, the bid price prior to the final minutes is of no consequence whatsoever relative to predicting the hammer price.

 

This is a signed first edition, donated by Seth himself, so I presume it is in reasonable condition.  I doubt that this auction will close for less than $1000.

 

Thanks for the correction, though I note that half of those bids come from a username that matches the charity.

  Its probably Seth running up the bid and old hedgie trick to bost their quarterly fees. He probably has 10,000 copies in his basement. Just kidding folks but those sort of tricks happen all the time in illiquid mkts like fine art. I have always wanted a copy I may bid myself thanks for the tip and the original post. I actualy think we have only 5 more years of sideways mkts so I guess I am not as pessimistic as Seth.
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One way would be to buy out of the money calls on TBT. You can buy Jan 12 75 calls for about 2.  If IRs double (about 10%), then TBT will go to 120 from 40 today and calls will be worth 45 and if IRs go up to 20% then TBT will go to 160 so calls will be worth 85.  These are only 1 yr 7 mo calls vs. Klarman's calls.  The one risk is if the volatility increase above 25%, then TBTs performance degrades.  I wasn't able to find any LEAPs on another LT bond ETF which would remove this risk.  Do you own DD to confirm the numbers above.

 

Packer

 

Thanks for your response.  I have thought about TBT too - trying to figure out whether it's better to buy TBT call or TLT put.

 

There's also long-treasury interest rate options like TYX but alas, maturity is within 1 year.

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