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Our National Predicament: Excerpts from Seth Klarman's 2010 Leter


farnamstreet
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When observing your competitors, your focus should be on their approach and process, not their results. Short-term performance envy causes many of the shortcomings that lock most investors into a perpetual cycle of underachievement. You should watch your competitors not out of jealousy, but out of respect, and focus your efforts not on replicating others' portfolios, but on looking for opportunities where they are not.

 

That's the most significant source of style drift I've seen among businessmen and investors in my circle.

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The sudden decline in consumer activity that followed the plunges in the housing and stock markets represented a reasonable – indeed a desirable – response to overindebtedness. Yet the federal government saw this well-advised retrenchment as cataclysmic, because the national economy had grown dependent on our living beyond our means.

The government’s knee-jerk response to contraction was to prop up economic activity by any and every means possible; the hole in consumer activity had to be materially repaired on the government tab.

 

It shocks me that someone as intelligent as Klarman seems to downplay how close to the brink we were in late 2008, and suggests that no government intervention was justified.

 

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It shocks me that someone as intelligent as Klarman seems to downplay how close to the brink we were in late 2008, and suggests that no government intervention was justified.

 

After reading and hearing Klarman for quite a while now, I would recommend as a rule to skip his macro comments.  His business is based in stable funding from conservative institutions that in turn gives him the opportunity to buy when everyone else is selling ... and he has to pander to these institutions misconceptions.

 

Can we keep the discussion in this board to bottom up investing? My cynicism is dripping.

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It shocks me that someone as intelligent as Klarman seems to downplay how close to the brink we were in late 2008, and suggests that no government intervention was justified.

 

 

I think you are misinterpreting him.  He is not attacking necessarily the government's rescue of money market funds from the panic, for example.  He is attacking the government's efforts to induce consumer spending to remain at unsustainable levels -- cash for clunkers, tax rebates, home purchase tax credit, raising the limit on federally-insurable mortgages, lowering interest rates, and on and on. 

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It shocks me that someone as intelligent as Klarman seems to downplay how close to the brink we were in late 2008, and suggests that no government intervention was justified.

 

 

I think you are misinterpreting him.  He is not attacking necessarily the government's rescue of money market funds from the panic, for example.  He is attacking the government's efforts to induce consumer spending to remain at unsustainable levels -- cash for clunkers, tax rebates, home purchase tax credit, raising the limit on federally-insurable mortgages, lowering interest rates, and on and on.   

 

I'm quite confident that Klarman knows more about how close to the brink we were than the vast majority of people..maybe even Buffett.

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It shocks me that someone as intelligent as Klarman seems to downplay how close to the brink we were in late 2008, and suggests that no government intervention was justified.

 

 

Can we keep the discussion in this board to bottom up investing? My cynicism is dripping.

 

Plan -

I completely agree with you.  Like I said, I was just surprised at his comments, which were a departure from his usually solid value investing framework.

Apologies for bringing the macro.

 

-M

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I completely agree with you.  Like I said, I was just surprised at his comments, which were a departure from his usually solid value investing framework.

Apologies for bringing the macro.

 

This is a value investor board and I do understand that macro calls are not our specialty. However, this thread was created in the "General Discussion" and it seems to me that we still live in a democracy. As far as I know Buffett, Prem and others are pretty tolerant, open and polite individuals also. My personal suggestion for Plan would be that he just disregards threads that he is not interested in.

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It seems to me the logical outcome of his argument is that the government should not intervene.  Most agree that the intervention was absolutely necessary.  And furthermore today, most mainstream economists believe that cutting off the spigots immediately, i.e. ending QE 2 and run the government with a breakeven or a surplus would be folly.

 

Does that mean the QE 2 should not end and that the fiscal situation needs to be corrected. No of course not, but if you look at the how these sorts of crises play out, (Rogoff, et.al.) these near depressions and panics take years to work out.  Many countries just repudiate their debts and move on.  That won't happen here, except possibly by some inflation (either a little or a lot).

 

A more nuanced argument would be that a) the stimulus although not perfect but was necessary and b) given political realities we should address the fiscal imbalances now because it will be a long hard slog to address.  (I would say that we will need to get the country's fiscal house together in the medium term, BUT in the short term we a still in a pickle and probabilistically we need the stimulus .)  Macro predictions are notoriously difficult to make.  But he does not say this. 

 

Uncharacteristically, Klarman is not thinking clearly, but his position in life let's him parrot Marie Antoinette--Let them eat cake.  Unlike her, he does tend to keep his head about him :)

 

 

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