Seth Klarman is the CEO and portfolio manager at The Baupost Group, an American investment management firm. Klarman is known for his value oriented investment approach made most famous by his book – Margin of Safety. In a recent interview with Harvard Business School professor Das Narayandas, he shares his take on the markets and more importantly his investing principles. In this post, The Transcript have compiled excerpts of the interview.
Step back from the current noise:
“I think it’s good to step back from the moment-by-moment noise. Investors sometimes get caught up in the noise, but it’s really important to step back….so Daniel Kahneman, my favourite author from Thinking Fast and Slow, wrote a book called Noise and he laid out…an example of somebody taking target practice. Bias is if every shot is up and to the right then there’s something. You know my aim is wrong, my gun is wrong or my my eye is wrong. But if all of the shots are scattered around the bullseye that’s noise, that it’s variability but not predictability and i think that’s relevant to investors. Investors just should always want to be thinking about their own thinking…we all know we we deal with enormous amounts of information we need to filter it down to the useful information.”
Best business book:
“We should not expect people to be rational all the time. Daniel Kahneman does a beautiful job in Thinking Fast and Slow. It is in many ways the best business book, the best investing book ever written even though it’s not ostensibly about business or investing because it tells us about ourselves”
>On his philosophy:
“A very significant part of my philosophy has to do with managing your psychology. Markets are about the psychology of others. When are they panicking? When are they greedy? But you have those same flaws or those same potential flaws, and managing your portfolio in a way that doesn’t leave you where you’re panicking or overexposed to greed. If you can rule those extremes out, you’ll navigate the markets well.”
On making mistakes:
“Today, there’s not so much mean reversion. Things may not be mean-reverting because of technological disruption, so I think investors have had to raise their game massively in the last several decades, and I’m not done raising it. I probably haven’t raised it as high as it needs to be. It is a great time to be knowledgeable about technology; it was a great time if you could figure out what Amazon was up to. For a value investor, it looked hopelessly risky but for a tech investor, maybe with the right insight into the value of platforms and the value of winner take all business models, that would have been a good thing to have that I didn’t have. I pat myself on the back and say, okay, Seth, you were a schmuck twenty years ago and ten years ago for not figuring it out, but you were smart to figure it out five years ago. That’s all an investor can do; be intellectually honest, be self-critical we’re justified, and keep trying to get better every day. Like Warren Buffett, the best investors study read admit mistakes um always looking to get smarter and wiser because what else can you do as a person.”
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