Seth Klarman: The Warren Buffett of his Generation

By
Paul Milnes

Seth-Klarman-Hedgethink

Specialist finance books tend to comparatively expensive, mainly due to the short print runs and the simple fact that if you need an educational guide to hedge funds, for example, then you can probably afford to splash out dinner-for-two-with-wine money on a financial tome.

However, while some are more expensive than others, very few are as expensive as Seth Klarman’s legendary (and still out-of-print) Margin of Safety: Risk-Averse Value Strategies for the Thoughtful Investor. If you don’t mind having a tatty old second hand copy, you can pick one up on Amazon for a mere $1500, and if you have to have a ‘new’ copy, it’ll set you back at least double that. No wonder it’s one of the most frequently stolen books from US public libraries.

So why are people prepared to pay so much for a rare and out-of-print book about investing? The simple reason is, it’s the only one that’s been written by Seth Klarman, the fourth most successful hedge fund manager of all time after George Soros, John Paulson, and Ray Dalio, with over $25 billion under management. Furthermore, it’s a classic, and has been cited as being essential reading by no less than legendary value investor Warren Buffett, to whom Klarman is frequently compared.

Who is Seth Klarman?

Klarman grew up as part of a Jewish family in Baltimore, the son of a university lecturer father and a high school teacher mother. He studied at Cornell University and then Harvard Business School, where he shared classrooms with many of his future peers at the top of the finance industry including Jamie Dimon, Jeffrey Immelt, Steve Burke, and Stephen Mandel.

At university, he eschewed the traditional process of hitting the library to study in favour of doing all of his studying while watching TV in his frat house. In spite of, or perhaps because of this unorthodox study technique, he excelled in his studies and went off to work for Max Heine and Michael Price of the Mutual Shares fund (now a part of Franklin Templeton Investments).

marginThen, in 1982, he formed his own fund management company, the Baupost Group in 1982, using an unconventional risk-averse strategic approach to investing which was to prove hugely successful. Soon, everyone wanted to know how he was doing it, and he duly obiged in 1991 with the publication of Margin of Safety, which distils much of the essence of his strategic approach.

One of the central facets of his approach is that he frequently keeps a lot of cash in his investment portfolios – often more than 50% of the total. His approach to stock-picking is similarly unconventional, using complex derivatives, buying put options, and going long on unpopular assets while they are undervalued.

Although Klarman largely prefers to stay out of the media spotlight, and very rarely does interviews or public appearances, he was one of the few top investors to speak pessimistically about the stock market in the time leading up to the credit crisis, warning of future inflation problems as early as 2006. However, he frequently gives written contributions to various financial publications talking about the issues of the day and his projections for the future. And he does do the odd interview here and there, such as this revealing chat with Charlie Rose on the topic of Margin of Safety:

When he’s not making billions of dollars on the financial markets, Klarman can often be seen giving his wealth away, and is a particularly big donor to Jewish organizations such as such as the American Jewish Committee, Boston’s Combined Jewish Philanthropies and Gann Academy. He also chairs an organization called “Facing History and Ourselves” which creates classroom materials that aim to overcome anti-Semitism, and is the main U.S. investor in The Times of Israel, an online newspaper reporting on Israel, the Jewish diaspora, and the Middle East in general.

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