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SethKlarmanBaupostGroup:SethKlarmaninconversationwithJimGrant

GrantsInterestRateObserverFall2013ConferenceOctober22,2013
Howdoyoureconcileyourbottomupinvestingstrategyandyourmacroconcerns?
o Itsdifficult
o Willalwaysinvestbottomupbutworriestopdown
o Macroworriesarelikesportstalkradio.Everyonehasagoodopinionwhich
probablymeansthatnoneofthemaregood.
Valueinvestorsfeelthattheyneedtobefullyinvestedatalltimes
Heisreturningcashtohisinvestors
o 50%ofhisassetsareincash,currently$14billion,alreadyhastoinvesttheother
$16billion
o Hisfirmhasalreadygrownsomuchinsizethatheisriskingadeterioratingculture
currentlyhas200employees
o Cantcontinueproducinggreatreturnsifhegetsanybigger
Investincorporatedistresseddebtandcorporateliquidations
o Nocorporatedistressopportunitiesrightnow
StructuredProducts
o In20082009youcouldbuyatoptrancheofaCDOandrecreaterealestateat2030
centsonthedollar
CorporateEquity
o Usedtodothriftconversions
o Currently1520%oftotalassets
o MicronTechnologiesworkedoutwellforthem
Complicated
Greatacquisitionthatwasmisunderstood
RealEstate
o Dreamscenariowouldbeabigofficebuildingwhereatenantjustleftandtheloan
isabouttodefaultsotheycanbuyatdistressedprices
Twobasicedges
o Longtermorientation
o Flexibility,caninvestinanycategoryofinvestment
NooneknowsthelevelofstocksorbondswithoutQE
o Thequestionishowtoprotectyourselfcheaply
o Goldisreallytheonlyplacetobe
Ownslongdatedoutofthemoneyoptionsongoldprices
Seesinflationasadefinitepossibility
Goldhedgesareabout1.5%ofhisassetsandwillrise5,10,oreven20
timesifgoldpricerisedramaticallyto$5000or$10000anounce.
Doesnthedgethingsthatarecheapinanabsolutesense
o WouldntpairtradeastockwithaP/Eof4againststockswithP/Esof5
o RiskmanagementatBaupostisjustpeoplesittingaroundatablethinking
LookedatRussiainthemid90swhentherewasnofundamentalanalysisgoingon.
o Neversoldsomeofthoseholdingsandhasselectivelyaddedtoacoupleofthem
thisyear
SethKlarmanBaupostGroup:SethKlarmaninconversationwithJimGrant
GrantsInterestRateObserverFall2013ConferenceOctober22,2013
o RussianequitiesarestillcheapbutyoucantbackthetruckupbecauseRussiadoes
nothaveruleoflaw
Thisriskhastobemanagedwithpositionsize
Hasmade1ofeverykindofinvestmentmistake
o Notunderstandingtheproduct,etc.
Heisstillthefinalyesoneveryinvestment
o Hadadifficulttimecomingupwithasuccessionplan
PromotedWagnerandthentalkedwithhimaboutbeingaroundfor810
moreyears.Wagnerdecidedthatsnotwhathewanted
Klarmanknowslessthaneveryoneelseaboutthethingshedecides
o Onlybringsexperienceandacertainmindset
EveryoneknowsthatwhattheFedisdoingiscrazy
o Thisisthefirsttimethenextgenerationwillbeworseoffandweshouldbe
ashamed
o TheFedhandingthereignstosomeoneelsewithnoexperiencetocontinuethe
experimentisinsane
Bigfundsshouldbeputtingmoneyinbigbluechips
o Theyrenotreallymispricedbuttheyrecomparativelycheap
Withtheexceptionoftheunionsandtheautoindustry,Americastillhasruleoflaw
Everythingthatcanbefinancedtodayhasbeen
o Evenifyieldsgoupbuttheresnocrisis,therewillprobablybeameltdowninthe
highyieldmarket
Klarmansannuallettershavebeenkeytobuildingagreatshareholderbase
o Thelettersarticulatehisphilosophyandhammeronthesamepointsfrequently