How good is Seth Klarman?
I see some value investors suggesting that Seth Klarman is in the same league as Warren Buffett. How good is he?
Quite frankly, I know very little of Seth Klarman so my comment should be taken in that light—namely, a distant observer with limited information. Institutional investors and others in the hedge fund world will have a better, truer, picture; but I have to go with what I have.
I have no idea what Klarman's performance in the last decade has been. But I did run across the Baupost Fund letters in the 1990's—I think I linked to them before but if you haven't seen them, do check them out—and let's look at how he performed.
If we go with the latest available information, at least to me, it is the 2001 letter. I extracted the performance table, which represents inception to 2001, which is around 10 years, from that letter:
Well, you can get a feel for an investor's skill and investing style from long-term performance. It's sort of like looking at a 10 year history of a business. A business with fluctuating profits, with losses once in a while, is not so great (such a business would represent my investing skills :( ). Another with stable, good profits, will represent a skilled investor (like Warren Buffett).
The first thing that jumps out is that Klarman is no Warren Buffett (I'm sure Klarman himself would agree that it is a ridiculous comparison.) Warren Buffett posted around 20% annual returns in the 1960's while Klarman posts 12.83%.
What was initially surprising to me, when I looked at this many weeks ago, was how Klarman underperforms the S&P 500. The margin is sizeable (around 2.4%) and someone investing $50k would have generated almost $40k more in the S&P 500. However, note that S&P 500 was wildly overvalued in 2001 (it was even more overvalued in 2000). In any case, it's interesting to me. A lot of value investors underperfomed in 1999 and 2000 but Klarman underperforms in the pre-1996 period as well.
However, we can easily tell that Klarman's strategy generates absolute positive returns. You'll notice that he rarely ever lost money and does not seem very correlated with the broad market. Even when he was underperforming the S&P 500, he was posting around +10% per year. The S&P 500 portfolio also didn't lose money, until 2001, but it is more volatile. Klarman's seems more smooth. The real test is to see what happened in the 2000's. Without that record, it's hard to say if Klarman's style actually avoids the volatility and inherent, occasionally massive, losses that are norm for the broad markets.
Based on this limited observation, I would put Seth Klarman a bit below Martin Whitman (admittedly Whitman seems to be having a terrible few years and it's not clear how Klarman did.) Based on my limited knowledge, no one comes anywhere near Warren Buffett. In the modern era, #2 would probably be George Soros (he isn't a value investor though.) There are a few others in the hedge fund world who have supposedly posted numbers that are even better than Warren Buffett's in the 50's and 60's but I have no access to their reports and am unfamiliar with their strategies*. Number three might be Jean-Marie Eveillard or someone like that.
FOOT NOTE:
* For instance, a lot of hedge funds post very high returns, compared to public investors or mutual funds, because they use leverage. Even if they don't leverage up much within the fund, they may invest in assets that are inherently leveraged, such as a CDO, CLO or some private equity fund. Some only care about returns and could care less about leverage but I discount anyone using leverage. If you post 30% with leverage, I consider it worse than, say, the 20% generated by Warren Buffett**. But most people, especially the media and the general public, would consider the 30% better because you would be richer and it's hard to tell if someone is using a leverage without extensive analysis.
** Admittedly, Warren Buffett also uses a special type of leverage. Buffett gets a boost for his returns by using the float of insurance companies (some bears, who do not respect Buffett's investing skill, argue for a slight discount to Berkshire Hathaway because this is a somewhat risky strategy if you are a bad investor. This bearish argument is the case for any insurance company you invest in. If you mismanage the insurance company assets, you can end up in more trouble than even if your insurance claims end up being large.) In any case, I don't think the float argument detracts from Buffett's skill because he didn't have quite the same amount of access to insurance float in the 50's and 60's.
Quite frankly, I know very little of Seth Klarman so my comment should be taken in that light—namely, a distant observer with limited information. Institutional investors and others in the hedge fund world will have a better, truer, picture; but I have to go with what I have.
I have no idea what Klarman's performance in the last decade has been. But I did run across the Baupost Fund letters in the 1990's—I think I linked to them before but if you haven't seen them, do check them out—and let's look at how he performed.
If we go with the latest available information, at least to me, it is the 2001 letter. I extracted the performance table, which represents inception to 2001, which is around 10 years, from that letter:
Well, you can get a feel for an investor's skill and investing style from long-term performance. It's sort of like looking at a 10 year history of a business. A business with fluctuating profits, with losses once in a while, is not so great (such a business would represent my investing skills :( ). Another with stable, good profits, will represent a skilled investor (like Warren Buffett).
The first thing that jumps out is that Klarman is no Warren Buffett (I'm sure Klarman himself would agree that it is a ridiculous comparison.) Warren Buffett posted around 20% annual returns in the 1960's while Klarman posts 12.83%.
What was initially surprising to me, when I looked at this many weeks ago, was how Klarman underperforms the S&P 500. The margin is sizeable (around 2.4%) and someone investing $50k would have generated almost $40k more in the S&P 500. However, note that S&P 500 was wildly overvalued in 2001 (it was even more overvalued in 2000). In any case, it's interesting to me. A lot of value investors underperfomed in 1999 and 2000 but Klarman underperforms in the pre-1996 period as well.
However, we can easily tell that Klarman's strategy generates absolute positive returns. You'll notice that he rarely ever lost money and does not seem very correlated with the broad market. Even when he was underperforming the S&P 500, he was posting around +10% per year. The S&P 500 portfolio also didn't lose money, until 2001, but it is more volatile. Klarman's seems more smooth. The real test is to see what happened in the 2000's. Without that record, it's hard to say if Klarman's style actually avoids the volatility and inherent, occasionally massive, losses that are norm for the broad markets.
Based on this limited observation, I would put Seth Klarman a bit below Martin Whitman (admittedly Whitman seems to be having a terrible few years and it's not clear how Klarman did.) Based on my limited knowledge, no one comes anywhere near Warren Buffett. In the modern era, #2 would probably be George Soros (he isn't a value investor though.) There are a few others in the hedge fund world who have supposedly posted numbers that are even better than Warren Buffett's in the 50's and 60's but I have no access to their reports and am unfamiliar with their strategies*. Number three might be Jean-Marie Eveillard or someone like that.
FOOT NOTE:
* For instance, a lot of hedge funds post very high returns, compared to public investors or mutual funds, because they use leverage. Even if they don't leverage up much within the fund, they may invest in assets that are inherently leveraged, such as a CDO, CLO or some private equity fund. Some only care about returns and could care less about leverage but I discount anyone using leverage. If you post 30% with leverage, I consider it worse than, say, the 20% generated by Warren Buffett**. But most people, especially the media and the general public, would consider the 30% better because you would be richer and it's hard to tell if someone is using a leverage without extensive analysis.
** Admittedly, Warren Buffett also uses a special type of leverage. Buffett gets a boost for his returns by using the float of insurance companies (some bears, who do not respect Buffett's investing skill, argue for a slight discount to Berkshire Hathaway because this is a somewhat risky strategy if you are a bad investor. This bearish argument is the case for any insurance company you invest in. If you mismanage the insurance company assets, you can end up in more trouble than even if your insurance claims end up being large.) In any case, I don't think the float argument detracts from Buffett's skill because he didn't have quite the same amount of access to insurance float in the 50's and 60's.
Klarman's fund performed quite well from 2002-2007 btw (he was down significantly for the first time in his career ~12% in 2008). I don't have year-by-year performance numbers but I would bet Klarman's 1991-2009 YTD performance has been about 13-15%, while the S&P 500 has been about 7% including re-invested dividends.
ReplyDeleteThere is another impotant factor in Seth Klarman's favor.
ReplyDeleteNot only does he not use leverage but he often keeps much of his portfolio in cash. That is, his leverage is actually quite negative.
It is true that the Baupost Fund lagged the S&P 500 for the decade of the 90s but that was an extraordinary decade for US equities. The rate of return on US equities over that period was twice the rate of return from 1926 to present (approximately 18% vs. 9%).
If Baupost's rate of return during the 2000-2009 period was as good or better than the prior decade's, Seth Klarman is very good indeed.
How about Joel Greenblatt eh ? 40% return over 20 years without leverage is just plain awesome
ReplyDeleteI defer on your conclusion. Seth Klarman is, in my opinion, is one of the smartest value investors out there.
ReplyDelete1) Your comparision with Mr Buffet is over two different periods. This is outright a wrong comparision to make.
2) Looking at performance compared to S&P is also incorrect. I have studied Mr. Klarman. He does not manage for beating benchmarks. Through his funds, his firm manages funds for wealthy families. His constituents do not care about beating S&P. They only care about preserving capital first, and then having decent positive returns over 10-yr periods. Unlike the mutual fund managers, he has almost no fear of redemptions provided he can assure downside risk protection. When a family has 50M dollars of assets, they care more about protecting catestrophic losses, than growing wealth at 20% yoy. Given this, he truly can afford to practices the first principle of value investing - "Rule #1: Don't lose money". Remember value investing is not about beating benchmarks.
3) Mr Buffet is obviously the best investor out there. But, through premiums at his insurance companies, he has had free float that he can invest. Thus, he has been able to leverage without the risk of leverage. Comparing Klarman or any investor that does not operate this way is not a fair comparision.
4) If you don't know too much about Mr. Klarman, I would suggest to get started by reading his book "Margin of Safety". Read his introduction to the 6th edition of Security Analysis.
Seth Klarman is revered, no doubt about it. Maybe his glamour comes from the fact that wealthy families have entrusted him with capital. Not to mention the fact that he writes well.
ReplyDeleteAnd, as you and an earlier commenter have noted, he's a master at the first rule of value investing: "don't lose money."
Hi,
ReplyDeleteI like Seth Klarman work and his thoughts ..But as an indivdual investor , his work is too hard for few points over S&P. If you invest in Index Fund , you can compund your money without any work and lag behind maestro slightly.
Regards
Vishnu
Vishnu, anybody who wants to few better points over S&P has only choices
ReplyDelete1) leverage
2) macro-forecast better and before anybody else
3) look for value where no one is looking
1 and 2 are the not the game for value investors. (3) obviously requires hard work, because if it was formulaic or something easy to detect, the prices would be bid up, and the value-price gap would disappear or the margin of safety would be lower.
Value investing, in the true sense, requires hard work and full-time committment. If an individual investors can do neither, he ought to be satisfied with a passive approach of indexing.
So, in summary, it isn't that Mr Klarman's approach is hard, but value investing is hard and time consuming. Any individual investor looking for a easy way to do active investing is just practicing wishful thinking, in my opinion.
Guest: "Value investing, in the true sense, requires hard work and full-time committment. If an individual investors can do neither, he ought to be satisfied with a passive approach of indexing. "
ReplyDeleteYep... I don't mean to be condescending to anyone but I see many people trying to be so-called value investors without doing any work. To paraphrase Benmjamin Graham, if you aren't committed, you cannot be an enterprising investor.
Visnu: "If you invest in Index Fund , you can compund your money without any work and lag behind maestro slightly. "
ReplyDeleteA few percentage points is a massive number over your lifetime. That's why we should all be paying attention to things like taxes, transaction costs, etc. In any case, I think index investing is fine. The vast majority of the people should be index investors. If I fail in my investing and realize that I'm not a good investor, I'll turn to index investing as well...
Thanks for all the responses from everyone... I'll address all of them in a future post...
ReplyDeleteThis post is a bit assuming. Klarman holds as much as 50% of his portfolio in cash at any one time. That is a sizable amount for even a value investor. He did indeed do much better after 2001, averaging I believe 30% pa. So what kind of return would one need to achieve 30% with sizable cash holdings? I think that speaks for itself.
ReplyDeleteRanking value boys is a bit naive. I hardly think Warren Buffett believes in such a thing. After all after liquidating his partnership, he recommended Bill Ruane who he mentioned would do as well or better than himself. In fact, he says that including himself, he can easily name half a dozen people who can compound small amounts of capital at 50% p.a. like himself.
Bit late to post the comments now..but posting it anyway..
ReplyDeleteLet take an following example for a moment..
You are offered a job..but with 2 option to choose.
1) 200$ pay without any work , no educational qualifications...and no prerequisite...
2) 210$ pay with hardwork..you need to work day and night..Learn a lot everyday basis
Which option you choose ? If you choose 1) you can enjoy with your family..with no work..but less money compared to option 2) you will get superb money compared to 1st option due to compounding..
Which option you will choose..my personal opinion is 1st option..(though I have all the capacity to do the necessary work and Intelligence to take the option2)
Regards
Vishnu
Bit late to post the comments now..but posting it anyway..
ReplyDeleteLet take an following example for a moment..
You are offered a job..but with 2 option to choose.
1) 200$ per day without any work , no educational qualifications...and no prerequisite...
2) 210$ per day with hardwork..you need to work day and night..Learn a lot everyday basis
Which option you choose ? If you choose 1) you can enjoy with your family..with no work..but less money compared to option 2 where you will get superb money compared to 1st option due to compounding..
Which option you will choose..my personal opinion is 1st option..(though I have all the capacity to do the necessary work and Intelligence to take the option2)
Regards
Vishnu
"This post is a bit assuming. Klarman holds as much as 50% of his portfolio in cash at any one time. That is a sizable amount for even a value investor. He did indeed do much better after 2001, averaging I believe 30% pa. So what kind of return would one need to achieve 30% with sizable cash holdings?"
ReplyDeleteI know a lot of people think investors holding cash are handicapped but I don't look at it that way. If you are risk averse then, yes, you may value someone holding cash but in terms of performance comparison, I don't think it should matter.
If someone holds cash, it will act as a drag when returns are good; but when returns are poor, it will boost your returns. For instance, I am sure that Klarman got an automatic boost in 2000 to 2002, relative to the broad market, because the market fell drastically.
So, I agree with you that the cash would have acted as a drag when the markets were doing well (say 1991 to 2000) but it would have helped him significantly (relative to the market) during, say, 2000 to 2002, and 2007 to 2009.
"Ranking value boys is a bit naive. I hardly think Warren Buffett believes in such a thing."
Naive is probably not the correct word; maybe you mean to say it is misleading. It's a subjective thing and I can see some saying one can't rank performance while others, like me, saying it can be done. It's no different than in, say, ranking sports athletes across decades. Some say you can't rank them because the situation is different while others are ok wtih it.
"In fact, he says that including himself, he can easily name half a dozen people who can compound small amounts of capital at 50% p.a. like himself."
Buffett is very humble and downplays everything so you shouldn't take what he says literally. There is hardly anyone who returns 50% per year. And there is definitely no one that I know of, who even comes close to Buffett's performance. Even the ones he recommended do not come anywhere near him.
You'll note that Buffett also says that if he had a small portfolio that he is guaranteed to post 50% per year. He makes it sound like almost anyone in that situation can do it but there are very few, if any.
Your example is slightly off (the second choice will compound so it will end up being much larger it seems) but, in any case, I agree with you.
ReplyDeleteEveryone needs to figure out if spending countless hours on investing is worth it for them. For the vast majority, they are better off doing it something other than investing. Furthermore, only a tiny percentage will succeed. So, you are right in implying that majority of the people are better off doing something else that they value. In fact, that is what happens in life: the vast majority of people out there are not into investing because it is not worth it.
This NY Times article from 2007 gives an update on Klarman's returns:
ReplyDelete"Since he began Baupost in 1983, it has posted an average annual total return of 19.55 percent, according to data provided by the hedge fund group. Declines have been posted in only 11 of the total 97 quarters since Baupost’s debut."
Average annual returns just shy of 20% for 23+ years does indeed begin to rival the record of Mr. Buffett in terms of returns (though not in terms of how long those returns are sustained, as Buffett's record now spans half a century).
The full article is here: http://www.nytimes.com/2007/05/13/business/yourmoney/13klar.html?_r=2&ref=yourmoney&pagewanted=print&oref=slogin
Thanks for the info Jim.
ReplyDelete