Lessons From Seth Klarman


Seth Klarman has made me a ton of money over the years. 

I’ve stolen many of his stock ideas, most of which have gone higher by a multiple of what I paid for.

For those not familiar with Mr. Klarman, he runs Baupost Group – a hedge fund that has been around since 1982 and has racked up annual returns of about 20% a year since the doors opened.

Klarman does invest in public stocks, but he has also been a huge player in distressed securities, real estate, and other private investments.

It’s not just his stock ideas that have made me a lot of money. His investing style is second to none. And it has helped me explore new corners of the market where I would have never thought to look.

Black Market Insights

Klarman wrote a book titled Margin of Safety back in 1991 that laid out the framework for his investing style. 

After publishing though, he quickly realized he had made a mistake by revealing too many details of his investment theory. He let the book go out of print and never authorized another edition.

A black market for the book was developed, and copies routinely sell for well over $1,000 today (Here’s your proof).

In the pre-Kindle days when I had free time and no Honey-Do list, I spent any weekend I could at used book stores, charity book sales, and even yard sales looking for books. About every six weeks, I would make the hour drive to Baltimore and hit the marvelous used book warehouse, The Book Thing, to scour the shelves.

(If you are anywhere near Baltimore, you need to check this place out). 

In part, this was to feed my voracious reading habit. But I had also learned to buy and sell rare investment books, including Klarman’s.

I have bought and sold these books several times over the years – always for a pretty tidy profit.

Seth Klarman’s shareholder letters have always been in high demand as well. Just about everything this man writes is treated like gold.

The problem is, he makes it as hard as possible to get your hands on a copy as he feels his insights and ideas are the investors’ property who are paying him. These take time and effort to get your hands on them, but just like his book, I usually manage to land a copy…

A New Revelation

This year several copies of the 2nd quarter 2020 letter made it online before Baupost had them taken down. I was able to save a copy. And from this letter, I may have stolen the most profitable idea from Mr. Klarman in my entire career. 

Klarman took a look into the post-pandemic world and outlined eight long-term changes that he thinks will be caused by the events of 2020. He outlines the case for all eight, and I have to say it’s pretty powerful stuff.

I could base a new political movement on the eight ideas he shared that would serve the public much better than any of the ideas I hear from the current parties.

Even more importantly, from our perspective, the eight takeaways from the pandemic could also be the basis for a long-term approach to investing that should result in massive profits.

One, in particular, struck me hard.

Charlie Munger always said that it is important to destroy one of your most cherished ideas, and this single sentence challenged and killed one of my long-held beliefs. 

I have always been a massive fan of Austrian economics and laissez-faire government and economic policies. Business going overseas to find the cheapest labor cost made perfect sense to me. So did just-in-time manufacturing that keeps limited inventory on hand to maximize profits. 

The pandemic has exposed both of these as horrible ideas.

Klarman notes in his letter that:

The invisible hand of the market can often lead to economic efficiency, but the invisible hand is apparently driven by an invisible (or non-existent) brain. No one could think, in retrospect, but even in prospect, that it makes sense to outsource American production in ways that made the American people dependent on their greatest geopolitical rival, one that routinely pilfers our intellectual property, and one with which we are in an escalating trade war. Hopefully we never make that mistake again.

It was not just the supply chain for toilet paper and pork chops that broke down as COVID-19 spread across the United States. We discovered that almost all of the Personal Protection Equipment (PPE) our front-line workers needed was manufactured outside the United States. Most of our pharmaceuticals were being manufactured somewhere else as well.

Laissez-faire policies work in a world where everyone is rational, and most are honest. It requires most participants to be driven by self-interest and have no desire to impose their will on others. 

We do not live in that world.

The Future Is Not What It Used to Be

We will need to bring manufacturing back to the United States. Foreign countries may have low labor costs but most don’t really like us very much.

To stay competitive on costs, factories will have to be heavily automated.

This is going to be a trend that takes years to play out and will create opportunities in logistics companies, automation technology companies, semiconductor manufacturers, and a host of other opportunities for long-term investors.

I have made a lot of money following Seth Klarman’s approach to investing, stealing his ideas, and trading his book. I expect to make even more over the next decade from the concepts outlined in his latest shareholder letter.

The return of the manufacturing supply chain should be one of the most profitable of all.