Before my November vacation, I will leave you with a juicy Baupost piece compiled through various sources that shall remain confidential. Instead of the usual excerpts or quotes, below are summaries of ideas and concepts. Creativity, Making Mistakes
- False precision is dangerous. Klarman doesn’t believe that a computer can be programmed to invest the way Baupost does. (Does this mean their research, portfolio monitoring, and risk management process does not involve computers? Come to think of it, that would be pretty cool. Although it would make some administrative tasks more difficult, are computers truly necessary for the value-oriented fundamental investor?)
- Investing is a highly creative process, that’s constantly changing and requiring adaptations
- One must maintain flexibility and intellectual honesty in order to realize when a mistake has been made, and calibrate accordingly
- Mistakes are also when you’re not aware of possible investment opportunities because this means the sourcing/prioritization process is not optimal
When To Buy, Conservatism, Barbell
- Crisis reflection – they invested too conservatively, mainly safer lower return assets (that would have been money good in extremely draconian scenarios). Instead, should have taken a barbell approach and invested at least a small portion of the portfolio into assets with extremely asymmetric payoffs (zero vs. many multiples)
When To Buy, Portfolio Review
- They are re-buying the portfolio each day – an expression that you’ve undoubtedly heard from others as well. It’s a helpful concept that is sometimes forgotten. Forces you to objectively re-evaluate the existing portfolio with a fresh perspective, and detachment from any existing biases, etc.
- They try to figure out how “risk is priced”
- Risk is always viewed on an absolute basis, never relative basis
- Best risk control is finding good investments
- Hedges can be expensive. From previous firm letters, we know that Baupost has historically sought cheap, asymmetric hedges when available. The takeaway from this is that Baupost is price sensitive when it comes to hedging and will only hedge selectively, not perpetually
- Prefer to own investments that don’t require hedges, there is no such thing as a perfect hedge
- Bad hedges could make you lose more than notional of original investment
- In certain environments, there are no cheap hedges, other solution is just to limit position sizing
- Ability to hold cash is a competitive advantage. Baupost is willing to hold up to 50% cash when attractive opportunities are not available
- The cash balance is calculated net of future commitments, liabilities, and other claims. This is the most conservative way.
- Reference to “right-sizing” the business in terms of AUM. They think actively about the relationship between Cash, AUM, and potentially returning capital to investors.
Returning Capital, Sizing
- Returning capital sounds simplistic enough, but in reality it’s quite a delicate dance. For example, if return cash worth 25% of portfolio, then capital base just shrank and all existing positions inadvertently become larger % of NAV.
- Will take on leverage for real estate, especially if it is cheap and non-recourse
- Only 1-2% of deals/ideas looked at ultimately purchased for portfolio (note: not sure if this figure is real estate specific)
Time Management, Sizing
- Intelligent allocation of time and resources is important. It doesn’t make sense to spend a majority of your (or team’s) time on positions that end up only occupying 30-50bps of the portfolio
- Negative PR battles impact not only reputation, they also take up a lot of time – better to avoid those types of deals
- Klarman makes a distinction between marketing operations (on which he spends very little time) and investment operations (on which he spend more time).
- There is a weekly meeting between the public and private group to share intelligence and resources – an asset is an asset, can be accessed via or public or private markets – doesn’t make sense to put up wall between public vs. private.
- Every investment professional is a generalist and assigned to best opportunity – no specialization or group barriers.
- Culture! Culture! Culture! Focus on mutual respect, upward promotion available to those who are talented, and alignment of interest
- Baupost has employees who were there for years before finally making a large investment – key is they don’t mind cost of keeping talented people with long-term payoff focus
- Succession planning is very important (especially in light of recent Herb Wagner departure announcement)
- The most conservative avenue is adopted when there is a decision disagreement
- They have a team of people focused on transaction structuring
- Baupost invests focusing on superior long-term returns, not the goal of ending each year with a positive return. We have talked about this before, in relation to Bill Miller’s trackrecord – despite having little logical rationale, an investor’s performance aptitude is often measured by calendar year end return periods. Here, Klarman has drawn a line in the sand, effective saying he refuses to play the calendar year game
- Differentiated sourcing creates opportunities via better pricing, less competition, etc. Learned from Michael Price (or perhaps Max Heine’s playbook) – focused on differentiated sourcing, something that public investors generally don’t think about.