Thursday, May 27, 2010

Notes from Seth Klarman's Speech at the Ira Sohn Conference

Seth Klarman, the president of Baupost Group, which manages about $20 billion for institutions and individuals politely went to town on Washington. Herewith, some of Klarman’s self-styled testimony to Congress:
  • Sure people in the industry do well when clients do not, but our primary obligation is to clients, not counterparties. And Wall Street isn’t a casino. Over time, deep financial analysis produces value for stocks. Klarman’s motto: don’t do anything you can’t live with as a next-day, front-page Wall Street Journal headline.
  • Warren Buffett has a word for people who get in over their heads: Patsy. Examples? American International Group (AIG) and those who thought housing-related derivatives would never lose money, or those with computer programs that recently forced the sale of some stocks at a penny.
  • We rarely if ever sell short, but it is important and patriotic … short sellers can dampen upside excesses,” Klarman says. He thinks much long-oriented analysis is short-sighted, simple and sloppy.
  • Bring in Ben Bernanke and ask him about inconsistent pronouncements about the economy, the cost of interest rates at zero for so long, why the rate of inflation is where it is, and, what a bubble really looks like.
  • Socialism may seem fairer, but would mean egalitarian sharing of a smaller pot. “Our buying and selling moves markets closer to fair value.
  • The government rescue will inflate the next financial market bubble. He said that while many learned to shun leverage as a lesson from the Great Depression, “the bailout has endowed a generation without any long-lasting lesson.” Huge deficits with no end, entitlements and the beneficence of foreigners mean no margin of safety. “We are kicking problems down the road,” he and many others at the conference said, and he added that if the government doesn’t rein in spending, a disaster like war or a currency collapse would leave the nation in great trouble. Slower economic activity with a margin of safety will help, and will take time. “No rational investor would want to rely on prayer,” Klarman says.
If you haven't seen it already, check out Klarman's forgotten lessons of 2008, and why he sees a poor outlook for stocks.