What can I tell you about this week's banger? Seth Klarman, legendary value investor, out of Boston at the Baupost Group. What a fascinating discussion about risk, the current environment, the Boston Red Sox, and anything that affects portfolios, distressed assets, stocks, bonds, real estate. I thought this was fascinating, and I know you will too. With no further ado, my conversation with Seth Klarman.
Seth Klarman, welcome to Bloomberg. It's so great to be here.
Thank you so much. I've been looking forward to this for forever. Before we get into your investment philosophy and the development of Baupost, let's roll back to your early days. Economics from Cornell, an MBA from Harvard. What was the original career plan?
I was always drawn to investing, even as a young kid interested in baseball statistics. I became aware of stock market columns, asked my neighbor, and started following it from an early age. I didn't have a career plan, but I was drawn to puzzles—the stock market and financial markets are big puzzles to solve. How does it all work, and how can an investor outperform? That drew me in.
How did you first find that beyond the newspaper pages? You grew up in Baltimore, parents divorced young. Mom was an English teacher and social worker; Dad a health economist. Was it just thumbing through the sports pages to the stock pages?
The numbers on the page attracted my attention. My origin story is like many in investing—I was drawn to small businesses to make money. I had a newspaper route, snow cone stand, mowed lawns, raked leaves, shoveled snow, and sold candy at religious school for arbitrage profit. It was a pattern of being drawn to small business and making money, which led to an interest in the stock market. I bought my first stock with bar mitzvah money at around ten years old—a share of Johnson & Johnson.
Let's fast forward to the Baupost origin story. You co-founded Baupost at 25, but reality is you were brought in to manage money for the founding families. That's shocking at 25—letting a kid run their portfolio.
I'd wonder the same in their seats. I don't think people should generally start investment firms at 25. The firm was being created by four clients who wanted an institutional structure to manage money well in a highly volatile time in the early 80s with stagflation and uncertainty. They wanted to keep money intact and managed properly. I was a student at business school, and my real estate professor, Bill Poorvu, was part of selling a TV station. They had $27 million, and my job was to figure out smart things to do with the money.
Eventually, you became the lead partner and CEO. How did that happen?
I wasn't CEO for the first seven years. I became CEO and effectively got control through a handshake deal—working hard and doing well for clients would earn me a stake. I started with no stake and ended up with over half, but now much less because I believe in sharing with my team.
Let's talk about timing. You mentioned turmoil and stagflation in the previous 16 years. Inflation-adjusted returns were down 75% from 66 to 82. 1982 was the beginning of a historic bull market. How did that affect your thinking on risk and opportunities? What did the markets look and feel like in 1982?
Malcolm Gladwell might say 1982 was an interesting time to start a firm with wind at your back. But at the time, you had no idea it was a long bull market. The market hadn't done well for a long time, and people were skeptical. You can always point to things that seem overvalued or risky, yet we get through most of those. It didn't feel like a layup. We tried to make money apart from the market by buying idiosyncratic situations and bottom-up mispricing, which built our record. We would have done okay whether the market was up, down, or sideways.
How did the environment of high rates under Volcker, and the malaise from Vietnam and Watergate, affect you as a professional investor? What lessons did you take?
Every investor needs to be a student of history—it may not repeat exactly, but it rhymes. Understanding financial history is valuable. What were the worst moments? How did we go through the 1929 crash and Great Depression? Even Benjamin Graham nearly went broke twice. Investors should hold multiple inconsistent thoughts: finding interesting opportunities today while knowing there are backdrops like expensive markets or euphoric conditions. Over 40 years, it's always been some of both. Value investors make money staying bottom-up—portfolio of bargains stress-tested and intellectually honest will probably do okay.
You mentioned Ben Graham. Who else influenced your investment philosophy? I've read about Michael Price and Max Heine.
Ben Graham was a major influence, as he has been on everyone in value investing. Warren Buffett, as a real-life practitioner, also influenced me. It was heartening to see someone like Buffett think similarly about downside risk, focusing on individual companies, not worrying about the overall market, and holding cash. He gave me certainty of compounding capital over time. Graham and Dodd is a North Star—focus on what something is worth, ignore the herd, growth at any price, and new technologies. Confidence in holding something worth more later underpins value investing.
You mentioned downside risk. In 1991, at 34, you published Margin of Safety on risk management. What led to writing the book? How was it initially received, as it's now sought after?
In retrospect, it looks presumptuous. A classmate at Harper Collins asked me to write it after seeing my client letters. I thought I was updating The Intelligent Investor with modern examples to make it more accessible. Writing it made me think more clearly about what I do—I write to figure out what I think. The initial reception was mixed: a handful of value geeks bought it, but it landed with a thud due to lack of advertising. I bought back copies, but it developed a cult following. Competitors used it to train their teams, which wasn't the goal, but it was successful in a weird way. We've reprinted it for clients and interns.
Let's talk about the 2008-09 financial crisis. You raised about $4 billion and deployed $100 million a day into distressed assets. Are those numbers accurate?
That's ballpark. We had been closed for new clients but kept a list. When the market fell apart after Bear Stearns and Lehman, with great stress and uncertainty of an economic decline, it was time to take capital. The odds of deploying fruitfully increased daily. The team worked heroically, raising significant capital within a quarter.
How did you put this team together, and what were their marching orders during the turmoil?
We were an established firm with a team in place, deeply knowledgeable and experienced in distressed assets. People at Baupost like being versatile athletes—nimble, agile, and cross-trained. Like baseball teams, we have people who can work on distressed situations, private investments, public markets. They call them in when busy.
Big chunk of capital aggressively deployed when many were paralyzed. Was it just the value framework, or broader?
It wasn't like coming in with giant satchels of money. It was the same cerebral, methodical process. We saw things at lower prices, looked at fundamentals, everything bottom-up. We bought bonds at 70 covered at par, mortgage securities, corporate debt like auto finance arms, and pieces from Lehman's capital structure. We stress-tested investments—if the world got worse, would this be okay? If downside is protected and many paths to winning, we're interested. We also owned equities and private investments. The challenge is not blowing up and having capacity to buy when opportunities arise and competitors are sidelined.
I'm fascinated by the tension between bottom-up research and top-down. You say you don't think top-down, but panic and distressed assets were over-responding to the top-down environment.
There are several layers. People responded to redemption requests, credit downgrades, and forced selling. You never want to be a force seller; you want to buy from them. Like mountain climbing, you look bottom-up for the right trail and equipment, but also have top-down view for weather. I always think about whether the environment is safe—markets feel stretched, but on the brink of unprecedented technology and prosperity, with risks and change. Bottom-up still feels right, but keep an eye on the weather: GDP, national debt, inflation. We don't invest based on that; we notice a security mispriced and look closer.
Let's talk about cash. Many see it as a drag, but it's been important for you. What optionality does it create versus career pressure to stay fully invested?
