Value Investing Legend and Charlie Munger Disciple Seth Klarman | At the Money

It's so great to be here. Thank you, Barry.

So, I was always drawn to investing. Even when I was a very young kid, I was interested in baseball statistics. I became aware that there were these other columns of numbers in the newspaper and asked my neighbor what those were and started to understand and follow the stock market a little bit. So, of course, I had no idea what I was doing, but I was paying attention from a quite early age. I didn't really ever develop a career plan, but I was drawn to the stock market. I think I'm drawn to puzzles, Barry. I like doing word puzzles every day. I like solving math puzzles. I subscribe still to something called a math puzzle book published by Dell. And the stock market's a big puzzle. The financial markets are a big puzzle. How does it all work? And how does the performance of the companies get reflected in stock prices? And how can an investor outperform everybody else? And so all of that is a piece of what drew me in.

That's literally the numbers on the page attracted my attention. I would say, you know, I think my origin story is a lot like other people who ended up in the investing business, like Warren Buffett, like I think Todd Combs, like many others, drawn to small businesses, wanted to make money. So, I was delivering newspaper routes for the Baltimore Sunpapers. I had a snow cone stand in my driveway one summer. I mowed lawns. I raked leaves. I shoveled snow. I did little carnivals for the neighborhood kids, whatever. I sold candy at religious school on Tuesdays and Thursdays because the kids were starving after school and I would buy it up over the weekend and bring it to school and sell it for an arbitrage profit. So it was just a pattern of being drawn to small business and making money. And over time that led to an interest in the stock market. I bought my first stock with some bar mitzvah money when I was around 10 years old.

It wasn't bar mitzvah money then. It was a present, but then bar mitzvah money continued to be piled in. I bought a share of Johnson and Johnson.

Do not still have it. It split three for one, but ultimately I presumably have traded that in for something else that I like better.

And I would say the same thing if I were in their seats, I would wonder, well, how does this kid know how to do that? So I don't think people should generally be starting investment firms at age 25. And of course, I really didn't start the firm. The firm was in the process of being created. The four clients of the firm that came together, the founders had the idea that they would build a firm that might go and make investments itself, might hand money to others who were in the business already of making investments. So I think they wanted to build kind of an institutional structure or framework for how to make sure the money got managed well given what was then back in the early 80s a highly fraught time, as you know from history. The volatile markets, long history of underperformance of the stock market and real economic uncertainty, stagflation, at some point and getting worse. Treasury bond yields were getting higher and higher. So, it was a really fraught moment. And I think they wanted to make sure that the money they had not only was kept intact, but was accounted for, clip the coupons and collect the dividends and all of that. The founders were all selling businesses around that time. So the serendipity was I was a student at business school. Bill Poorvu, the P of Baupost, was my real estate professor and he and some friends were selling Channel 5. He was a big investor in that, the Metro Media largest sale at the time of a TV station to Metro Media. It was the ABC affiliate in Boston. A third friend had a computer publishing and consulting business. All that was getting sold. So they had this pile of $27 million. And the basic job offer I got wasn't come run a fund. It was come join us and let's figure out smart things to do with the money.

I wasn't CEO for the first seven or so years and then I became CEO and effectively got control of the firm as sort of a handshake deal where we agreed that if I worked hard and did well for the clients that they would recognize that with a stake in the business. So I had no stake the day it was formed and ended up with over half.

And now much less because I'm a big believer in sharing the pie with my team.

Yeah. So, right, I think Malcolm Gladwell would look and say 1982, what an interesting time to start an investment firm. That certainly was a wind at your back in terms of being successful. The challenge is, and you know this, how it works in the markets, is you had no idea that you were at the beginning of a long bull market. What you felt was the market hasn't done that well for a long period of time and people were very skeptical about it and you could always point to, I think this is probably valuable insight, is you can always point to things at any moment that don't add up, that seem overvalued, that seem risky, and yet we get through most of those things. So at the time it didn't feel like a gimme, it didn't feel like a layup hand. But what ended up happening was we tried to make money apart from the market. We weren't buying an index. Indexes weren't big then anyway. We weren't buying the market. We were buying idiosyncratic situations looking for bottom-up mispricings and that led to us building a record. So while it looks just okay compared to the market over that period of time, I think we would have done okay whether the market had been up, down, or sideways.

I would tell you I think every investor needs to be a student of history. It may not repeat exactly but it certainly rhymes and it is very valuable to understand, and I think especially financial history for an investor. So what are the worst moments? How did we go through a market crash in 1929 to 1933 and a great depression that lasted close to a decade? What must that have been like for the people at the time? How would one handle oneself if you were going into a period like that? That we know that even the greatest acclaimed value investor of all time, Benjamin Graham, nearly went broke twice during that era. So, I think it's incumbent on all investors to be thinking and maybe holding multiple inconsistent thoughts in their head at the same time, that I found this interesting opportunity today, this bargain-priced stock, for whatever reason it's out of favor, they cut their dividend, it's a spin-off, it's a bankrupt security that's converting into a new equity. These things tend to get mispriced. But you've got a backdrop of, from time to time as we do today, a backdrop of very expensive market and a bit of euphoric conditions. Is that dangerous? It's dangerous, but we're also at the cusp of maybe a groundbreaking new technology. So I think over the 40 years it's always been some of both, that you've got a backdrop of something, sometimes very depressed, sometimes very optimistic, but you've also got individual securities that are fluctuating around maybe creating bottom-up opportunity. What I deeply believe is that value investors make money staying in the bottom up. That you might have a top down view. You might say yeah this could be a bubble, it could be a problem. But bottom up is where you're going to devote your time. It keeps you anchored. That if you have a portfolio of bargains, you're probably going to do okay if you've stress tested them and if you've been intellectually honest about them and they really are bargains.

Right. So I think reading Ben Graham was certainly a major influence on me, I think as he has been on essentially everybody in the value investing community. And then Warren Buffett, the real life practitioner of Graham as well. And it was always heartening to know that somebody like Buffett who seemed to think similarly to how I thought, thought about downside risk, thought about the need to stay focused in individual companies and not worry so much about the overall market, the willingness to hold cash, and concurrently, the willingness to not have an opinion on everything. I have a lot of ideas and I end up with no opinion, no position. But once in a while we find something that seems way off the beaten path that's really interesting. So to watch Warren Buffett do that, I've realized now that Warren probably had a certainty of the idea that he would compound capital over a long period of time. And I think that is something that Graham probably gave Warren and gave me as well. The idea that if you protect on the downside, if you don't find yourself getting margin calls, frozen in place because you're too exposed, or getting massive redemptions because you're down so much, if you can position yourself that way, it can leave you in a position to play offense when even your best competitors might not be on the playing field. And that's a huge advantage. So, I think that Graham is kind of a north star. It kind of is a place where you can stay focused on what something's worth. You can ignore the herd. You can ignore the siren song of growth at any price and of exciting new technologies and exciting IPOs. And you can ignore all that because you have a confidence that I own something that's going to be worth more a year or two from now than it is today. And that's I think the underpinning that lets you follow a value investment strategy.

Yeah. So, I think in retrospect that looks pretty darn presumptuous. I got asked to write it by a classmate from business school who worked at Harper Collins at the time, or Harper and Row maybe before Harper Collins. And she had seen some of my client letters. She said, you know, you seem like you'd be a good writer and you're a smart guy. Maybe you'll have something to tell the audience. What I really thought was I'm just updating The Intelligent Investor with modern examples and a contemporary market that's decades since that book was written. And I thought maybe I'd make it a little bit more accessible for the average Joe. I don't know whether it accomplished that, but that's what I was trying to do. I had no idea. I didn't think I would make money from writing the book. I mean, as an author, you know, we get like a buck fifty an hour, but it's a great feeling and it's a ton of work, but I think ultimately worth it. And you get smarter from the act of writing about what you do. You can do what you do all day long without maybe fully forming the philosophy, but if you want to share it with anybody else, it makes you think more clearly about what you do.

So, it's somewhere in between. What happened first was I think my editor got fired three different times. So, I kept getting new editors. They had promised to back the book with advertising and they didn't. So, the book landed with a bit of a thud. I think it had maybe a very tiny second printing. So, I think they printed maybe 7,000 copies. I ended up buying a bunch of them back from Harper Collins by the time they took it off the market and the rights somehow reverted back to me. What it did do though, it was bought I think significantly by competitors who used it to train their teams. And that was also like, is that what I wrote it for? Because I don't mind. But it wasn't maybe the starting goal. The starting goal was, if you go back to the book, the first half of it was about the street and about how they treat the average investor and maybe the challenge of whether the investor is getting a good deal. And the second half is maybe an investment approach, a value-oriented approach, and how an investor might think about doing that even if they're not a professional investor. So, it was successful. In a weird way, it's sort of because it didn't get republished, it developed a bit of a cult following, and that's kind of amusing and interesting to me. And of course, we've reprinted some on our own. So, we've made it available to our clients and to summer interns and to anybody that's connected to the firm.

So the earlier edition, the sixth edition, I was co-editor with Jim Grant and Bruce Greenwald and the seventh edition they asked me to just edit that one as editor. We didn't follow the process that you might follow because we kind of thought of Security Analysis as the Bible and we thought we should leave it alone and what we should do is have modern-day expert investors write commentary about the different chapters, different sections of the book. So that's what we did. So I think the sixth edition and the seventh both have some really great selections by investors, some of whom are well known, but some of whom aren't known at all. And my former colleague David Abrams is one of them. David's contribution in the sixth edition is one of the most brilliant things I've ever read. And so I felt like we were moving Graham into a different era. The thing that's beautiful about Graham, it was written a hundred years ago give or take and it was written during the depression and things that made sense in a depression haven't made sense every day since then because we haven't been in depression most of the time since then if at all. So it was an update taking what's valuable, why people revere the book as a Bible, but also making it more accessible and more relevant modern day. We expanded it to cover some topics that weren't covered. It certainly has more international investing which wasn't really focused on by Graham. It talks about some other private investments. It talks about some of the changes in financial markets, the latest manias and fads and all of that, but also the changes in market structure, the changes in asset classes that have come into existence. And all of that, I think, is a valuable updating of the literature and helps keep something relevant that deserves to be relevant while updated, because in its original Graham and Dodd 1934 form wouldn't be very useful to people.

It's ballpark. What I would tell you first of all is we had been closed for new clients much of our history, but we kept a list in case. And so when the market started to fall apart after Bear Stearns and then after Lehman, there were all kinds of things going on and people were in great stress as we entered the uncertainty of an economic decline that could have pretty epic proportions. As it turned out, it certainly was the worst decline since the Great Depression and it stands out as kind of the mother of all bear markets for anybody in the last 100 years. So the challenge was maybe it's time to take some capital and the odds are increasing every day that we're going to be able to deploy it fruitfully. So what you said is about right. So Bear Stearns, if I'm remembering correctly, was spring of 2007. Lehman was September of '08.

The team worked heroically and we were able to raise very significant capital within a quarter.

So we already were an established firm. We'd been up and running for a couple of decades by then. So I had a team in place and they were deeply knowledgeable, experienced.

Not everybody on the team has that, but a very high percentage of the team has that. And people at Baupost like being versatile athletes. So, we're nimble, we're agile, and we cross-train. Just kind of like baseball teams are doing now in the minor leagues. They don't want you to just be a third baseman. They also want you to play outfield and maybe second if need be. And so, the same with us that we have people that sit in four different groups as you mentioned. But all of them can work on distressed situations and people on the private investments especially love when we're super busy in the public markets and we call them in to work on distressed credit.

Yeah, I think Barry that the way you're conveying it probably comes across as we come in with giant satchels of money and hand over fist deploy it. It wasn't like that at all. It was the same cerebral, methodical, painstaking environment that we do every day. So, we see things trading at lower prices and we notice that and we look at the fundamentals and everything we do at Baupost is bottom up. Nothing's top down. We're not saying probably a good time to be a contrarian. None of that. We're saying, oh, I can buy this bond at 70 that I think is covered at par. I think people are worried maybe it could have a blip or have a problem for a while, but people aren't really doubting that there's something there. I think as the economy got worse, people may have started to doubt more and more. Prices come in more and more. And so we're literally able to buy mortgage securities, residential mortgage securities. We're able to buy corporate debt, especially of the auto financiers, the financial arm of General Motors and Chrysler and Ford. And Lehman goes broke and that had pieces within its capital structure that got very interesting. So, we're seeing all kinds of things and we're kind of kids in a candy store. Sadly, right, it's a tough time. People are hurting, but also as an investor, you're a fiduciary and you've got to put money to work where you're going to benefit your clients. So we're in every case stress testing, hey, if the world got even worse, hey, if this turned out to be 1933, will this investment be okay? And that's the only place where we're making decisions, is if the downside is protected and if we can see lots of paths to winning, then we're very interested. So we found a lot to do in distressed. We also owned equities. We also found private investments. And there were just all kinds of things worth doing in that era. The challenge in investing I think for everybody is you want to make sure that you know those environments are going to happen once in a while and you need to make sure you don't blow up during them and if possible you need to make sure that you'll have capacity to buy when the best opportunities become available and maybe your competitors are sidelined. And so that's the moment that I think investors need to at least have in their heads. How are you going to handle that environment? Because if you're too exposed, if you're getting margin calls, if you're getting massively redeemed because you took the wrong clients and they're short-term oriented, then you're going to be out of commission on that day. So to be around on that day and be able to do what we do, we just did the same thing we do every day. We did a little bigger size.

Yeah, there are several layers to that. First of all, I think people were responding to all kinds of things. They were responding to redemption requests by their mutual fund shareholders. They were responding to credit downgrades so that it wasn't just I'm nervous that things are going to be bad. This bond is no longer investment grade and maybe my mandate is I can only own investment grade bonds or this bond has defaulted and I can no longer hold this bond. So you have forced selling all over the place and forced selling is a, you never want to be a forced seller and you especially want to be able to buy from forced sellers in any asset class if that comes along. What I would say is I think that, and I'm not a mountain climber or big hiker, but if you're going to climb a mountain you want to look bottom up. You want to understand is this the right trail? Is this safe? Do I have my equipment? Am I prepared? And then you also want to have the top down view. What's the weather? And what if it suddenly gets snowy up there? If the wind's 60 miles an hour, how am I going to handle that? And so you kind of want to have in your head the weather forecast. And I think I'm always thinking about is this environment safe? In today's market, it feels stretched, but it also feels like we're on the brink of an unprecedented technology and an era that might be one of very substantial prosperity, but also one of risk to society and great change. So, bottom up still feels like the right way to invest, but it feels like you still need your eye on the weather in the financial markets. That means where's the GDP going and what's the national debt and where's inflation going to take us. So I always have an eye on that stuff but we're not investing our portfolio based on that. The same way we don't invest based on a macro view that this country would be a good place to invest in. Rather we notice a security bottom up and say wow that seems egregiously mispriced. I wonder if there are more mispricings. Maybe we should look at that market a little bit closer.

So, you're nailing it with your question. You've covered all the parts of holding cash. I think that cash can be valuable optionality, especially just imagine you have a reasonably concentrated portfolio, a large position or two comes off the books. Should you put it to work in a nanosecond or can you wait till something really interesting comes along? So that's the origin of us holding cash. Positions would come off and we'd hold some cash until something great came along.

But with concentrated positions, we have five and 10% positions in the portfolio. When two or three of them come off, cash goes from next to nothing to 15 or 20%. So that's the origin. That's how we got started with the idea that we would hold some cash from time to time. I think though I would accept that I almost certainly made a mistake in holding cash to that extent. There were times when we had 30% cash and even higher and I viewed it as valuable optionality. The problem is the optionality didn't pay off very well for big swaths of time, especially since '08, that with suppression of interest rates and the Fed printing a lot of money and the US running large deficits that we really haven't had a serious downturn in almost two decades. And so that amount of cash became painful. I think the argument for holding cash when a client says I'm not paying you to hold cash, my answer would be I'm not getting paid to hold cash. I'm getting paid to use my judgment on when to deploy the money and in what to deploy it. So I feel like that's right, but I felt like I was not optimizing for our clients in an environment that stopped being as volatile as the one I'd grown up in. So we changed our strategy somewhat. We made our liquid books more liquid, especially our public equity book where we used to own companies with 500 million or billion dollar market cap. Now we own much bigger market cap holdings on average. That liquidity in the public equity book has made us feel better that we can pivot on a dime with a large percentage of our book, so we don't need as much cash to be able to take advantage of a sudden opportunity that shows up.

Yeah. We think about our benchmark as an absolute return, not a relative return. So, we're not very interested in keeping up with the market. Market's going to do what it does and especially a market this concentrated in a handful of names. And it's really been that way for a number of years with the FAANG stocks and the handful of names that carry the market often, not always, but often are expensive, overpriced. So, we just think that's not the right way to think about it. We want to earn absolute return. We want to beat inflation by hundreds of basis points. And if we're doing that, we're not going to worry about whether that's ahead of the market or behind. I think over the fullness of time, a good absolute return strategy is going to beat the market, too.

So we came about these through our experiences. We didn't just wake up one day and said let's be in four different areas. Rather we noticed that over the transom interesting private investments were coming into the portfolio. We were getting phone calls. Hey, would you ever inject capital into this business or would you buy this portfolio of venture investments from a failed company that needed to sell them? Or would you buy 22% of a company owned largely 78% by a large Middle Eastern company and 22% up for sale? Would you buy that? Well, at three times EBIT, maybe you would. So literally by seeing examples one at a time bottom up, we started to figure out that there were more things to focus on than just the public equity markets. And so we got drawn. One of our specialties, I think, is distressed credit. And we became really good at it. We've got smart people. We're very patient. Sometimes there's nothing to do. There's nothing distressed. Other times there's an avalanche of opportunity. And so we wait patiently in all of our areas. We built teams of versatile people so that our team is basically a generalist team and the same person can work on a private investment, can work on a credit investment, can work on an equity investment. Real estate is a bit more specialized than that. But even within real estate, many people have a land person and a hotel person. We don't do that. Everybody works on everything. So we have the team in place and we're able to respond bottom up. The bottom up approach to opportunity I think lets us allocate capital better than if we were doing it top down. I think a lot of people will look at historic returns and will say the expected return from owning private equity will be mid-teens or upper-teens, the expected return from venture capital will be better than that. And we don't do that. We really don't know what an asset class is going to do because we think that's very time-specific and very valuation dependent. Rather, we see what's available right this second and by looking bottom up opportunity after opportunity I think we can paint a really clear picture. So right this second real estate's been in tough shape since COVID, especially commercial office, and people started working from home and that hasn't fully returned and in certain markets especially there's too much space and a lot of people that have been in real estate have not done that well. A lot of people got in at the wrong vintage and a lot of properties have become structurally obsolete. So that sounds like a mess. Why would you touch it? But it also means the competition is hardly looking. And so we think there are opportunities right now, for example, in assisted living, which is population is aging. You can make a very strong case for fundamentals. Rents haven't moved up in years. And I think there's probably pent-up growth in rents to come. And COVID was obviously a giant problem because any facility tended to empty out as people pulled their relatives out to save their lives during COVID, understandably, and a lot of newly built facilities from that era, from 2021-2022, never got filled and a lot of them have run into bankruptcy or financial distress. So it's been an opportunity to build a position in an area with strong fundamentals. The past is the past, but moving forward, it looks like they're going to have real ramp for rents and for occupancy. And we're seeing opportunity here and there to add to a portfolio of assisted living. Similarly, we like certain parts of the real estate office market, especially some outside the major cities. In a few select markets though, and we're seeing more in other submarkets within real estate. Real estate is, as you know, a giant market. It's probably got a market cap around as big as the public equity market. But it has a very different capital structure in terms of who are the players and how much capital can they tap and the opportunity set. So, real estate's interesting. We like looking at it and we have a team that's agile and can deploy capital quickly when something comes along. In private investments, it's opportunistic. And so there have been some things to do lately as capital's pulled back from private investments, for example in energy and midstream, that's led to some things that have trickled down to us that we've been very excited about, very high return and well-hedged, so downside protected. So we're just opportunistic investors. I would say though using my top-down lens that you mentioned, we are certainly nervous. We're in a bit of an economic boom, possibly an inflationary boom, who knows what's going to happen with the Strait of Hormuz and the end result of that, and the demand for AI and AI-related investments is so all-encompassing it's almost as if the market has said we want the AI winners, we're going to dump anything that looks like an AI loser and maybe we'll throw out some babies with the bath water and we don't care, and AI-agnostic, we're not looking at that either. So we think there's opportunity even in some larger cap high-quality equities that are being thrown out as people want to make the high returns from speculating in AI.

Yeah, you're asking something that we've had a bit of a painful lesson in over time, which is cheap is not really a strategy. We tend to look at our investments not as are they at a discount from what we think they could be worth, but rather what is our expected go-forward return from here. And we tend to also ask that our investments have catalysts. And that when we lay out a thesis in an investment conversation, it's very clear not just how undervalued is it, but why is this going to work? What's going to drive it? And if we can't make an argument for why it should turn around in the next year or two, it might be nice that it's trading at a five-year low, but that doesn't mean it's not going to be at a seven-year low and a 10-year low. And so our time horizon is not that long. We can't just hold things that don't perform for five or 10 years. I think very, very few people can do it today. And we think that's not holding our feet to the fire. All organizations need to demand accountability from their teams. So we always are asking ourselves, and really I think changed our approach a little bit where we're asking a different question about what is going to drive the success of this investment rather than just letting it be cheap. Being cheap is not enough.

So, I think AI is a sea change. And that I'm not a tech guy and I'm not a personal user at the cutting edge of technology, but I've spent a huge amount of time. I think that the advent of AI has forced me and probably everyone to just add more time to their day to stay current. I've never seen a technology with this kind of importance and potential game-changing magnitude. So, I read everything I get my hands on. I listen to a lot of podcasts as well. I read a lot of books and magazine articles as well. I'm consumed because even though I don't think Baupost as a value firm is going to find too many ways to get long AI exposure, I think that we don't want to be behind the curve. We don't want to not know what we don't know. And so, the team is doing a fabulous job thinking about AI, thinking about ways to incorporate it into our processes, but also especially thinking about the implications of AI on our portfolio companies. So I think we have found ways to have a little bit of long exposure in things for example like data centers where we own a few private investments at what we think is a very considerable discount to where data centers tend to trade. We're not sure what the right discount is or we're not really sure what the right long-term cap rate is but we think owning at a significant discount is a good thing. So we have some exposure but mostly we're trying to own a portfolio where we have avoided AI losers and maybe occasionally we found something that the market thinks is an AI loser that we think isn't. And to otherwise have things with ancillary exposure to AI where we can turn into AI winners but not pay much for the privilege. So it's a piece of what we do. In the meantime, obviously you referred to tariffs and the volatility of the president and this administration. There are things coming out of left field all the time. Some of it is policy, some of it is distraction. I think maybe deliberate distraction and it's very hard to deal with that. I think most investors and I too have said I need to make a mental note of it. I need to think about who I want to vote for next time there's an election, but I also need to not get distracted by this. And most of it doesn't end up mattering on an investment by investment basis. So, it is a time of tremendous change, high degrees of volatility. And you see the volatility, the stock by stock volatility is unbelievable that when they love a stock, they can't get enough of it and it goes through the roof. And when they turn on a stock, it gets clobbered. And so the individual stock dispersion is very high while the overall market volatility is actually quite low.

So, my compliance team is very clear that I can't talk about individual securities and we own no SpaceX privately or in any other form. What I would say to you is I share your sense that this is the kind of bell that might ring at the top. It is an unprofitable company in aggregate. It is an enormous valuation. I think we both read in the paper this morning that Goldman estimates of what growth would have to be in some parts of their business like 100x in order to justify the current price for a long period of time. And those projections have a way of not happening. It's not impossible but it's hard. I think that investors might be missing just how much money is being sucked out of the system between large IPOs. This won't be the last one. OpenAI, Anthropic are coming and there's a ton of other IPOs that are stuck in institutional investors' portfolios that they'd love if they could get them off at any point. Then the float might be tiny today but you have a large number of shareholders, private investments. We read again this morning that 10 or 15% of some endowments' entire endowment is in the one name SpaceX. So they're going to want to sell, employees are going to want to monetize and go from being wealthy on paper to wealthy in a bank deposit. And so that's a lot of stock for sale and we have to sell that stock while apparently Google and Facebook need more money and OpenAI and Anthropic need more money and utilities need more money to power and chip companies need to build new factories in America. There's so much demand for money and I think we're in a vulnerable place where ultimately supply and demand for money determines the cost of capital and that's true in a bond market and it's in effect true in the stock market. So, we might be looking at some supply-demand imbalance where prices soften just because there's so much supply of securities and the need to monetize is so great by these private companies.

I think that all investors should be students of history as we talked about and I think we know that over the course of history there are cycles that you're going to have a cycle where you're at war and then another cycle where people are tired of war and you have peace for a while. At some point you have peace long enough that people forget how bad war is and you end up in another war. And you have those similar cycles whether it's the government spending and inflation and deflation, that sort of thing. Even the nature of debt, that debt feels great when nobody's asking you to pay it back and when interest rates are low. At some point debt becomes pernicious and a giant problem. So I think we're likely to always see those cycles at least as long as humans are in charge of markets. How do you navigate it? I think you navigate it by realizing that you may not see the cycle with clarity while you're in it, but you know there are cycles. You know that what seems to be true today for all time probably won't be true for all time and hold on to that. So again, it goes to the idea of holding inconsistent ideas in your head at the same time. This is both true and likely at some point to become less true or untrue and you don't know exactly how. So how do you hold a portfolio? You diversify. When things are up a lot and become more expensive and the go-forward return is low, you take profits. You trade out. When things are out of favor so badly that the returns look high and maybe there's a time to step in and buy during a period when others are dumping. So, I think it's that stay focused on the bottom up. Remember broadly the weather so when you go camping you don't not prepare appropriately for stormy days, not just in the mountains but in the financial markets. And look, Baupost protects on the downside as best we can by doing deep fundamental analysis, by knowing our names unbelievably well, by not being afraid to sell them when the price is up, the same way we buy more when the price is down, by finding securities that are maybe more senior in nature whether in public or private markets, and by macro hedging the portfolio to an extent because we know that those rainy days are going to happen and so we're buying macro protection when VIX is low and people think nothing bad is going to happen. So we can sell that at a gain both because the price moved and because VIX moved up during a stormier moment in the markets.

You know, I believe in people taking responsibility for their actions. I believe that we are a healthier system when there's a reckoning for excess and for egregious speculation and for over-leverage. So, I kind of hated that the Fed took rates, I totally understood why the Fed took rates down to zero after the great financial crisis and that it was really the only way to hold things together, give time to heal. But by leaving rates there for an extra decade after there was no crisis, I think we stoked a problem. We sort of incented speculation and maybe disincentivized responsibility. And so we got some of that. We saw that firsthand in 2022 when the market had gone higher and higher and higher. You had those SPACs and all kinds of garbagey companies trading at very high prices, the meme stocks. And then it blew up in 2022. A lot of stocks down, you know, 50, 70, 80, 90, 95%. And that's what happens when you get that kind of unregulated speculation. I think today we are back speculating. We're speculating in an era that feels more legitimate. It's hard to say exactly what's going to happen with the continued development of AI, with the possibility of AGI coming and what that will mean. We don't know whether it's going to lead to massive unemployment, whether it's going to lead to incredible prosperity, or whether it's going to create even more dispersion in the economy between the people who are doing well and the people who are not doing well, the K-shaped economy. And that's a real source of concern. So there's always going to be that kind of uncertainty. I think what we should agree is that there's going to be a path that nobody today in 2026 could say with any precision what things are going to look like in two or four or 10 years. And the dilemma with that is people are paying very high prices as though the future is extremely predictable and clear when obviously given what's going on it is anything but that.

So, my two biggest sports passions are baseball and I'm a small owner in the Red Sox, and horse racing. And I've been fortunate to have some really high quality thoroughbreds over the years. And we won a few races, Belmont Stakes weekend, not the Belmont, but a few other stakes races this past weekend. So, those are my favorite sports. I thought the Celtics season was disappointing. They played so well the first three quarters of the season and sadly when their superstar Jayson Tatum came back I think it got them out of their game where they were introducing younger players into the mix. They were passing the ball a lot and really winning in an exciting way. So maybe the chemistry just didn't go as well as they had hoped and then when Tatum got hurt right at the end of the playoffs we bowed out. I think sports is great. It's a place where Americans, blue Americans and independent Americans and red Americans can all root for the same team and can be excited about a sport and can do it in a way that's gracious and accept winning but also accept losing. Sports is a great equalizer and a great unifier. So, I love sports. It serves a lot of positive purposes in a society. It's a little crazy because we're rooting for strangers we've never met who represent our city, but it is a powerful wave that I think also can unite a city.

Yeah, I think that it is partly as small numbers that we've only played 60 or 65 or 70 games, so there's still a lot of season to go.

It's a third of a season, but statistics, you know, things can mean reversion will eventually catch up.

But in fact, is there really a shooting streak or is it simply, to every good shooter you get a little overconfident and start taking worse shots.

So I think that baseball will always surprise you. It's a perplexing game that what you draw up on paper doesn't happen but it also doesn't happen in the locker room, that the players can't understand, I could hit last year and now I can't hit. And part of it is that the opponents adjust. If you're a rookie and you're Roman Anthony and you come up and you hit .300 for two months, he's hurt. But the pitching figures out your weak spots and they make you look bad and then you adjust and you make the pitchers look bad. So, I think there's that perpetual back and forth between defense adjusting and then offense adjusting and where it ends up determines who goes in the Hall of Fame.

So I'm probably a little bit more introvert than extrovert. So, I'm not looking to be on TV or in the papers. I also think a lot of the work we do is better off when everybody isn't looking to copy our investments. That if you want to accumulate a stock, you're better off if everybody doesn't know that you're trying to do that. You're going to get a better price like in any business transaction. That said, we've never been, we're not a recluse. Everybody knows where we are. Everybody knows members of our team. We're very, very well known on the street. You just don't see me on TV talking about it all the time. I don't know why that's a bad thing. It feels to me like a good thing.

On our third date, my wife and I were taking a walk on Cape Cod on the beach and she said, and we were just getting to know each other, obviously, third date, she said, what do you hope for in your life? I said, I hope that if I'm able to provide for my family and there's still resources beyond that, I want to give back. And that just comes from my fundamental view, I guess it's how I was raised, that some of us are going to be fortunate and be in that position at a time when not everybody is. And it's both a privilege and a responsibility to give back. It's, you can't take it with you and you probably don't want to. I mean it's not a good look to spend it all ostentatiously in your lifetime. That's not my nature. So, I've always, I think, been working to make money, to give away, and it's what keeps me focused today that I love investing as a puzzle, but I love knowing that if we do it well, we serve our clients, I'm going to have money that I'm going to be able to add to what we give to charity. Charity is a calling. It feels very, very important to me personally. I think this is a broken world. There are all kinds of problems from climate change to poor education systems to challenges to democracy that threaten America the way you and I have known it our whole lives and the country that I want you probably want future generations to grow up in. America's been amazing for me. I have been such a beneficiary of growing up in this country and having unprecedented opportunities that if I was in another country I wouldn't have had. So I'm grateful for that. I want to make sure everybody has the same chance. But we also have to be realistic. The American dream is broken for a lot of people. People are less likely today to be able to say that their kids and grandkids will be able to eclipse them. And I think we need to restore that and we have a lot of hard work to do. So our philanthropy goes into many different areas. Some as you said in science, some in terms of thinking about democracy and making sure that the system holds. Some in terms of healthcare, some to the universities that were good to me and my wife. We spread it pretty well because we believe that a lot of causes will come together to lift up people throughout the country. One of the things we do is a music instrument fund because our son is extremely musical and it reminded us that every kid that is passionate about music should have a chance to have an instrument. We also do capital gifts in institutions throughout Massachusetts in some of the harder hit towns during COVID or just economically depressed areas. There's just not a lot of money there. So, kind of as a value investor, I'm seeing an opportunity to refurbish this civic center or this library in a small town in Massachusetts. And it just feels great to know that the people in Pittsfield will have as good a library as the people in Boston.

So I worked for Max Heine and Michael Price at Mutual Shares right out of college and that was an incredible couple of years and they were and I stayed in close relationship with them over the years. They've been great friends and mentors to me. I think Warren Buffett, who I didn't know until later in my career, but reading about Warren, reading his annual reports and reading his old shareholder letters, was very inspiring and also reminded me of the idea of quality companies, which was not something that Graham and Dodd talked that much about, but was something that Warren taught us all about, I think. So, they were the people I would list as mentors. And then I also developed mentors who were kind of peers. I had a tiny firm. I didn't get trained officially at any big Wall Street firm, but I was able to form friendships with people that ran other funds. And some of those people, probably all of them, but somebody like Richard Perry or somebody like Frank Brosens or somebody like Paul Singer have all been mentors in various ways over the years in a way that hopefully I've provided something to them as well. But I think finding kindred spirits out there makes all of us both enriched by the experience but also wiser along the way.

So, right now I'm finishing Lloyd Blankfein's memoir. I'm also reading Michael Pollan's latest book about consciousness, which is really interesting. It's combined some things I'm intrigued by, including the idea of what plants are up to. Plants turn out to be a lot more conscious and a lot more aware of their environment than you might think, when you just walk by them and think of it as lawn. There's a lot more going on with plants. I love history. My favorite is probably Battle Cry of Freedom about the Civil War. I read a fair amount of everything. I love The Red Queen and evolutionary biology. I'm a pretty good reader of fiction as well, biography, memoir, across the board.

My favorite streaming, I think this is maybe a golden age of TV streaming. We loved Pit on the Pittsburgh General Hospital emergency room and it's just a remarkable series. Noah Wyle, but also a great surrounding cast is just off the charts. We also loved Shrinking.

Yeah, first of all, go somewhere that you would want your capital invested. If you wouldn't put your money there, don't go there. And don't be afraid to go somewhere out of favor. If two years ago you would ask me, I would have said, well, biotech is hitting lows every day as though there's never going to be any new drugs discovered or anything good happening in that sector. I would have said, I'm not sure. I'm not an expert on that stuff, but take a close look. And now it's on fire. A lot of takeovers, a lot of people are doing really well. I think that it pays to be a little contrarian and go somewhere where they're going to be mentors to you, where they're willing to be patient with you, where they're not going to just expect you to make money the first six months you're there. That's where you're going to be able to build a career and learn a lot.

Yeah, I've thought about that. It's a really good and hard question and what I think is I wish I knew the importance of the economic engine that Silicon Valley is, that American creativity and ingenuity is. It's why I worry so much about the bad things happening in our country that are threatening our democracy. The ability to try and fail, the ability to innovate, the desire to innovate, these startups unleash the passion of brilliant hardworking people who want to cause their dream to happen. And that is the driver of this economic engine that keeps not only winning but keeps outpacing everywhere else in the world. Israel has maybe a mini version of that, but it hardly exists in the rest of the world. Certainly doesn't exist in Europe much. And it's really sad because the opportunity that is present for young Americans to dream and to start something is just an amazing engine for their lives, for their communities, for future philanthropy, for tax receipts. It's across the board. And I wish I'd understood it better. I would have owned some venture capital in my foundation. I would have been recommending that institutional portfolios diversify into at least a piece. Now, venture capital is the last thing a value person is going to say it's a bargain. You should go long. But I do think that as a value investor, maybe too much paint by numbers, I wasn't focused enough on the engine that is venture capital.