Baupost Q2 Letter

Seth Klarman: The Proper Wiring For A Long-Term Investor

In Seth Klarmans’ latest shareholder letter he writes successful investing is like being a successful relief pitcher, saying:

Q4 hedge fund letters, conference, scoops etc

Baupost Q2 Letter

Consider the plight of a relief pitcher. Historically undervalued, unappreciated, often used interchangeably with other relievers, and, until recently, low on the major league pay scale. Required to be ready throughout most games at only a moment’s notice. And the role comes with the possibility of major psychological trauma. Few remember the slugger who grounds into a double play in the fourth inning, squandering a one-out, bases loaded opportunity. But everyone knows who gave up the gopher ball with the game tied in the bottom of the ninth to lose in a walk-off.

And that’s only the prelude. The really hard part is psychological, and comes in that pitcher’s next outing. The only logical, yet psychologically challenging, thing for the reliever to do is let it go and forget it happened, even if his teammates, manager, and fans seem possessed by an indelible and bitter memory that flashes before their eyes as he heads in to the mound from the bullpen.

In this way, a reliever has much in common with an investor. When you make an investment and the price drops, the key is to see the fall in price as not necessarily indicative of a past error or failure (no one, after all, can predict the daily meanderings of the markets), but as an opportunity. It’s not a do-over – what’s done is done – but it is a fresh chance to make another good investment, potentially an even better one now that those shares are lower in price. As we’ve said before, the key in investing is to see the market’s fluctuations not as a source of feedback, a report card if you will, but as a potential driver of opportunity.

Is there information content in price fluctuations? Might the market have foresight into the future? It could, but it’s very hard to tell; we believe it’s best to think of the market as a place where hordes of buyers and sellers come together to transact and set a price. The information content largely involves what people are willing to do – volume and price – on that day. And such data rarely foretell that a downturn is coming, or a recovery, or any other macro insight.

We have known many people who find the daily report card the market hands them a source of consternation and even anxiety. If the stock they recently purchased falls in price, they feel like they failed. Had they waited after all, they could buy more shares for the same capital invested. But in investing, it’s necessary to experience those price drops and see them as a source of further and greater opportunity and not as a problem. Similarly, price gains should not be experienced as a pat on the back from the market. They represent a diminution of opportunity to buy at the right price, though they do offer the potential to sell at a much fuller valuation.

We wish we had perfect market timing (as well as the ability to fly). The reality is that no one does or ever will. The key is to find a way to care about one’s investment results over time, but to not feel burdened by the daily fluctuations of Mr. Market. The only way to invest, after what you purchased has fallen in price, is to be that successful relief pitcher. Put yesterday’s outcome out of your mind, get back on the mound, and make the best decision you can today with all the information at hand.

For more articles like this, check out our recent articles here.

Article by The Acquirer’s Multiple


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