WWII 086: Seth Klarman Q2 2017 Investor Letter Review
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Main Topic: Seth Klarman's Q2 2017 Investor Letter Highlights
Seth Klarman is usually not that outspoken about politics, but in Baupost Group's second quarter investor letter, he lets Trump have it with both barrels. Here are some excerpts I think you may find interesting.
“The market’s post-election gyrations are emblematic of what markets do: they attempt to forecast the future and reflect it in daily securities prices. But markets are hardly efficient; they frequently overshoot. As Barron’s columnist Kopin Tan pointed out in late November, “the stock market is behaving as it Trump will fulfill only the campaign promises it likes but conveniently break all those promises it doesn’t like.”
“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” he wrote.
“The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty,” he wrote. “Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.”
“President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient anduncompetitive enterprises is likely to only temporarily stave off market forces,” he continued. “While they might be popular, the reason the U.S. long ago abandoned
protectionist trade policies is because they not only don’t work, they actually leave society worse off….”
“The Trump tax cuts could drive government deficits considerably higher,” Mr. Klarman wrote. “The large 2001 Bush tax cuts, for example, fueled income inequality while triggering huge federal budget deficits. Rising interest rates alone would balloon the federal deficit, because interest payments on the massive outstanding government debt would skyrocket from today’s artificially low levels….”
“If things go wrong, we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation, and global angst.”
“The erratic tendencies and overconfidence in his own wisdom and judgment that Donald Trump has demonstrated to date are inconsistent with strong leadership and sound decision-making.”
At Baupost, we practice humility and moderation, aware of how much we don’t and can’t know…. We watch our competitors’ actions in order to learn. It would be foolishly arrogant to always assume that we’re right and they’re wrong. We strive to build self-awareness, the ability to recognize both our own skills as well as our limitations. We consistently attempt to learn from our mistakes and draw enduring lessons…. An investment firm must create an environment of debate and truth-seeking…. At Baupost, all ideas go through the same meat-grinder of process.”
“While we think of ourselves as a value-oriented investment partnership, our primary competitors are hedge funds, a category we sometimes get lumped into…. We believe we have real edges as a firm, such as our truly long-term focus and flexible investment mandate (including the ability to hold significant cash balances.)…. Most of our competitors feel intense pressure from their clients to generate short-term performance and have trouble maintaining a truly long-term perspective….”
Ask JB: Do investors need to read to become successful?
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JB Says: Absolutely. Charlie Munger says “we get paid to read.” Few people who are successful don’t read a lot.
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JB Says: No. Insider trading is when you have access to material non-public information and you trade based on that information. Your experience at Chipotle was at only one store and you are not considered an insider, you are the general public.
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