This interview was done nearly a decade after the formation of Blaupost Group. Klarman success has been buying picks where others don't even bother to look. What is very interesting is the amount of cash he held - 40-50%. So when a good opportunity came his way he would swinging his bat when most of the others would have no cash
Some of the snippets from the interview are given below
We define value investing as buying dollars for 50 cents, somewhat like Mike Price's definition.
We will buy dollars for 40 cents, or dollars for 60 cents when they are attractive dollars to buy. I think that we implement it a fair bit differently than many value investors or many so-called value investors who frankly I'm not sure are buying good value at all. Value to some extent is in the eye of the beholder. It is very hard to pin down what the value of a future set of cash flows from a business, be it cable TV or biotechnology, is going to be. Some are easier to predict than others. But it is very hard to predict what those future cash flows are going to be. And it is very hard to ascertain the correct discount rate to bring them back to the present with.
When we look at value, we tend to look at it on a very conservative basis -- not making optimistic forecasts many years into the future, not assuming growth, not assuming favorable cost savings, not assuming anything like that. Rather looking at what is there right now, looking backwards and saying, Is that the kind of thing the company has been able to do repeatedly? Or is this a uniquely good year, and is it unlikely to be repeated? We tend to look at hard assets as much as possible.
For instance, cash is something we understand. When a company has cash on the books, or marketable securities on the books, we think we understand that. And the more you get into businesses that depend on things going right in the future, the harder we find it to understand it. So we tend to buy asset-rich businesses, very predictable businesses. But perhaps most important, we are not just focusing on equities. We focus on any security of a company that is mispriced. We can even find some companies where one security, like the equity, is overvalued, but where another security, like the debt, might be undervalued. We have flexibility in our partnership agreement to do pretty much anything we like. Right now, and for the better part of the last two years, much of our investment has been in the senior securities of overleveraged companies.
What creates opportunities is an interesting question. Often we do best in turbulent times, specially if we are fortunate enough to be holding cash going in. If you think of the stock market as a cauldron of mine strone soup that occasionally somebody sticks a ladle in and stirs up, it takes a while before all the vegetables float back to the level that they were at before.
Q: How do you get your ideas?
A: We originate, I would guess, half or so internally. That would mean reading the newspapers, looking at periodicals, looking at Barron's, for instance
One thing we want to look for is perhaps a market inefficiency or imperfection. And often these are caused by what we would call institutional constraints. The institutions, first of all, because of their tremendous size, and second of all, because many have gotten away from fundamental investing, tend to be prolific creators of opportunities. An example of this would be when a large company spins off a much smaller subsidiary and distributes the stock free to shareholders. The institutions tend to be natural sellers of the spinoffs.
Either they would have to buy an enormous amount to justify a large position, or they sell. And they sell regardless of fundamentals, regardless of the price compared to the value. So we tend to look at spinoffs as one category. That would be a type of rock that we look under. So when in the newspaper it mentions that such and such a company is considering a spinoff, we will follow the progress of that and look at the registration statement when it becomes available for a possible investment. There are, of course, now people who follow spinoffs, including an analyst at one major firm. So even in that area there might be fewer opportunities than before. Although every so often one slips through the cracks, or one is written up but ignored by most of Wall Street. We do find some opportunities even in overpopulated areas.
Another type of rock we would look under would be when securities get downgraded from
investment grade to below investment grade, i.e., distressed. In particular, many funds that own these are not permitted to own other than investment-grade securities. So when the downgrade happens, they have to sell, they have no choice, given the rules that they operate under. That may create a short-term supply/demand imbalance. Another opportunity created by selling that is not dictated by fundamentals.
Q: And that is with how much cash?
A: It has actually been over 50% until very recently. It has probably averaged between 40% and 50% for the year. We were fortunate to be well-positioned at the beginning of the year with a few major positions in distressed securities that worked out quite well.
Q: What was the lowest cash position you have had in the eight-plus years you have been doing this?
A: We came very close to being fully invested shortly after the '87 Crash.
No comments:
Post a Comment