Baupost portfolio includes significant real estate plays, debt in periphery EU countries and asset backed securities, not just stocks

Hedge fund Baupost is up 60 percent in its roughly $4 billion stock portfolio, points out an article in Gurufocus, but that might not tell the whole story.

Sources intimate with Seth Klarman’s operation indicate the hedge fund overall is actually in single digits through the first quarter.

Baupost manages over $27 billion in assets, making it among the largest hedge funds in the world – its highly touted $4 billion stock portfolio is but a percentage of its overall holdings.

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Baupost heavily invested in real estate

As first reported in ValueWalk, this year Baupost is heavily invested in real estate, including Spanish shopping centers, and is known to have exposure to asset backed securities and debt in European periphery countries.

When asked about concerns that the 60 percent number reported in the article might distort investor expectations, knowledgeable sources were unfazed.  “Baupost does a very robust job of communicating performance with their investors,” a source intimate with Baupost operations and performance said. Baupost investors are considered among the most sophisticated in the hedge fund community.

Baupost’s successful investments in Idenix, RF Micro Devices and Keryx

The article in question accurately highlights Baupost’s most successful investments in what might be considered the speculative sleeve of the equity portfolio. The focus was on Idenix Pharmaceuticals Inc (NASDAQ:IDIX), up nearly 400 percent, RF Micro Devices, Inc. (NASDAQ:RFMD), up 61 percent and a relatively mild performer, Keryx Biopharmaceuticals (NASDAQ:KERX), which was up only 7 percent year to date.

The stocks mentioned in the article largely were the high flyers that benefited from developing drug innovations, acquisitions or other “homerun” type investing outcomes. The Baupost Group stock portfolio is said to have a separate sleeve for aggressive plays along with a sleeve for more conservative value plays and consistent dividend plays.

Idenix is a biopharmaceutical company developing treatments for human viral diseases, the article noted, specifically hepatitis C. It has already successfully discovered treatments for hepatitis B and HIV/AIDS. On June 9, Idenix Pharmaceuticals Inc (NASDAQ:IDIX)’s shares rocketed as Merck agreed to acquire the company at $24.50 per share for Idenix, valuing the company at $3.85 billion. Baupost purchased the shares near $6 per share.

Seth Klarman: Fed Created Truman Show Style Faux Economy

In March of this year, ValueWalk was first to report on Klarman’s year ending letter to investors, one noted by observers as potentially the fund’s manager’s most interesting and insightful among a history of highly regarded letters. In the investor letter, Klarman memorably said Fed Created Truman Show Style Faux Economy and went on to outline the economic reality in a debt ridden world with an honesty rarely observed in mainstream communication.

Baupost is known to have a 2.27 percent stake in Banco Espirito Santo SA (ELI:BES), a stock in a downward spiral in the middle of Portugal’s debt crisis, as first reported by VW yesterday.

The post Baupost Returns Not 60% Year To Date appeared first on ValueWalk.

Despite the mountain of negative news, do hedge funds think all the blood is in the street on this stock?

The problems at Banco Espirito Santo SA (ELI:BES) may be deeper than originally thought with the detention of Ricardo Espirto Santo Salgado, the bank’s patriarch and former CEO, by authorities in Portugal Thursday.

Banco Espirito Santo was being held for money-laundering and tax evasion probe

Salgado was being held for questioning as part of a three-year money-laundering and tax evasion probe conducted in conjunction with a wider investigation of the relationship between Swiss wealth managers and Portuguese customers, the Wall Street Journal is reporting.

Salgado exited Banco Espirito Santo SA (ELI:BES) earlier this month as the stock price tumbled nearly 380 percent as hidden financial problems were uncovered at the bank’s holding company, Luxembourg-based Espírito Santo International SA.

An audit revealed the bank was in dire financial condition and found irregularities in its accounts. Espirito Santo International subsequently filed for bankruptcy protection last week, followed by the main unit, Rioforte Investments SA, filing for protection this week.

Salgado sat on the board of directors for Luxembourg-based Espirito Santo International until last March, the Journal reported.

Detention intensifies problems for Espirito Santofamily

The detention intensifies the problems faced by the Espirito Santo family, which is fighting to hold on to its business empire following discovery of the material irregularities, the Guardian noted. The stock had endured a significant slide lower from a five year high of $3.28 in February 2011 to bottom at 0.46 cents on May 31, 2012. From there the stock rebounded slowly. In January of 2013 Salgado was reported to have been a voluntary witness in the investigation and said he had always paid his taxes and was not a suspect. The stock crescendoed to $1.05 at the end of the month, ultimately climbing to $1.42 in February of this year. Then the investigation started to uncover problems, leading the stock price on a freefall, where it is currently trading near $0.60.

With blood all over the street and few shoes left to drop, some hedge fund players may be entering the waters. As reported in ValueWalk, Baupost’s Seth Klarman recently acquired a 2.27 percent stake the beleaguered stock.

Separate speculation is hedge funds may consider the realistic low to hover around the $0.50 range with a three to five year potential time horizon for an upside near $1.40.

The post Banco Espirito Santo Patriarch & Former CEO Arrested in Portugal appeared first on ValueWalk.

Below is a summary of notable value funds/hedge funds and changes in their positions based on 13Fs for the second quarter of 2014, as always take the 13Fs with a grain of salt. Additionally, this list is not complete please check back for updates and for more coverage tonight and/or tomorrow (sign up for our free newsletter to ensure you do not miss any coverage).

13F grab via Bloomberg

Baupost Group

Buys: EBAY SEMI KOS THRX KERX TQNT RFMD LNG VSAT PBF

Dan Loeb

Bought: ALLY RAX IACI FMC FNSR AMGN WAG MRD JDSU OC MC

Added to: DOW YPF MAS DG ST BUD ASH HRB CCE STZ ROP APC

Dodge & Cox

Buy: SRE

Add: TGT, GOOG, WMT,

Reduce: GE, PFE, SLB,

Sell: UTX,

John Burbank

Buy: MRD, SWK, RLGY,

Add: APC, FOX, HAL,

Reduce: LINTA, YELP, SFUN,

Sell: NRG, GOOG, AMZN,

Leon Cooperman

Bought: NAVIV KKR AAPL QEP GULTU SEAS COG ABY CNOB RRC SEMI QIWI ANET PRTA PBFX MET MOBL CQH ASPN

Added to: CMCSK OCN ACT GLPI SVU APC PVH UAL ETFC ICE ASPS EBAY JPM ATLS PMT LORL TMO DISH NOV ARP EFC APL TCRD TWC

Warren Buffett

Bought: CHTR DNOW

Added to: IBM VZ SU USG LBTYA GM CBI VRSN V WMT USB

David Einhorn

Bought: CVEO AER TIME NRF CHMT DSW

Added to: SUNE LRCX NOV IACI CONN MRVL

Stan Druckenmiller

Buy: GDX, FB, EOG,

Add: ILMN, SNDK, AA,

Reduce: GOOG, WDAY, AZN,

Sell: MSFT, ADBE, MON,

John Griffin

Buy: IMS, YNDX, V,

Add: WAG, LBTYK, GOOG,

Reduce: C, ENDP, AIG,

Sell: COH, AAPL, GOOGL,

Berkshire Hathaway

Buys CHTR

Increases VZ, LBTYA SU, V, CBI

Decreases COP PSX, DTV, NOV, USG

Liquidates SNY

Fairholme (Berkowitz) discloses material changes in holdings in 13F filing

Initiates MO, DO, KKR, MCY, OAK, RAI, RIG

Decreases, LE, AIG,

Liquidates, CHK

Follow-up: Third Point discloses material changes in holdings in 13F filing

Increases APC, BUD, ASH, HRB, CCE, STZ, DG, DOW, MAS, ROP, ST, YPF

Decreases AAL, LNG,CTXS, EQT, FDX, TMUS, WMB,

Liquidates BIDU, COG, C, CCK, GOOG, IP, MDLZ, NCR, NOK, OCN, SIG, TSU, TWC, VRX, VZ

Third Point discloses material changes in holdings in 13F filing

Initiates AMGN, AZN, FMC, FNSR, IACI, JDSU, MRD, MC, OC, RAX, WAG

David Tepper

Bought: MHK WFT RYL

Added to: FB GM PCLN AAL GOOG MAS CBS UAL CBI DAL EXPE OC HDS

Steven Mandel

Bought: CMCSA CP WMB UA JD SAVE TRIP AAL WSM LNG ANET

Added to: PCLN ADBE MA KORS BIDU SFUN WYNN VRX TIF MHFI FLT AN WDAY CTSH RLGY ACT ICE EQIX

Einhorn’s Greenlight

Cuts: AAPL,

Adds: MU, SUNE

Pershing Square

Cuts: BEAM, AIV, HME

Trian

Increases BK ,TIF

Decreases ALLE, GNC

Greenlight (Einhorn) discloses material changes in holdings in 13F filing

Initiates AER, CHMT, DSW, NRF, TIME,

Increases LRCX, SUNE, NOV, IACI, CVEO

Decreases XON, BWC, APC, AAPL, CHS,CI, CSC, MDR,

Liquidates AHL, HAWK, HTS, LO, NOK, DNOW, PENN, RAD

Carl Icahn

Sells: FRX

Adds: AAPL

Buys: GCI

Paulson & Co

Adds: AGN, DTV, COV, HSH, QCOR.

Increases: SHPG, CIE, MNK, FDO, and DG.

Decreases: TMO, Vodafone VOD, FCX, CNO, CBS.

Liquidates: AAL, PXD, HES, GM, and DLR.

Soros Fund Management

Adds: CNX, GOOG, LVLT, TWC, EDU.

Increases: YPF, AAPL, FB, AIG, and AAL.

Decreases: TEVA, LBTYK, ABX, EQT, CMCSA.

Liquidates: FDX, MNST, GOOGL, DVN, MPC.

Eddie Lampert

Buys: LE

Sells: AN

H/T Dataroma

UPDATE August  8:56AM EST NOTE: Much of the information will overlap with the above, but there is still some new info – check back later for further analysis.

13F Updates. All data is from Bloomberg. Keep in mind this information is 45 days old.

• Appaloosa: top new buys: GOOG, MHK, WFT, RYL; top disposals: QCOM, JPM, MET, TRN,

DLPH; top position increases: FB, GM, AAL, PCLN, MAS; top position decreases: SPY, QQQ, C,

EMN, DD.

• Berkshire: top new buys: CHTR, DNOW; top disposals: STRZA; top position increases: SU, VZ,

GM, LBTYA, V; top position decreases: GHC, COP, DTV, PSX, LMCA.

• Elliot: top new buys: HITT, OPB, IRM, MNK, CAM; top disposals: HOS, DLPH, RYAAY, LBTYA,

DYN; top position increases: APC, WMB, SBS, SM, JNPR; top position decreases: ELX.

• Fairholme: top new buys: LE, RAI, MO, RIG, MCY; top disposals: CHK; top position increases:

SHLD, FMCC, FNMA, VOD; top position decreases: BAC, LUK, BRK’b, AIG, JOE.

• Farallon Capital: top new buys: COV, HSH, QCOR, AGN, SCHW; top disposals: TWC, DG, DIS,

SIRI, DF; top position increases: FRX, SWY, CCE, HCBK, GOOGL; top position decreases: CHTR,

GRFS, EBAY, TDG, ORCL.

• Glenview: top new buys: WLP, HTZ, EBAY, AMAT, UNH; top disposals: XRX, CPN, LAMR,

RLGY, PAY; top position increases: AET, MON, HUM, TMO, DG; top position decreases: PNR,

URS, AAP, MSFT, CBS.

8

• Greenlight: top new buys: CVEO, AER, TIME, CHMT, NRF; top disposals: RAD, NOK, PENN,

AHL, HTS; top position increases: SUNE, LRCX, NOV, CONN, IACI; top position decreases:

AAPL, BWC, CI, APC, CSC (MU also was reduced).

• Icahn: top new buys: GCI; top disposals: FRX; top position increases: NAV, EBAY, IEP; top

position decreases: NFLX.

• Jana capital: top new buys: APA, FMC, CVEO, PETM, CHTR; top disposals: SIRI, JNPR, GLNG,

OUTR, TEVA; top position increases: ACT, AIG, MNK, HDS, ACAS; top position decreases:

LVNTA, OIS, EBAY, LMCA, LINTA.

• Lone Pine: top new buys: CMCSA, CP, WMB, UA, JD; top disposals: MON, QCOM, WYN,

BEAV, ENDP; top position increases: PCLN, BIDU, ADBE, MA, MHFI; top position decreases:

IBN, LBTYK, DG, FOX’a, MSFT.

• Omega: top new buys: NAVI, KKR, AAPL, GULTU, QEP; top disposals: DG, ADT, SPWR, EXXI,

CIE; top position increases: CMCSK, OCN, ACT, SVU, GLPI; top position decreases: COF, UNH,

QCOM, S, CAM.

• Paulson: top new buys: AGN, DTV, COV, HSH, QCOR; top disposals: AAL, PXD, HES, GM, DLR;

top position increases: SHPG, CIE, MNK, FDO, DG; top position decreases: TMO, VOD, FCX,

CNO, CBS.

• Pershing Square: top disposals: AIV, HME; top position increases: AGN; top position

decreases: CP.

• Point72: top new buys: BHI, WLL, VRX, WFT, HES.
• Third Point: top new buys: ALLY, RAX, IACI, FMC, FNSR; top disposals: VZ, COG, IP, CCK,

GOOG; top position increases: DOW, YPF, MAS, APC, DG; top position decreases: FDX, EQT,

TMUS, CF, CTXS.

• Relational: top new buys: WFM; top disposals: GRA, FAF; top position increases: CLH, MHR,

MTW, ESL, YUM; top position decreases: MDY, SPY, BG, TKR, HOLX.

• Soros: top new buys: CNX, GOOG, LVLT, TWX, EDU; top disposals: FDX, MNST, GOOGL, DVN,

MPC; top position increases: YPF, AAPL, FB, AIG, AAL; top position decreases: TEVA, LBTYK,

ABX, EQT, CMCSA.

• Trian: top disposals: GNC; top position increases: BK, MDLZ, PEP, and TIF; top position

decreases: ALLE, IR.

• ValueAct – top new buys: AWI, FOX’b; top disposals: SYMC, MCRS; top position increases:

MSFT, CBG, MSCI; top position decreases: COL, EXPD, DRC, ADBE.

UPDATE 9:37AM EST

APPALOOSA MGMT Boosted Stakes in FB, GM, AAL, PCLN, MAS in 2Q; Cut Stakes in SPY, QQQ, C, EMN, DD; Took Stakes in GOOG, MHK, WFT, RYL; Exited Stakes in QCOM, JPM, MET, TRN, DLPH

BAUPOST GROUP Boosted LNG, KERX, TQNT, RFMD, PBF Stakes in 2Q

BAUPOST GROUP LLC Cut Stakes in THRX in 2Q

BAUPOST GROUP Took Stakes in EBAY, TBPH, SEMI, KOS, BYD in 2Q

BAUPOST GROUP LLC Exited Stake in BP in 2Q

BERKSHIRE HATHAWAY Took Stake in CHTR in 2Q

BERKSHIRE HATHAWAY Boosted Stakes in SU, VZ, GM, V in 2Q

BERKSHIRE HATHAWAY Cut Stakes in COP, DTV, PSX in

BERKSHIRE HATHAWAY INC Exited Stake in STRZA in 2Q

BRIDGEWATER Exited Stakes in BRK/B, CELG, PRGO, PCLN, MON in 2Q 8/12 16:38

BRIDGEWATER ASSOCIATES Took Stakes in KO, BBBY, HPQ, CA, ADI

BRIDGEWATER ASSOCIATES Cut Stakes in SYMC, JNJ, CSCO, K, LVS

ELLIOTT MANAGEMENT Cut Stakes in ELX in 2Q; Boosted Stakes in APC, WMB, SBS, JNPR, SM; Took Stakes in OPB, IRM, MNK, CAM, EMC; Exited Stakes in HOS, DLPH, DYN, RYA

ETON PARK CAPITAL Boosted Stakes in CBS, WMB, ACT, NUS in 2Q

ETON PARK CAPITAL Cut Stakes in LNG, EBAY, STZ, TK, ARCP in 2Q

ETON PARK CAPITAL Took Stakes in AGN, AWI, MCRS, BEAV in 2Q

ETON PARK Exited Stakes in EQIX, MCO, MJN, CMCSA, Brookfield

FAIRHOLME CAPITAL Took Stakes in LE, RAI, MO, RIG in 2Q

FAIRHOLME CAPITAL Cut Stakes in BAC, LUK, BRK/B, AIG in 2Q

FAIRHOLME CAPITAL Boosted Stakes in SHLD, FMCC, FNMA in 2Q

FAIRHOLME CAPITAL MANAGEMENT Exited Stake in CHK in 2Q

GATES FOUNDATION Cut Stakes in BRK/B, TTF in 2Q

GREENLIGHT Took Stakes in CVEO, AER, TIME, CHMT, NRF in 2Q; Cut Stakes in AAPL, BWC, CI, APC, CSC; Exited Stakes in RAD, NOK, PENN, AHL, HTS

HIGHFIELDS CAPITAL Boosted DTV, MON, APD, IRM, OCN Stakes in 2Q

HIGHFIELDS CAPITAL Cut Stakes in AIG, RDS/A, BP, AMAT, AGN in 2Q

HIGHFIELDS CAPITAL Exited Stakes in XOM, TSLA, SPY, SD in 2Q

HIGHFIELDS CAPITAL Took Stakes in HTZ, LLY, GS, AZN in 2Q

ICAHN ASSOCIATES CORP Boosted Stakes in NAV, EBAY, IEP in 2Q

ICAHN ASSOCIATES CORP Cut NFLX Stake to 2.9% in 2Q

JANA PARTNERS LLC Took Stakes in APA, FMC, CHTR in

JANA PARTNERS Boosted Stakes in ACT, AIG, MNK, HDS, ACAS in 2Q

JANA PARTNERS Cut Stakes in LVNTA, OIS, EBAY, LMCA, LINTA in 2Q

JANA PARTNERS LLC Took Stakes in APA, FMC, PETM, CHTR in 2Q

JANA PARTNERS Exited Stakes in SIRI, JNPR, GLNG, OUTR, TEVA 2Q

LONE PINE CAPITAL Cut Stakes in IBN, LBTYK, DG, FOXA, MSFT in 2Q; Boosted Stakes in PCLN, BIDU, ADBE, MA, MHFI; Exited Stakes in MON, QCOM, WYN, BEAV, ENDP; Took Stakes in CMCSA, CP, WMB, UA, JD

MARCATO CAPITAL Boosted Stakes in GT, MIC, MTN, NCR, BID in 2Q

MARCATO CAPITAL Took Stake in CAR in 2Q

MARCATO CAPITAL Exited Stakes in URI, GY, EQC, SIG, CONE in  2Q

MOORE CAPITAL Cut Stakes in JPM, HTZ, C, CBS, EEM in  2Q

OMEGA ADVISORS Exited Stakes in DG, ADT, SPWR, EXXI, CIE in 2Q

OMEGA ADVISORS Cut Stakes in COF, UNH, QCOM, S, CAM in 2Q

OMEGA ADVISORS Took Stakes in NAVI, KKR, AAPL, GULTU, QEP in 2Q

PAULSON & CO Boosted Stakes in SHPG, CIE, MNK, FDO, DG in 2Q

PAULSON & CO Cut Stakes in TMO, VOD, FCX, CBS in 2Q

PAULSON & CO Took Stakes in AGN, DTV, COV, HSH, QCOR in 2Q

PAULSON & CO Exited Stakes in AAL, PXD, HES, GM, COF/WS in 2Q

PERSHING SQUARE CAPITAL MGMT Exited Stakes in AIV, HME in 2Q

PERSHING SQUARE CAPITAL MGMT Cut Stakes in CP in 2Q

PERSHING SQUARE CAPITAL MGMT Exited Stakes in AIV, HME in 2Q

RBS PARTNERS Cut AN Stake in 2Q

RBS PARTNERS L P Took Stake in LE in 2Q

RELATIONAL INVESTORS Boosted Stakes in CLH, MHR, MTW, ESL, YUM

RELATIONAL INVESTORS Cut Stakes in MDY, SPY, BG, HOLX in 2Q

RELATIONAL INVESTORS Took Stakes in WFM in 2Q

RELATIONAL INVESTORS LLC Exited Stakes in GRA, FAF

SOROS FUND MANAGEMENT Boosted Stakes in YPF, AAPL, FB, AIG, AAL

SOROS FUND MANAGEMENT Cut Stakes in TEVA, ABX, EQT, CMCSA in 2Q

SOROS FUND MANAGEMENT Took Stakes in CNX, LVLT, TWC, EDU in  2Q

SOROS FUND MGMT Exited Stakes in FDX, MNST, GOOGL, DVN, MPC

STARBOARD VALUE Boosted Stakes in BWC, RLD, DRI, UPIP, CW in 2Q  8/14 16:30

STARBOARD VALUE Cut Stakes in PLCM, CCC, IWM, CPWR, LXU in 2Q

STARBOARD VALUE LP Exited Stakes in AAN, RFMD in 2Q

THIRD POINT LLC Cut Stakes in FDX, EQT, TMUS, CF, CTXS in 2Q

THIRD POINT Took Stakes in RAX, IACI, FMC, FNSR in 2Q

TEMASEK HOLDINGS Took Stakes in SABR, JD, CMCM in 2Q

TEMASEK HOLDINGS Cut Stakes in MOS, EXPD in 2Q

TEMASEK HOLDINGS Boosted Stakes in GILD, BMRN, TAM in 2Q

TEMASEK HOLDINGS PRIVATE LTD Exited Stakes in WUBA in 2Q

TIGER GLOBAL Exited Stakes in CRI, CCE, MSI, GPS in 2Q

TIGER GLOBAL MANAGEMENT Took Stakes in NFLX, QIHU, MNK in 2Q

TIGER GLOBAL MANAGEMENT Cut Stakes in PCLN, FIS, TDG, MYGN in 2Q

TIGER GLOBAL MANAGEMENT Boosted Stakes in CHTR, RH, FLT in 2Q

TUDOR INVESTMENT CORPORATION Cut Stakes in PFE, HRB, DGX, V, VZ

TUDOR INVESTMENT Boosted Stakes in EEM, FB, LLY, MA, PRGO in 2Q

TUDOR INVESTMENT Took Stakes in AAPL, LQD, KRE, GPN, EWJ in

TUDOR INVESTMENT Exited Stakes in HYG, IHS, EFX, ANF, LNKD

TRIAN FUND MANAGEMENT Boosted Stakes in BK, MDLZ, PEP, TIF in 2Q; Cut Stakes in ALLE, IR; Exited Stakes in GNC

VALUEACT HOLDINGS LP Boosted Stakes in MSFT, CBG, MSCI in 2Q

VALUEACT HOLDINGS LP Cut Stakes in COL, EXPD, DRC, ADBE in 2Q

VALUEACT HOLDINGS LP Took Stakes in AWI, FOX in 2Q

VALUEACT HOLDINGS LP Exited Stakes in SYMC, MCRS

The post 13F Filings For Q2: Buffett, Loeb, Einhorn, Druckenmiller, Griffin, Berkowitz, Tepper, Mandel appeared first on ValueWalk.

Funds reduced their positions in Berkshire Hathaway’s class B shares before it set its recent $200,000 record

While it’s easy to read too much into 13Fs, the time delay and the single snapshot after a quarter of activity make them hard to interpret, they’re still one of the few tools we have to gauge the changing interest that investment funds have in the markets, and looking for big shifts can point to attractive investments (aggregate data via Bloomberg, Edgar, Dataroma).

Also see 13F Filings For Q2: Buffett, Loeb, Einhorn, Druckenmiller, Griffin, Berkowitz, Tepper, Mandel

13F – Top new/increased positions for 2Q14

National-Oilwell Varco, Inc. (NYSE:NOV) had the most interest from institutional investors last quarter including a 43% bump in the position that David Einhorn’s Greenlight Capital holds. Leon Cooperman’s Omega Advisors also increased its position 25%, while Ariel Focus, Wedgewood Partners, First Eagle US Value, Dodge & Cox, Olstein Value, and Markel Asset Management also added, though Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) reduced its position by 17.7%.

Seth Klarman’s Baupost initiated a position in eBay Inc (NASDAQ:EBAY) while Omega Advisors, Hillman Focused, Weitz Value, and Dodge & Cox all increased their positions last quarter. Fellow tech giant Oracle Corporation (NYSE:ORCL) also had a lot of interest as Lou Simpson’s SQ Advisors, Brave Warrior Advisors, Oakmark Select, Ariel Focus, and Markel Asset Management all increased their stakes.

Other companies that either had at least four funds initiate new positions or increase existing ones include Navient Corp (NASDAQ:NAVI), major banks Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC), both Google Inc (NASDAQ:GOOG) and Google Inc Class C stocks, The Western Union Company (NYSE:WU), Express Scripts Holding Company (NASDAQ:ESRX), credit card companies Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V), United Continental Holdings Inc (NYSE:UAL), and NOW Inc (NYSE:DNOW).

13F

13F – Top sold/reduced positions in the second quarter

Berkshire Hathaway Inc. (NYSE:BRK.B) share were sold off by Wintergreen Advisers and reduced by Whitney Tilson’s T2 Partners Management, the Bill and Melinda Gates Foundation Trust, Arlington Value Capital, Wedgewood Partners, and Akre Capital Management.

DirecTV (NASDAQ:DTV) reduced by Warren Buffett’s Berkshire Hathaway and Weitz Value, and completely sold out by Oakmark Select, Ariel Focus, and Akre Capital Management. Qualcomm (QCOM) was reduced by Omega Advisors, Matrix Advisors Value, and Century Management Advisers, while Lone Pine Capital and David Tepper’s Appaloosa Management closed their positions entirely.

13F – Corning and others reductions

Corning Incorporated (NYSE:GLW) was reduced by Hancock Classic Value, Mairs & Power Growth, and Century Management Advisers, while Matrix Advisors Value and Yacktman Focused Fund both sold their entire positions.

Other stocks that at least four funds either reduced or sold out during the second quarter include SLM Corp (NASDAQ:SLM), Baker Hughes Incorporated (NYSE:BHI), Apple Inc. (NASDAQ:AAPL), E I Du Pont De Nemours And Co (NYSE:DD), Merck & Co., Inc. (NYSE:MRK), major banks Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC), and the oil and gas companies Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM).

The post 13F Roundup: National Oilwell Varco and eBay Attract Interest appeared first on ValueWalk.

This is a repost for those not subscribed to our business feed, but stay tuned for Part II!

In the second quarter letter, Klarman spoke of the profits it made on investments such as Idenix Pharmaceuticals Inc (NASDAQ:IDIX). The biotech company helped make June Baupost’s best month in five years. Idenix was acquired by Merck & Co., Inc. (NYSE:MRK)’s wholly-owned subsidiary Imperial Blue Corporation. Baupost exited the investment in early August. Baupost’s returns in the second quarter were driven chiefly by its public equity portfolio, backed up by positive performance in distressed debt, real estate, and structured products as well.

See Baupost 2013 letter to investors, which discusses Greek investments, distressed debt, real estate and more, here

Note we will be posting more from Baupost and the Value Investing Congress, sign up for our daily newsletter to ensure you catch the articles.

The letter, a copy of which was reviewed by ValueWalk, also noted that Baupost has evolved its investment themes over the years. Many value investors have often wondered why Klarman invests in many bio-tech stocks, Klarman answers the question in the letter. The value investor notes that while sticking to its rigorous discipline of stock-picking, the hedge fund has made several investments in the volatile biotechnology and computer tech sectors. Klarman said that Baupost’s analysts look out for structural changes in companies and are now making investment decision that they probably would not have done a decade ago. In this regard, Klarman mentioned his position in Micron Technology, Inc.(NASDAQ:MU), which is one of Baupost’s largest long positions in the U.S.

Specifically, the value investor states:

“Our team is continually improving at knowing where to look  for opportunity. Our analysts are doing some really creative work thinking about structural changes in  some companies and industries, which has led to several new public equity investments. Pulling threads  on existing stock investments has led to a few others.” Furthermore, Seth notes further, “I view it as a substantial positive that our  team has the background, talent, and drive to source opportunity in new areas of the markets, generally  with very favorable results. I am also pleased that this old dog (your Portfolio Manager) is still open (I’m  always cautious but open) to learning a few new tricks.”

The fund’s portfolio was distributed 35% in cash and 14% in Lehman claims at the end of the June quarter. Before returning funds to investors, Baupost had nearly 50% of its portfolio in cash at the end of 2013. The recent letter said that part of the reason Baupost’s cash base has not grown over the last six months is that it returned funds to shareholders. The other reason was the market’s lack of perception of value. Klarman said that,

“The other reason is the bifurcation of today’s markets. Most assets today–especially assets offering current yield–are bid up strongly in price. But some are not, and we are finding our fair share of those. Money flows rapidly to perceived opportunity, but just as rapidly out of other areas, which may leave opportunity like seashells on the beach at low tide.”

Klarman on lack of opportunity and abundance of opportunity funds

Klarman said that despite the high prices of assets these days, funds are consistently over-bidding in pursuit of marginal opportunities. He criticized the practice of raising multiple funds, sometimes on the behest of clients, to make exorbitant bids on assets like Greek private investments, Spanish real estate, or European non-performing loan pools. Klarman said this over-abundance of cash has encouraged a lack of discipline in the investment process.

“With investment bankers and hedge fund executives canvassing Europe today to bet on recovery, you have the increasingly common circumstance of proliferating “opportunity funds,” absent only the investment opportunity. Some clients of hedge funds today are, in a sense, disintermediating themselves, funding new entities to bid higher for the same sort of assets their other, more disciplined managers are already bidding more judiciously for. The discipline problem in this case is not that of the legacy managers; it may just be that of the clients.”

Klarman mentioned Baupost’s investment in Banco Espirito Santo in the second quarter letter. Klarman said that their initial analysis underestimated the problems with the bank’s parent company, Espirito Santo International. The letter said that they were watching how the investment plays out and have so far lost 0.2% on the position. We reported last week that Baupost Group had exited the investment in late July.

We will be posting more from Baupost’s letter soon, sign up for our free newsletter to ensure you do not miss our coverage.

The post For Email Subscribers: Baupost Has Best Month In 5 Years appeared first on ValueWalk.

The bailout of Portuguese bank Banco Espirito Santo SA (ELI:BES) by the European Union has been challenged by hedge funds that held major investments in the company. Those leading the charge are Dan Loeb’s Third Point and Brazilian investment company BTG Pactual.

Dan Loeb challenges Banco Espirito Santo bailout

According to a report from the Financial Times, Third Point and BTG Pactual filed a lawsuit challenging the terms on which Banco Espirito Santo was rescued by the European Union. The hedge funds launched their complaint in a EU General court in Luxembourg last Friday. They allege that the bailout was put together too quickly and that the bank’s condition was not fully reviewed. Third Point and BTG also claim there were alternatives for the bank’s rescue which were overlooked by the European Union. The plaintiffs are asking the court to overthrow the endorsement of the BES bailout by EU.

Banco Espirito Santo

Novo Banco, the good bank

The bailout of BES involved packaging its “good” assets in the form of a new entity called Novo Banco. The EU approved a $6.1 billion rescue plan for the Portuguese lender in August of this year that effectively reduced the value of its shares and junior bonds to zero. The healthy assets of BES, which included bond holdings of senior creditors and unsecured deposits, were moved to Novo Banco.

Third Point, BTG Pactual GoldenTree Asset Management, Beach Point Capital and EJF Debt Opportunities together own €750 million in subordinated debt that was issued by BES a year ago. If the Luxembourg court agrees to hear this lawsuit, it will cast doubt on the upcoming sale of Novo Banco. The plaintiffs are attempting to delay the sale and have requested that the court expedite the hearing of this case. The deadline for submitting expressions of interest for Novo Banco is Dec. 31.

Baupost and Goldman Sachs sold out of their stakes

In October, Third Point and other holders of Espirito Santo’s subordinated debt filed a lawsuit in Lisbon court. They claimed the bailout was illegal because it allegedly violated the constitution and treated them unfairly.

Seth Klarman’s Baupost Group and Goldman Sachs exited their investments in BES’ equity earlier this year, just as the bank’s shares fell 80%. Baupost held a 2.3% stake in the bank’s voting rights and share capital, whereas Goldman Sachs owned a 2.8% position. In September, Goldman Sachs Group Inc (NYSE:GS) sold some part of the $785 million worth of bonds it held in BES.

Banco Espirito Santo was rescued by the European Union in August after financial irregularities were uncovered at the bank. The Portuguese Espirito Santo family owned BES via Espírito Santo International.

The post Dan Loeb, Other Bondholders Sue EU Over Espirito Santo Bailout appeared first on ValueWalk.

This is part nine of a multi-part series on Walter Schloss, legendary value investor. To ensure you do not miss the rest of the series, sign up for our free newsletter. Parts one to eight can be found at the respective links below.

1. Part one
2. Part two
3. Part three
4. Part four
5. Part five
6. Part six
7. Part seven
8. Part eight

Walter Schloss – Part nine: The First Ten Years

Experience counts for a lot in investing but it is difficult to tell how much experience is enough. However, Walter Schloss was able to put an exact figure on how much experience is enough; around ten years.

Walter Schloss made this quite clear in an interview with the Outstanding Investor Digest, given in 1989 with his son, Edwin Schloss when the father-son duo were managing Walter J. Associates.

“OID: As I mentioned to you in a prior conversation, Templeton’s worst ten years investment-wise were his first ten years. And you told me that the same was true for you.

Walter Schloss: Yes, that’s right. I think the first ten years you get kind of acquainted with what you’re doing.”

Walter makes a great point here. All investors need experience and most are bound to incur hefty losses in the first few years of trading/investing. These are words of wisdom for all new investors, even if you get things wrong, it took Walter Schloss, undoubtedly one of the world’s greatest investors, a decade to feel comfortable investing. Don’t rush things, it’ll come, you need to get acquainted with what you are doing. The interview continues:

“…people have to be very humble about money if they want to keep it. They have to work at it. It doesn’t just happen. And different children have to be treated differently. Some people are even afraid of money. My mother, for example, would have been one of the worst investors and my father was a terrible investor. And it’s because they lived through fear – through the Depression. As a result, they allowed fear to make their judgments…”

Deep-value investing is, by its very nature a risky business, especially for investors like Walter Schloss, who brought as many securities as he could, even though he knew some would eventually go out of business. Deep-value investing requires patience, ability to ride out volatility, and above all, a strong conviction as well as a belief in your own abilities.

“…In the last 15 years [1974 to 1989], it’s been a remarkable stock market. But people forget what things were like during the 1930s. I think Graham – because he lived through that period – remembered it, was scared it would happen again and did everything he could to avoid it. But in the process of avoiding it, he missed a lot of opportunities…One of the problems of a lot of the people who went through the Depression – Ben Graham, Jerry Newman and others – is that they keep on thinking that things will always be like that…People who did missed this tremendous market. Some people can do it. Most people can’t and I don’t think they should try.”

Walter Schloss’ example is as relevant today as it has ever been. After a bear market and losses, investors simply lose faith in their own ability, often missing the market recovery, or worse, changing strategy and making poorly researched trades in an attempt to make back money lost.

The one true trait of a devoted value investor is the ability to ride out bear markets, and there will be plenty of them.

For example, last year I wrote about the investment philosophy of Seth Klarman and the performance of his hedge fund, Baupost over the last two decades. Virtually unknown outside value circles, Klarman is, in my opinion, one of the most influential value investors living today. His strategy has adapted with the changing market and as deep-value opportunities have disappeared, Klarman has continued to find value in distressed debt and special situations. And investors can learn a lot by studying Klarman’s performance throughout the dot-com bubble.

From 1997 through to the beginning of 2000, Klarman’s Baupost significantly underperformed the S&P 500. The following is taken from a previous ValueWalk article.

“1997 was an odd year for Baupost…Baupost’s financial year ended on October 31 and for the twelve months to this date, the fund returned 27%, despite holding around 20% of assets in cash. For the twelve months ending October 31, the S&P 500 returned 32.1%.

From January 1 1998, through April 30, 1998 the S&P 500 Index rose by 15.1% and from November (1997) to April (1998) the index gained 22.5%. Over the same four and six month periods, Baupost only returned 7.4% and 11.3% respectively.

Full-year 1998 was a terrible year for Baupost. For the year, the Fund posted a market value decline of 16.3%, once again a terrible performance considering wider market gains.

Once again, Baupost’s relative poor performance continued into 1999. To October 31 1999 the group returned 8.3%, while over the same period the S&P 500 returned around 23.8%.

As 2000 began and the dot-com bubble reached its peak, Baupost was falling behind but Seth Klarman kept buying U.S. equities, spending almost all of Baupost’s cash cushion. Baupost’s cash weighting had dropped to 4.6% of AUM by April 2000. 61.9% of Baupost’s assets were invested in U.S. stocks.

For the financial year ending October 27 2000, Baupost posted a return of 22.4%. The S&P 500 peaked during September and by the time Klarman wrote his letter to investors during December, the market had fallen more than 13% from its peak…”

These are some of the investments Klarman was buying over this period.

It’s important to remember that value investors don’t necessarily outperform in a bull market:

“ … I must remind you that value investing is not designed to outperform in a bull market. In a bull market, anyone…can do well, often better than value investors. It is only in a bear market that the value investing discipline becomes especially important…it helps you find your bearings when reassuring landmarks are no longer visible …” – Seth Klarman

Conclusion

The key theme of this article is patience. Walter Schloss and Seth Klarman was/is two value investors who have been able to achieve outperformance through a long-term, patient investing strategy. It’s a strategy that takes time to develop understand and become accustomed to, but after the first ten years, it should be easy.

Stay tuned for the tenth and final part of this series — coming soon.

The post Walter Schloss – Part nine: The First Ten Years appeared first on ValueWalk.

As hedge fund manager Seth Klarman, leader of the $28 billion Baupost Group, reviews 2014 performance and considers investors gained near 7 percent on the year, he considers a hockey analogy. He says the fund’s team is playing “playoff hockey” all the time. His fund employees operate with this intense period of performance, typically a step ahead of the regular season’s daily grind.

After slightly underperforming the market in 2014, Baupost focused on capital preservation, absolute returns

As he looks at what is considered a risky market environment, Klarman doesn’t overly bemoan the fact that his hedge fund underperformed the S&P 500 in 2014. The fund is as much focused on preserving investor capital as it is in generating strong absolute returns.

“Today, stocks and bonds are both in favor; tomorrow, and without notice, this could change,” Klarman wrote in his 2014 annual letter to investors, which was reviewed by ValueWalk. The letter was first reported on by Sabrina Willmer of Bloomberg News.  “Markets, like hemlines, will rise and fall. The current flavor of the month can turn sour.”

NOTE we will be reporting more from Klarman – sign up for our free newsletter to get the latest into your inbox

It is that “turning sour” that can happen rather quickly, as the path downward in stock prices can be much quicker and steeper when wiping out gains than is typically the stair-stepped, measured pace of a market climbing higher in price. The problem is, when the market reaches the top of a mountain is when certain groups of investors jump in.

“Bull markets have a way of sucking everyone in at the top,” the Baupost letter said, noting how “easy” it is to get fully invested at the top, and once a bear market occurs, get fully invested way too early in protracted bear markets. The tale Klarman considers was the “cautious soul” who was left on the sidelines of the booming September 1929 stock market highs, then sat on cash, and plunged in only after shares were 19 percent lower by April 1930.  When stocks reached the time of the eventual bottom in June 1932, that investor had lost 83 percent. “This is a risk we strive to avoid for Baupost,” the letter said.

With the stock market on a fantastic bull market run and stimulus set to come out of the market, Klarman notes that the time to engage in risk management is when the market looks strong.

“That’s why it is of paramount importance to do everything humanly possible in a bull market to prepare for the next bear market: Improve processes and procedures. Train up your team. Stick to your knitting. Avoid portfolio leverage. Maintain sell discipline. Develop a loyal and supportive clientele. Match your funds’ liquidity terms with the liquidity of the underlying investments as best as possible. Hold some cash in reserve to take advantage of future opportunity.”

The Baupost letter says the hedge fund is preparing its team “for the inevitable bear market” and gives itself a grade of A- or B+ for performance during previous bear markets.

“We typically distinguish ourselves by not being overstretched going in. With names we first purchased at higher prices, we typically are adding more at the bargain counter, where a little incremental capital goes a long way. As the situation warrants, we can inject fresh capital directly into a capital structure on favorable terms to right a faltering ship. If successfully executed, we are able to load up in a bear market on bargains that will still be paying off for us three or even five years in the future.”

Baupost: Managing risk by holding cash, buying bargains, avoiding leverage

The letter pointed to the primary risk management techniques of making well-thought-out investment decisions from the start, buying stocks that were a bargain to begin with, holding cash and avoiding the use of leverage among their best practices. The Baupost letter states:

“Our determination to prioritize capital preservation, while seeking strong, risk-adjusted returns when measured over the fullness of time, drives us to do many things unconventionally. In a business plagued by group think and conventional wisdom, we try to avoid consensus thinking. We don’t mind being out of sync with the herd, and we don’t let that get to us. While we enjoy the challenge of analytically complex situations, we begin by looking for low-hanging fruit while eschewing the ‘high-hanging’ kind. We prefer ‘no-brainers’ to ‘brainers,’ and we are willing to work diligently and patiently to find them. When opportunity is scarce and markets expensive, it is dangerous to force money into new investments. We are disciplined at all times, and when we can’t find bargains, we choose to hold cash–sometimes large amounts– as a residual of our bottom-up investment process. This is something few on Wall Street appear able or willing to do.”

Karlman takes pains to point out how Baupost is different from most hedge funds. “We actually don’t see ourselves as a hedge fund,” the letter states. “The world at large labels us as such simply because of its predilection to jam everything into categories. We manage in parallel a series of investment partnerships with a deep-value approach and a broad mandate to own whatever is particularly compelling at a given time: public investments or private; debt, equity or anything else; domestic or international; large or small; troubled or well-performing; plain vanilla or rocky road.”

If it is to be considered a hedge fund, the Baupost letter says it can be done in two respects:

“First, we hedge some of the risks we have incurred. We typically don’t manage risk with short sales of stock, which would expose us to the possibility of unlimited loss and thus might inadvertently increase, not reduce, risk. Rather, we often hedge with derivatives, where our potential losses are known and capped, and which target and at least partially offset our greatest perceived exposures, such as rising interest rates or inflation. We are not completely hedged and don’t try to be. Some risks are worth taking at a price.

“Second, we charge a management and performance fee like a hedge fund, though we have intentionally not raised our fees to keep up with the ‘market.’ Charging a performance fee enables us to attract some of the best talent in the investment business to join Baupost and to stay for a long time. We share financial rewards generously throughout the firm as a matter of fairness, but also to provide proper motivation to take a long-term and patient approach to investing, and to reward investment acumen as well as other contributions that make our firm stronger and more successful. A performance fee also further aligns our interests with those of our investors, since we do significantly well only if our clients do so also. Calling us a hedge fund won’t make us act like one. We won’t usually develop opinions on the most widely owned or shorted equities; such stocks aren’t likely to be a source of opportunity for Baupost. We won’t serve up an opinion du jour on everything under the sun. Our success has never emanated from frenetic trading of macro bets, quarterly earnings forecasts, or momentum strategies. We can’t afford such distraction. The effort required to develop and maintain necessarily imperfect views on every currency, economy, sovereign, commodity, and market would distract us beyond ruin. So forgive us for not having much of a perspective on things where our view is unlikely to add value; we simply can’t afford to spend the time.

In regard to risk exposure, Baupost’s chief thinks the current market environment might be worthy of a hedge, as his letter casually mentions rising interest rates and inflation as two potential hedge issues. The fund, however, isn’t entirely hedged. It’s only in places that warrant the risk management cost.

“We are not completely hedged and don’t try to be. Some risks are worth taking at a price,” the Baupost letter said.

Baupost: Risk management is a logical process of evaluating potential issues

It is avoidance of painand preserving capital during difficult market environments in which hedge funds earn their fees.

“As hard as it is to endure the pain of a severe bear market, it’s crucial to remember that a bear market is still a market,” Klarman wrote, as he noted that even in bear markets the market is still operable for professional investors to find value. The hedge fund manager says in order to take advantage of low prices in a bear market, investors should be buying on the way down, “perhaps all the way down.”

Stay tuned for more..

The post Baupost Details Risk Management, Hedging In Q4 Letter appeared first on ValueWalk.

Baupost’s Seth Klarman has a bone to pick with the media.

The issue Seth Klarman has, according to his year end investor letter, is that his bearish prose is primarily reported, leaving the true measure of his “bullishness” out of most articles and reports.

Stay tuned for more exclusive coverage from Klarman’s 2014 letter

He is really more about a balance between being bearish and bullish rather than one or the other. He expresses concern that articles in unnamed blogs don’t present this balanced viewpoint. He says the reporter and audience should be capable of holding more than one viewpoint at the same time, which is a truer measure of his thoughts “than the one-dimensional picture that is often painted of us on our views.”

We understand that some in the media and many bloggers like to sell stories by sensationalizing headlines and content. But they do a disservice to their readers and viewers when they only report a piece of the story. The reporter and audience should be capable of holding multiple ideas at the same time.

He may have a point, but there is more to the issue than presenting multiple opposing viewpoints in an article. Those who follow hedge fund managers are often most interested in their hedging activity – how they manage risk and view troubling issues in the world. What differentiates great minds in the investing community is not just delivering performance in bull markets, but almost more interesting is how they perceive risk.

To be clear: Seth Klarman is “value-ish”

Seth Klarman is one of the top risk managers of a generation and his views on the economy and world events newsworthy. To certain hedge fund observers what isn’t as newsworthy are endless (and rather boring) bullish statements that one might expect from a long only mutual fund manager. The business news is full of stock market cheerleaders. What makes Seth Klarman so fascinating is his unique world view and risk management approach. Perhaps Klarman’s own statement captures the situation best when he dryly describes the fund’s outlook: “In short, we are neither bullish nor bearish. We are value-ish.”

Seth Klarman 13F data chart via Novus Research

Klarman is undoubtedly rooting for higher stock prices and a robust economy based on the positioning of the Baupost portfolio alone. The nearly $16 billion the fund had invested in 2014 that benefits from a strong economy speaks volumes, but it is the $12 billion he has in cash that speaks to risk management and the ability to convert on opportunity as it presents itself that is where his “value-ish” comments come into play.

As he noted in his 2014 letter to investors, as the U.S. equity investors were rewarded with one record high after another in the fall of 2014, markets sprinted higher at a rate healthy enough to reward the bulls and punish bears.  As a hedge fund manager with investments primarily tied to a healthy economy, Seth Klarman is hoping, like many, that the stock market avoids bear markets and the economy continues to lavish riches on a great nation. It’s just that he spends much more time discussing risk management issues in his letters than he does parroting bullish happy talk. As just one minor indicator of the focus of Seth Klarman’s letter, the word “bull” is mentioned 19 times in his 2014 review document and “bear” is mentioned 28 times. More materially, he spends considerable more time discussing risk issues than he does gloating about potential reward, making an old school hedge fund manager phrase “positive returns take care of themselves, but a focus on risk management is the sign of a professional.”

In Seth Klarman’s letters the real differentiation comes when he discusses risk management issues, and in the 2014 iteration Seth Klarman does not disappoint. “When a bull markets end, a variety of bad things can happen to investors,” Seth Klarman wrote in a protracted piece on risk management titled “Preparing the Team for the Inevitable Bear Market.”

Bear markets are roach motels

Noting that while history doesn’t often repeat, he noted “it certainly rhymes.” During bear markets liquidity can evaporate and “marketable securities can become roach motels – easy to get into, but hard to get out of.” The same is true in debt markets, when a company that could have comfortably refinanced their debt in a bull market suddenly finds, without changes to their individual circumstance, “the liquidity window can suddenly slam shut.”

As a bear market approaches it is easy, if not comforting for an equity investor to immerse themselves I happy bull talk. But risk managers are typically on the lookout for risk to manage, and Seth Klarman notes the bullish blinders.

Amid a severe market decline, you will regret almost anything you thought about selling but didn’t, especially when you realize that you were too nonchalant about acting on negative information. You will also lament how you haggled too much over a small price difference, realizing now that you should have simply hit the bid. In a bear market, you will painfully learn just how easy it is to lose money and just how hard it can be to make it.

Preparing for a protracted bear market does not mean one is hoping it happens

As a convergence of various concerning risk issues could converge this fall, the specter of a protracted bear market is considered. This doesn’t mean Seth Klarman is rooting for a bear market, he and his team are just actively planning for what has been inevitable in market history. He writes:

In a protracted bear market, you will be unique if you aren’t questioning yourself. Everything you thought you knew starts to seem wrong. Everything you bought thinking it was a bargain will appear, at least for the time being, not to have been a bargain at all. Now, at a lower price, the stock may indeed have become a bargain, but do you like it as much as you thought you would now that its price is lower? Or are the facts worse than you thought, the earnings and cash flow eroded, the “compounder” blemished, or are other bargains now simply more appealing? Whereas you once may have said that you would “back up a truck” at such discounted prices, you may find that you imagined wrong, and you have neither the desire nor the capital to add to positions as they hit new lows. Even with market prices scraping bottom, corporate managements that repurchased a company’s stock at higher levels suddenly suspend the program. Expected buildup of corporate cash flow fails to materialize. Debt that seemed inconsequential compared with total enterprise value may now seem large compared with a shrunken market cap that limits recapitalization alternatives.

A key point about bear markets is that instead of somewhat bullish analysts matching wits with even more bullish analysts, Seth Klarman notes that bear market selling takes place on the bloody battlefield of forced or panic selling” as margin calls revert pricing “to more primal ‘sell before it goes lower’ behavior.”

For a value investor such as Seth Klarman the bear market can be a buyers dream – to a limited extent. Values are all around, but the investor’s mental discipline can be severely tested as the core definition of “cheap” becomes relative in a stock market filled with ever more nervous buyers.

Some investments in bear markets become cheaper than you ever thought possible. It will actually seem like more stock or bond certificates have somehow been printed than actually exist. In other words, you won’t believe the prices, but you won’t believe the volumes either. You can buy all you want, but whether you actually want to be a buyer will be tested and re-tested.

Yes, Seth Klarman is a positive person. He likely roots for the economy to grow and prosper as does everyone. But his genius, by his own admission, surrounds his ability to preserve capital. It is his thoughts on risk management that make headlines and are worthy of the attention of sophisticated hedge fund observers.

The post Let’s Be Clear: Seth Klarman Is Not A Bear appeared first on ValueWalk.

Like the majority of Baupost’s investor correspondence over the years, Baupost’s 1994 year-end  letter contains some valuable insights. However, the year-end letter is difficult to get hold of in full, although ValueWalk has a copy and some analysis. The 1994 letter is also a gem and we recently saw a copy for the first time.

The market of 1994 has many parallels with today’s market environment.

1994 saw a surprise rate hike by the Federal Reserve and the following panic hammered hedge funds, credit funds and foreign exchange traders. The suddenness of the move caught many investors by surprise, unprepared and dangerously exposed. This drove forced selling across the credit markets, and bond prices collapsed. The effects of this reverberated around the world and into developing markets. The Mexican peso fell as much as 40% within one week before coming to rest.

This crash was preceded by a warning from Klarman in his book, Margin of Safety. The concept of the ‘yield pig’ became a term for investors who were susceptible to any investment product that promised a high current rate of return, without properly assessing the risk that the product carried. Seth Klarman uses Margin of Safety to try and prevent investors from becoming yield pigs, warning that if high yield assets were indeed low risk, they wouldn’t be offering a high yield in the first place.

Seth Klarman wrote the following statement during February 1992:

“…These days, however, I don’t believe investors are being compensated sufficiently to venture beyond risk-free instruments…”

Klarman’s decision to stay away from the credit markets in the run up to 1994 allowed Baupost to take advantage of the credit market turmoil that ensued throughout 1994.

Baupost 1994: Positive returns

After warning about yield pigs, Klarman avoided much of the carnage following the 1994 surprise rate hike and his partnerships all posted positive returns for the year, beating the Dow and S&P 500. This outperformance was a result of Klarman’s conservative investment strategy, high cash weighing and a strict discipline to only buy value.

Even in 1994, six years before the dot-com bubble burst, Klarman was reporting that the market in general was overvalued, although he was still able to find bargains.

“Our assessment of the stock market today remains virtually the same as it has been for the past few years: the market has entered a state of near-chronic overvaluation, driven predominantly by enormous cash flows of investment funds into equities rather than any identifiable fundamental development at could justify today’s prices… Fortunately we invest in individual securities and assets not markets. Even in the most overvalued of markets some investments become quite undervalued… Since overly optimistic assumptions take time to be proven wrong, no near-term correction is likely…” — Seth Klarman 1994 annual letter to investors.

Once again, there are many similarities here between the market in 1994 and 2015. Klarman’s hunting ground moved from distressed equities, towards distressed debt. Both publicly traded and bank debt instruments that provided the potential for a high return, with lower than average risk.

“At year end, the largest position of each of the partnerships is a stake n the bank debt and a much smaller investment in the bonds of Maxwell Communications. We have also recently taken a position in the bank debt of a Canadian holding company that is selling off its subsidiaries over time. In November our large position in the bank debt of Integrated Resources was exchanged for cash and shares in Presidio, a liquidating entity which holds Integrated’s remaining assets. At this time, we are in the process of analyzing a number of other distressed bank credits for possible purchase…”– Seth Klarman 1994 annual letter to investors.

Other distressed debt situations acquired by Baupost included distressed real estate loans — pools of loans on various types of property, which in many cases were non-performing. Due to Baupost’s size and its talent pool, the fund was able to assess the risk/reward ratio more effectively than other investors:

“…We have found that distressed real estate investments offer Baupost three advantages compared to marketable securities. First, we are able to gather and analyze superior information with which to make a more informed investment decision. Second, we have been able to identify a number of transactions that were priced to involve both less risk and higher return. Finally, direct investments generally have several formidable analysts or the realization of underlying value that publicly traded securities do not…”– Seth Klarman 1994 annual letter to investors.

An example:

“Colony Land Fund

This is a pool of California and Arizona land loans purchased from the RTC in the late summer of 1993. This pool was acquired at the bottom of the real estate market; we effectively bought finished building lots at raw land prices. It appears that the internal rate of return on this investment could exceed 40%. Baupost regrettably has only a minor interest this transaction.” — Seth Klarman 1994 annual letter to investors.

Baupost 1994: Physical property

Baupost also made several “one-off” property investments during this time. These included four multi-family properties in the Atlanta area for a total of $12 million. One of these properties was sold for an 80% return within a year, and the other three were, at the time of the 1994 letter, producing cash yields for Baupost in the mid-to-high teens. Other property investments were made on similar terms with many of the physical properties acquired through distressed debt trading at significant discounts to the guarantee property’s underlying value. There were more than twenty of these single-property investments made at the time.

These debt investments and illiquid instruments made up 54.4% of the Baupost Partnerships assets at year-end 1994 as Klarman looked outside the equity markets for value.

With cash amounting to 13.6% of assets, publicly traded equities and fixed income securities totaled 29.3% of Baupost’s portfolio at the end of 1994 and the best performers for the year were as follows.

Crossland Federal common, Brooklyn-based thrift that had been bailed out by the government only a few years before. Carson Pirie Scott & Co, a department store company that had come to the market only a year before and was struggling to live up to lofty growth expectations. The rest of the equity portfolio was populated with the common stock of beaten down communications shares, as well as Klarman’s favorite; thrift conversions. C

ompanies in the portfolio included; Cellular Communications, Coherent Communications, Viacom warrants, Paramount Communications, Maxwell Communications, New Dartmouth Bancorp, Grant Street National Bank, Lehman Bros. common stock and Bay Ridge Bancorp common stock. Klarman also held a large number of S&P 500 put options, which came back to haunt him as the market charged higher throughout the rest of the decade.

The post Lessons From Baupost Group’s 1994 Letter appeared first on ValueWalk.

“Credit expansion is the government’s foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.” — Ludwig von Mises, 1940 (German)/1949 (English)

Continuing ValueWalk’s coverage of Seth Klarman’s 2014 year-end letter to Baupost’s partners, this two part series will take a look at some of the key themes within Baupost’s year-end letter.

Additional ValueWalk coverage of the correspondence can be found at the links below (stay tuned for more coverage).

• Let’s Be Clear: Seth Klarman Is Not A Bear
• Baupost Details Risk Management, Hedging In Q4 Letter

2014: A tale of two halves

2014 was a tale of two halves for Baupost. After a strong first half, the fund struggled in the second half with few resounding successes and several minor mistakes. Overall, Baupost’s partnerships gained approximately 7 to 8% for the year, lagging the S&P 500 but outpacing the broader Russell 2000.

Depending on how you measure this performance it was either a great success or minor failure. However, it should be kept in mind that value strategies rarely outperform in a bull market. With the S&P 500 pushing to a new high almost every month during 2014, Baupost’s value-driven investment strategy was always going to struggle to keep up with the wider market.

“ … I must remind you that value investing is not designed to outperform in a bull market. In a bull market, anyone…can do well, often better than value investors. It is only in a bear market that the value investing discipline becomes especially important…it helps you find your bearings when reassuring landmarks are no longer visible …” — Seth Klarman commenting on the market in a letter to partners published during the dot-com bubble.

Baupost has never aimed to outperform the wider market. The fund’s main goal has always been capital preservation and over the past 32 years, it has accomplished this with only two down years.

“We don’t mind being out of sync with the herd, and we don’t let that get to us. While we enjoy the challenge of analytically complex situations, we begin by looking for low-hanging fruit while eschewing the “high-hanging” kind.” — Seth Klarman 2014 letter.

Value difficult to find

Baupost’s cash balance grew steadily during 2014. Distributions were received from Lehman assets, and the fund made numerous profitable exits of fully priced positions in public equities and real estate. Bargains remained hard to find in the market, and Baupost found itself being outbid by cash-rich firms on a number of loan portfolios, private equity, and real estate opportunities. Bids received often eclipsed Baupost’s offer by 20-30% or more according to Klarman as the hunt for yield has pushed many investors to accept lower a lower return on investment (see Klarman’s notes on Yield Pigs).

“At their winning bids, investors were buying these assets at paltry (sometimes even zero) returns to our base-case assumptions. This was reminiscent of 2006-2007 behavior.” — Seth Klarman 2014 letter. 

The lack of value in today’s market is a key concern for Klarman. He writes in the 2014 letter that lose money policies have, “unleashed a tide of bullishness” and at today’s market valuations “there is little room for error”. Nevertheless, as Klarman notes in the 2014 letter, despite the wider market performance, Baupost will not let its hand be forced to buy assets that do not meet its stringent value criteria.

Culture is key

2014 was Baupost’s 32 year in business and Klarman attributes the fund’s longevity, as well as its strong performance to a deep rooted culture of finding value and putting clients first.

Klarman praises Baupost’s culture in the 2014 letter. And in many respects value investors can learn a lot from Baupost’s culture and attitude towards investing that has been applied over the fund’s history.

Indeed, as it is described, it seems as if there’s not Wall Street ego at Baupost, or drive to make excessive profits. Everything, or so it appears, is done in a calculated way with one thing in mind: value.

“Another way in which we are different from others is that we invest considerable time and effort into improving the management, processes, and culture of our firm. It’s often said that no one goes into investing to manage people, and investment firms, especially hedge funds, prove that point daily…We pursue opportunity by recruiting and developing a great team and by following a team approach to investing. From day one, members of our team are taught the importance of internal (and sometimes external) collaboration in reaching the best possible result. No one at Baupost has anything so silly as a “profit budget,” which could lead to frenetic risk-taking instead of calm introspection. We think of the capital under our control like a fountain, available to anyone with a deserving idea…At Baupost, losses don’t raise ire. Often, declines are temporary, and a sober assessment can lead to turning today’s lemons into tomorrow’s lemonade. Permanent losses caused by avoidable mistakes, while painful, provide valuable learning lessons which ensure that future errors remain scarce…We are ever hungry, highly motivated, and determined to do as we have always done: protect and safely enhance our own capital and the capital entrusted to us by our clients over the long run, amidst all market and economic conditions.” — Seth Klarman 2014 letter to partners.

Stay tuned for part two.

Baupost Group

The post Baupost’s 2014 Letter To Investors: A Tale Of Two Halves appeared first on ValueWalk.

Continued from part one…

Baupost Group – Market psychology

It seems Baupost exited 2014 preparing for a bear market. This is something that has been covered in a previous ValueWalk piece, here, so I won’t go over the topic again. Nonetheless, Seth Klarman’s letter contains some interesting commentary regarding the psychology of analysts in bear markets. While we may, or may not be heading into a bear market right now, this is advice is certainly worth paying attention to and keeping in the back of your mind.

“In past bear markets, I have noticed some of our analysts self-censoring when they come across new investments. Analysts, especially those with less experience, may come to doubt themselves as a bear market deepens, when everything they recently thought and said may suddenly appear wrong. It’s hard to buy when the message from the market is that everything is going to go much lower. Under such pressure, the most important thing for an analyst is to remain engaged and in conversation…If we didn’t own it already, would we like it at this price?… Amid losses, it’s more important than ever to remain fully rational while assessing and re-assessing price versus value, which is really the only thing that matters.”

“Even experienced investors struggle in bear markets. That’s why it is of paramount importance to do everything humanly possible in a bull market to prepare for the next bear market: Improve processes and procedures. Train up your team. Stick to your knitting. Avoid portfolio leverage. Maintain sell discipline…Hold some cash in reserve to take advantage of future opportunity…” — Seth Klarman 2014 letter to partners.

Baupost Group – Bear markets

Klarman spends a lot of time in the 2014 letter talking about bear markets. It seems he is either expecting one in the near-term, or he is just issuing a warning to investors that the smooth sailing seen over the past five years will not continue: a prudent approach. Whatever the case, it seems as if Klarman is trying to warn Baupost’s investors that volatility may be around the corner and when markets start to fall, it’s important to remain calm.  As Klarman writes:

“…it’s crucial to remember that a bear market is still a market. Markets are driven by supply and demand, and greed and fear. They constitute, as Benjamin Graham noted, a voting machine, not a weighing machine. Emotion-driven individuals dominate markets, and just as no bull market goes on forever, neither does any bear market…To take advantage of the low prices in a bear market, you have to have been buying on the way down, perhaps all the way down. There is no way to perfectly time the bottom, and no other way to put substantial capital to work.” — Seth Klarman 2014 letter to partners.

Baupost Group – Bottom up

The best way to achieve above average investment performance is to invest inside your circle of competence. At Baupost, the fund’s wide selection of analysts and sector experts means that the fund has plenty of experience to draw from. However, one area where Baupost lacks experience is the field of macro forecasting.

You could argue that few fund managers and economists have an edge in the macro forecasting arena. Still, Klarman is not shy about admitting that Baupost has no edge. Therefore it is not willing to make macro bets.

“We have our macro views–almost everyone does–as to whether the government’s fiscal situation is dangerous or whether artificially low interest rates are a problem. But we have no discernable edge in the macro. Like sports talk radio callers, everyone can have a macro opinion. But most of those opinions involve no profound insight, and will not lead to investment profits.”  — Seth Klarman 2014 letter to partners.

Macro forecasting has no place in true value investing and to some extent. You could also argue that even company specific forecasting has no place in value investing — see the Superinvestors of Graham Doddsville essay. It’s a waste of time and effort to try and forecast something the individual investor has no impact on.

Klarman believes that Baupost’s method of finding value through bottom-up investing is the best way to approach the market, a view that seem entirely appropriate.

“Our approach has always been to worry top-down, but invest bottom-up…The market may be expensive and contain excesses, but we don’t need to own the market. When we see individual bargains, we buy them, and we buy them whether the market is overvalued or undervalued, whether we believe that risks in the world are high and rising or low and falling.” — Seth Klarman 2014 letter to partners.

Baupost Group

The post Baupost Group 2014 Letter: Market Psychology appeared first on ValueWalk.

As the illusive hedge fund manager David Abrams considers his investment in Fannie Mae and Freddie Mac, placing his bet for just pennies on the dollar almost five year ago, part of his investment thesis depends on a change in the family residing in the White House, which will happen in less than two years.

Abrams: Hell will freeze over before Obama gives up the ghost

When asked if hell would freeze over before the Obama administration allowed the hedge fund community to cash a check from Fannie or Freddie, Abrams told the assembled financial insiders at New York’s Plaza hotel for James Grant’s Spring Conference   “That sounds like a reasonable bet.”

“I think that someday there (will be) interesting optionality because some administration – not the Obama administration – is going to decide that having the linchpins of the U.S. mortgage market in bankruptcy… is not a clever idea (for government to own the securities),” the founder of the $8 billion hedge fund Abrams Capital said, noting the payoff point. “When they do, they will have to deal with the junior securities.”

When he made his initial investment in 2010, it was done during a drawdown in the stock as Abrams was sifting through the bones of what had become an unpopular holding.  Abrams bought the stock on the news that it was being delisted – as many long-time investors were throwing in the towel.

Abrams: Picking a stock out of a graveyard

Perhaps thinking like Seth Klarman, the legendary value investor who spawned this “Baupost cub,” Abrams liked the value investing reasoning. With the stock close to zero, basic risk / reward analysis likely revealed the investment had much more room to the upside and a limited downside risk.

“One of the things I’ve learned over the years is that with a lot of securities, you have to buy them when nobody wants them,” he said. “I have no idea whether there will be anything in the next 12 to 24 months. This thing could end up being a complete zero.”

The stock has a significant amount of float, but not as much liquidity relative to the ownership. “Even Fannie and Freddie, where there are many billions of face of the preferreds (stock) and a decent amount of common (stock), it only trades when there is news, and it only trades down when there is bad news.”

After trading near zero from 2010 to 2013, FNMA traded consistently at $4 per share in 2014 and closed trading yesterday at $2.80.

The post David Abrams Waiting For Obama To Leave Office For Fannie, Freddie Payout appeared first on ValueWalk.

One of the value investor’s greatest tools is patience. Value investing by its very nature is a marathon, not a spirit and this has become increasingly apparent in today’s market.

QE and near six-year bull market are two factors that have held value strategies back over the past two, or three years. Following the financial crisis, value immediately outperformed, due to its contrarian nature, but since the market recovery began, returns have deteriorated.

Value underperforms

Take the Vanguard S&P 500 Value ETF (VOOV) for example. The fund is designed to track the S&P 500 Value Index, an index of companies that meet a certain set of value criteria in the S&P 500. Over a five-year period, since the beginning of March 2010 ,the fund/index has produced a compound return of 96.3%, compared to the S&P 500’s index return of 96.5%.

However, over the past three years, performance has slipped slightly. The fund produced a compound return of 52.8%, compared to the S&P 500’s 56.6%. And over the past year, the value index has only returned 9%, compared to 11.3% for the wider index. According to the FT, year to date the Russell 3000 value index is underperforming its comparative growth index by almost 5% in the US. MSCI indices show value underperforming growth by 4.6% globally year to date.

Value Investors: Don’t give up

But it isn’t time to give up on value investing just yet. According to the FT and Robert Schwob, of Style Research in London, the performance of value strategies is tied to market, interest rate and economic cycles. In other words, the global QE-fueled stock market rally that has taken place over the past six years has fostered a hostile environment for value investors.

Research has shown that value strategies perform best during periods of market turbulence. During periods of stability, growth strategies reign supreme.

Still, there’s a wealth of research that shows over the long-term, value outperforms. It just requires patience to wait for the market cycle to complete. Unfortunately, many investors lack the required patience.

Value investors: No patience

Research by Jason Hsu of Research Affiliates shows that value funds returned 9.36% per annum 1991 to 2013, beating the S&P 500 by 0.39% per annum — that’s not spectacular but it’s still better than the index.

Neverthless, the average value investors who invested in these funds only saw a return of 8.05% per annum. Most of these value investors were too impatient and jumped in/out of the funds after a brief period of underperformance.

One of the greatest case studies I’ve encountered, that shows the patience required for successful value investing, that is that of Seth Klarman’s Baupost in the late 90s. While the rest of the market surged, Baupost underperformed and during 1998, the group lost a double-digit percentage, at a time when the wider market was reporting annual gains in excess of 20%.

During 1999 Baupost underperformed once again, lagging the S&P 500 by 15.5%. But when the market collapsed during 2000, falling 13% between September and December, Baupost’s performance rebounded and the fund reported returns of around 22%. More on this case study here. Seth Klarman wrote the following at the time of the market collapse:

“ … I must remind you that value investing is not designed to outperform in a bull market. In a bull market, anyone…can do well, often better than value investors. It is only in a bear market that the value investing discipline becomes especially important…it helps you find your bearings when reassuring landmarks are no longer visible …money has come out of technology stocks, driving them mostly lower but it has not left the market. Instead, it has moved into “value” stocks, seeking more certain returns and downside protection. This is one manifestation of the “stocks for the long-term” thinking that prevails among most professional and individual investors. Stocks will outperform other asset classes over the long term because they always have, the thinking goes, so the real risk is being out of, and not in, the market …” — Seth Klarman

The post These Are Trying Times For Value Investors appeared first on ValueWalk.

Baupost and Seth Klarman have backed Biotie Therapies Corp., the Finish biotech group, by means of subscribing for convertible promissory notes and other equity-based instruments.

The issue and subscription of the convertible notes and warrants is conditional, among other things, on the granting of necessary authorizations and election of new Board members by an Annual General Meeting of Biotie to be held on 26 May 2015.

The issue of these instruments is part of Biotie’s plan to strengthen its capital structure to finance a Phase 3 double-blinded clinical trial, including the open label extension, of its lead product candidate tozadenant in Parkinson’s disease. The total amount to be raised is approximately E95 million.

Biotie — Tozadenant

Tozadenant is an oral, selective adenosine A2a receptor antagonist which has previously reported positive data from a 420-patient Phase 2b study evaluating tozadenant in Parkinson’s patients experiencing levodopa related end-of-dose ‘wearing-off’. Full data from this trial was published in Lancet Neurology in 2014. The trial met its primary endpoint of a highly significant decrease in “off” time vs. placebo, as well as demonstrating efficacy across multiple secondary endpoints. The Phase 3 protocol will largely replicate that of the Phase 2b study.

As part of the deal, Biotie is also planning to conduct a US IPO and listing on the Nasdaq Global Market of American Depositary Receipts.

Convertible loan

The convertible loan to be represented by the convertible notes can be converted into new shares in the company by their holders at any time prior to the repayment of the convertible notes, which is scheduled to occur on or after 1 May 2035. Further, the convertible Notes would automatically convert into new shares in the company upon completion of a proposed US public offering and listing on the Nasdaq Global Market of American Depositary Receipts representing the Company’s shares. If the US public offering would not take place by 1 May 2016, the Company can force the conversion of the convertible notes at any time thereafter. The Warrants will entitle to subscribe for shares in the Company until 1 November 2020.

Timo Veromaa, President and Chief Executive Officer of Biotie commented:

“We are delighted to have these leading investors contributing to the finance of the clinical development of our lead product candidate tozadenant, for which we have worldwide rights. Parkinson’s disease remains an area of high unmet medical need and these funds, together with the proposed US IPO, will allow us to commence a pivotal Phase 3 clinical trial that we believe could form the basis for approval of tozadenant by the FDA as an adjunctive treatment to levodopa in Parkinson’s”.

The post Seth Klarman Builds Stake In Biotie Therapies Corp appeared first on ValueWalk.

Seth Klarman is, undoubtedly, one best value investors working today. His hedge fund, the Baupost Group, has returned an average of 19% per annum since inception and currently looks after around $30bn for clients.

When Seth Klarman speaks, it pays to listen. To that end, I recently stumbled across a speech Klarman gave at the end of October 2007.

When Klarman made his speech on October 20 2007, the market had just peaked. After hitting a high of just under 14,000 on October 1 2007, the DJIA started its slide as the financial crisis took hold.

Seth Klarman - Pressures showing through

Pressures on the financial system were already started to show through when Seth Klarman gave his speech. He began:

“Recent financial market events, including subprime loan losses, hedge fund and quant fund woes, and the bailout or takeover of numerous financial institutions...highlight the extreme risk taking and leverage that have lately permeated our financial system.”

But Seth Klarman was far from panicking about the market turmoil:

“The current distress will likely create opportunities for patient investors, but while proper investing requires a disciplined and long-term perspective, few market participants are able to ignore short-term phenomena. The daily blips of the market are, in fact, noise -- noise that is very difficult for most investors to tune out.”

It’s here that Seth Klarman then goes on to talk about the pressures of long-term investing. The pressure to outperform in the short-term was a reason in itself for the financial crisis, encouraging risk taking and leverage to increase returns. The same short-termism, coupled with fear, Seth Klarman notes, threatens to affect investors’ performed coming out of the downturn.

“Human nature involves the extremes of investor emotion--both greed and fear--in the moment; it is hard for most people to overcome and act in opposition to their emotions...Ironically, it is this very short-term pressure to produce--this gun to the head of everyone--that encourages excessive risk taking…”

Seth Klarman

Seth Klarman - Risk avoidance

Seth Klarman then goes on to mention Warren Buffett’s first rule of investing; don’t lose money. He notes that few investors have this level of risk avoidance. Up to 2007, Seth Klarman had only lost money in one of the 25 years he had been running Baupost -- an impressive record and one that was achieved by investing cautiously and achieving “ample returns” year after year. He notes:

“Had we strived to generate high returns, I am certain that we would have allowed excessive risk into the portfolio—and with risk comes losses.”

“The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk.”

This is an interesting topic. Seth Klarman does not believe that investors should target an annual return rate; say to match the market return of 7% p.a. He believes that this drives a herd mentality, where investors sacrifice security in favor of returns:

“Pressure to keep up with a peer group renders decision making even more difficult. Then, there is no assurance whatsoever that the incurrence of greater risk will actually result in the achievement of higher return.”

“When the herd is single-mindedly focused on return, prices are frequently bid up and returns driven down.”

Seth Klarman - Avoid leverage

Seth Klarman’s speech then moves onto the issue of leverage. Klarman has never been a fan of leverage and it only take him a couple of sentences to present a valid argument as to why investors should avoid using leverage in general.

“If you purchase some investments, and then borrow with recourse debt to buy more, you are now vulnerable to mark to market losses in what you own. Depending on the precise terms of the debt, a decline in the value of your holdings could force you either to put up more collateral—which you may not have—or to sell off some of the investments you purportedly like to meet margin calls. By borrowing, you have ceased to be the master of your own fate and allowed the lender—or actually the market—to be. How ironic to allow the market, which has dished up your current portfolio of opportunity, to dictate to you the need to sell your attractive holdings in order to survive.”

If you’re familiar with Benjamin Graham’s “Mr. Market” thesis, then the above quote will make perfect sense. If not, here’s a refresher from Investopedia:

“Mr. Market is a hypothetical investor who is driven by panic, euphoria and apathy (on any given day), and approaches his investing as a reaction to his mood, rather than through fundamental (or technical) analysis...Benjamin Graham invented Mr. Market as a clever means of illustrating the need for investors to make rational decisions in regard to their investment activities instead of allowing emotions to play a deciding role.”

Primarily, Seth Klarman is trying to put forward the idea that by using leverage you are in fact letting the market’s emotional biases’ take control of your portfolio.

Stay tuned for part two!
Source: Seth Klarman MIT Speech 2007 10 20

The post [From The Archives] Seth Klarman On Value Investing, Leverage, Trading Strategies And The Herd Mentality Pt. 1 appeared first on ValueWalk.

Continued from part one…

Seth Klarman on trading strategies

After warning about the risks of leverage, (part one) Seth Klarman talks at length about the dire state of the securitization industry and property markets at the time of the interview (2007). Additionally, Klarman talks at length about levels of consumer debt and leverage on Wall Street.

After, Seth Klarman moves on to discuss trading strategy:

“Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets. Momentum investors become lost when the momentum wanes. Growth investors - who pay a premium for the fastest growing companies - don't know what to do when the expected growth fails to materialize. Highly leveraged investors, like some quant funds in the headlines, were recently forced to sell regardless of value when their methodology produced losses rather than gains.”

By the time the bad news arrives, it’s usually too late for those following the above strategies to get out in time. No one can predict the future direct of the stock market or economy, making growth and momentum strategies difficult to implement over the long-term. Value investing, on the other hand is a different matter:

“Value investing...is one strategy that provides a road map to successfully navigate not only through good times but also through turmoil. Buying at a discount creates a margin of safety for the investor--room for imprecision, error, bad luck or the vicissitudes of volatile markets and economies.”

Short-termism

Of course, in today’s markets (this is relevant to both the markets of today (2015) and those of 2007) long-term value investing is becoming an increasingly difficult strategy to follow. Investors are placing an ever increasing emphasis on short-term performance. Back to Seth Klarman:

“My friend and fellow value investor, Chris Browne, President of Tweedy Browne, describes what value investors do by telling this story. He was interviewing a new trader and after the interview, walked them through the Tweedy Browne offices. At the elevator on their way out, the trader commented, “At other Wall Street firms, just by walking through the office you can tell if the market is up or down. At Tweedy Browne, you can’t even tell if the market is open!” This really does highlight the difference between most of today’s frenzied, decision-aminute firms and the behavior of a truly long-term oriented investor.”

Seth Klarman continues:

“As value investors, our business is to buy bargains that financial market theory says do not exist...there is a large gap between standard financial theory and real world practice. Modern financial theory tells you to calculate...the beta of a stock to determine its riskiness. In my entire professional career, now twenty-five years long, I have never calculated a beta. This theory urges you to move your portfolio of holdings closer to the efficient frontier. I have never done so, nor would I know how...Some people stick to elegant theories long after it is apparent that the theories do not explain reality.”

Efficient markets theory

A speech on value investing wouldn't be complete without an attack on the efficient markets theory. In this case, Seth Klarman cites Warren Buffett’s performance as a value investor over time. If markets were truly efficient, would Buffett have been able to achieve these returns? It’s unlikely:

“Unlike speculators, who think of securities as pieces of paper that you trade, value investors evaluate securities as fractional ownership of, or debt claims on, real businesses. They are evaluated as one would evaluate the purchase of an interest in a business or of the entire business. Buying such bargains confers on the investor a margin of safety, room for imprecision, error, bad luck, or the vicissitudes of economic and business forces. Value investing is a long-term oriented investment approach—never to be confused with short-term speculation—that requires considered patience, discipline and rigor.”

“Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment. Price, of course, is determined in the financial markets, varying with the vicissitudes of supply and demand for a given security.”

Seth Klarman goes on to discuss the reasons why value investing is such a successful school of thought. In essence, Seth Klarman believes that value investing is successful because markets are inefficient. Market inefficiencies create discrepancies between price and value. Inefficiencies like forced selling, illiquidity, the deletion of a stock from an index, a credit rating downgrade and human emotion. All can cause supply-demand imbalances in the market, which will ultimately lead to opportunities for value investors.

“As the father of value investing, Benjamin Graham, advised in 1934, smart investors look to the market not as a guide for what to do but as a creator of opportunity. The excessive exuberance and panic of others generates mispricings that can be exploited by those who are able to keep their wits about them.”

And after a quick summary of the topics discussed throughout the speech, Klarman concludes:

“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”

This is only a brief summary of the topics discussed within Seth Klarman's 2007 speech. I strongly recommend reading the whole piece for additional ideas and thoughts from one of the greatest value investors living today.

Source: Seth Klarman MIT Speech 2007 10 20

The post [From The Archives] Seth Klarman On Value Investing, Leverage, Trading Strategies And The Herd Mentality Pt. 2 appeared first on ValueWalk.

Seth Klarman's Baupost Group added positions in energy, biotech, and telecoms during the second quarter while reducing its exposure to key energy stocks, according to a 13F filing. It is important to note that most of Baupost's investments are in assets which are not required to be reported with the SEC, so the equities mentioned represent just a small picture.

[klarman]

Seth Klarman: New Acquisitions

During the second quarter, Seth Klarman added three new positions to his fund: Sanchez Energy Corp., Biotie Therapies Corp. and Frontier Communications Corp.

The biggest buy was Frontier Communications Corp. Seth Klarman acquired both the common and series A preferred stock of Frontier for Baupost and the total value of the position stood at just under $100 million at the end of the second quarter.

Baupost started buying Biotie Therapies Corp., the Finish biotech group during April by means of subscribing for convertible promissory notes and other equity-based instruments. The issue of the notes was part of Biotie’s plan to strengthen its capital structure to finance a Phase 3 double-blinded clinical trial, including the open-label extension, of its lead product candidate tozadenant in Parkinson's disease.

Seth Klarman’s new position in Sanchez Energy follows a similar move by Lee Cooperman's Omega Advisors at the end of last year.

Seth Klarman: Increased Positions

Along with Sanchez, Seth Klarman also added to a number of existing energy positions during the second quarter.

Baupost increased it position in Cheniere Energy Inc. by 11.3% to 15,365,230 million shares, roughly 18.3% of the fund’s total portfolio. Klarman increased his position in Pioneer Natural Resources by 28.4% to just over four million shares, or 9.7% of Baupost’s portfolio.

Further, Klarman hiked his PBF Energy holding by 27.3%, to 11.03 million shares, 5.4% of Baupost’s portfolio.

The biggest add on a percentage basis was NovaCopper Inc., where Klarman nearly doubled his position, although Nova only accounts for a tiny fraction of Baupost’s portfolio (0.08%)

Other position increases include Keryx Biopharmaceuticals Inc (15.2%), Veritiv Corp. (9.1%), SunEdison Semiconductor Ltd. (5.1%), Atara Biotherapeutics Inc. (1.0%) and Theravance Biopharma Inc. (0.8%).

Seth Klarman:  Decreased Positions

Seth Klarman reduced his stake in five holdings during the second quarter. In terms of the number of shares held by Baupost, the fund’s biggest position reduction was Alliance One International Inc. with the holding reduced by 90%. However, during the quarter Alliance One conducted a 1-for-10 reverse stock split on Monday, June 29, 2015, the Company's common stock began trading on the split-adjusted basis. On a dollar basis, Klarman’s Alliance One position almost doubled during the quarter.

Other positions reduced during the quarter were Alon USA Partners LP (-34.1%), Kosmos Energy Ltd. (-17.2%), Antero Resources (-14.2%), Paratek Pharmaceuticals (-11.0%) and Ocwen Financial Corp. (-2.3%). 

Seth Klarman didn’t sell any positions during the second quarter.

Baupost SEC filings

• Second Quarter 2015 
• First Quarter 2015

The post Seth Klarman Buys Sanchez Energy, Biotie, and Frontier Communication appeared first on ValueWalk.

Baupost Group, the hedge fund managed by acclaimed value investor Seth Klarman, has once again boosted its holding in Keryx Biopharmaceuticals.

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Today, Keryx announced that it has entered into an agreement with funds managed by Baupost Group, L.L.C, to raise $125 million through the private placement of Convertible Senior Notes, due 2020.

Keryx Biopharmaceuticals is focused on bringing innovative therapies to market for people with renal disease. Baupost has held a position in the company since May 2014.

And Klarman has been steadily increasing his position in Keryx since the second quarter of last year. After buying an initial stake of 9.15 million shares, at the end of Q2 2015, Klarman had boosted his stake to 25.8 million shares, roughly 24.6% of the company's outstanding shares. Today's transaction will significantly increase Klarman's exposure to Keryx.

The zero-coupon notes will mature in October 2020 unless converted in accordance with their terms prior to such date. The conversion price of the notes has been set at $3.74, the closing price of Keryx's on 10/14/2015, the day before the deal closed.

As part of the deal, Keryx will increase the number of directors on its Board to eight, as Baupost will have the right to appoint a director to Keryx’s Board by the end of 2015. Baupost will also appoint an observer to Keryx’s board.

Keryx Biopharmaceuticals: Funds for restructuring

Keryx plans to use the funds raised from this convertible offering for working capital and efforts to expand the utilization of the company's flagship drug, Auryxia™ in the US.

Keryx Biopharmaceuticals is looking to increase its field-based sales force by approximately 50% to drive increased revenue from Auryxia and advance label expansion efforts. What's more, after completing a comprehensive review of the company, Keryx's management has decided to implement a cost reduction plan and plan to re-align the company's operating expense structure.

The plan is expected to significantly decrease the company’s cash operating expenses, excluding cost of goods sold, in 2016 to between $87 million and $92 million.

Commenting on the company's plans and fundraising, Scott Holmes, chief financial officer said:

"We are pleased to enter this financing agreement that, we believe, provides all of the capital required to support our efforts to position Auryxia as a market leader. This transaction is a validation of the potential of Auryxia and reflects continuing support by Baupost. Taken together with our plan to re-align our expense structure, we are now well positioned to achieve our commercial and development objectives for Auryxia.”

Keryx Biopharmaceuticals: Slow progress

Baupost is one of Keryx Biopharmaceuticals' only friends.

Short sellers have pounced on the company this year as sales of Auryxia have failed to meet expectations. The drug racked up sales of just $1.8 million in the second quarter since its launch, making up most of the company’s $2.5 million in revenue for the three-month period. Wall Street was calling for sales of $2.9 million for the quarter. One analyst in particular was predicting sales of $4 million per month for Auryxia. Just 3,700 prescriptions were written for Auryxia in the second quarter.

However, many believe that Auryxia still has the potential to become a blockbuster. Keryx had a pro-forma cash position of approximately $225 million as of September 30, 2015 after, including Baupost convertible note infusion.

Auryxia is currently the only drug Keryx Biopharmaceuticals has on the market. The company is seeking approval to market Auryxia in Europe and expects a ruling from the Union’s regulatory authorities sometime in mid-2015. The company is conducting additional clinical trials to expand the reach of the drug to anemia patients with stages III to V chronic kidney disease, who have previously not responded to oral iron therapy.

More on Keryx Biopharmaceuticals:

• A Battle is Brewing Between Keryx (KERX)'s Largest Backer and Short Investors
• Keryx revenue falls short despite support of analysts, Baupost

The post Keryx Biopharmaceuticals (KERX) Soars On Baupost Deal appeared first on ValueWalk.

Get The Full Seth Klarman Series in PDF

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Tough year for value investors - Bloomberg says that Seth Klarman's Baupost Group is down almost 7% through September. The firm we assume has most assets in cash, RE and debt (specifically Lehman debt)  which are not reported on the form 13F - but some equity bets did not help. Energy has been crushed since the decline in oil prices and pharma/biotech etc. has been stung by Shkreligate and the latest 'controversy' regarding a hedge fund favorite - Valeant. Ackman, Einhorn, Loeb, Hawkins and many other famous event driven and value investors are also having a brutual year. If you look at the top returns for the year value is under-represented. Anyway, below is a partial excerpt from BBG.

Baupost Is Said To Decline 3.8% In September On Energy, Biotech by Sabrina Willmer, Bloomberg

• Klarman hedge fund down 6.6% for the year through September
• Brian Spector, partner in public investment team, to leave

You know it’s a bad year for value investors if Seth Klarman is losing money.

Klarman’s $27 billion Boston-based hedge fund declined about 3.8 percent in September, bringing its loss to about 6.6 percent for the year through the end of September, said a person with knowledge of the matter, who asked not to be named because the information is private. Baupost, which manages multiple partnerships that have varying returns, told investors in a letter that some holdings rebounded in October, said the person.

Baupost was hurt by losses in energy and health-care stocks during the third quarter. The firm has tried to benefit from the decline in oil prices after years of monetary stimulus inflated prices for most assets. A bargain hunter and author of the 1991 book “The Margin of Safety,” Klarman has only suffered two losing years since the firm’s inception in 1982.

The firm told investors that Brian Spector, a partner on Baupost’s public investment team, will leave at the end of the year, according to the person. Spector, who worked at Baupost since 1998, will pursue education reform-focused philanthropy, the firm said.

Einhorn, Ackman

See full article here.

http://www.valuewalk.com/2015/11/benjamin-graham-the-evolution-of-value-investing-past-present-and-beyond/

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