Seth Klarman Interview

Biggest mistakes?

There are too many examples that we could say, “Ah, that was right in our sweet spot, and we should have had it.” All investors need to learn how to be at peace with their decisions. We as a firm are always going to buy too soon and sell too soon. And I’m very at peace with that. If we wait for the absolute bottom, we won’t buy very much. And when everybody’s selling, there tends to be tremendous dislocation in the markets.

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What’s the secret to success?

Every manager should be able to answer the question, “What’s your edge?” This isn’t the 1950s, when all you had to do was buy a corner lot and build a small drugstore and it gradually became incredibly valuable land or you owned a skyscraper or you built a small shopping center and it became the big regional mall. The market’s very competitive; there are a lot of smart, talented people, a lot of money chasing opportunity. If you don’t have an edge and can’t articulate it, you probably aren’t going to outperform.

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Why do some hedge fund managers fail?

Their clients are pressuring them for short-term results, or they think their clients want short-term results. That’s probably the biggest problem for professional money managers. It makes it very, very hard for an investor to hold a stock that’s going down, to take a contrary viewpoint. I also think leverage is a great risk. If you look at hedge fund failures, virtually all of them were on the back of excess leverage.
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Is it getting more difficult to find value?

Sure, but I can’t worry too much about things I can’t control. If suddenly tomorrow I got the conviction that all securities were efficiently priced, that nothing was dropping to levels where I cared about it, I would be happy to close up shop. But human nature makes it hard for the markets to be efficient. As recently as earlier this year, there were days when it felt to a lot of people like the world was ending, that we were staring into some kind of abyss of financial distress, and a lot of buyers weren’t buying. Those were interesting days. We were looking for bargains, and the Fed massively intervened, and people decided it was safe to invest again, and the markets worked out. So the question is not, Are people smart, are people sophisticated, do they have clever ways of looking at things, are they looking in the right areas? The question is, Are there periods when none of that matters because their human natures get the best of them?

What’s your opinion on hedge funds going public?

It’s a terrible mistake. One of the worst days for the hedge fund industry was the day the first one became public. As an investor, you do best when you think about what’s in your client’s interest, which is managing a reasonable amount of money that will earn a good return with limited risk. When you go public, you change that risk-return equation and start thinking about how much money you can make. It becomes a business where the client relationships don’t have to be longer than the next quarter and the talent can leave and the clients can leave.