Biography of Seth Klarman: Mastering the Art of Value Investing and Philanthropy
Biography of Seth Klarman
Seth Andrew Klarman, born on May 21, 1957, is an American
billionaire investor, hedge fund manager, and author renowned for his advocacy
of value investing. He serves as the chief executive and portfolio manager of
the Baupost Group, a private investment partnership headquartered in Boston,
which he established in 1982.
Klarman is deeply influenced by the investment philosophy of
Benjamin Graham, a pioneer in value investing. He is noted for his strategy of
purchasing assets that are currently undervalued and unpopular, with a keen eye
on ensuring a margin of safety. By patiently waiting for these assets to
appreciate in value, he aims to generate profits for his investors.
Since the inception of his fund with an initial capital of
$27 million in 1982, Klarman has achieved an impressive compounded return on
investment, reportedly averaging around 20%. This sustained success has
cemented his reputation as one of the most skilled investors in the financial
industry. Currently, he manages a substantial portfolio totaling $30 billion in
assets.
Early Life and Entrepreneurial Spirit
Seth Klarman was born on May 21, 1957, in New York City,
into a Jewish family. At the age of six, he relocated with his family to the
Mt. Washington area of Baltimore, Maryland, close to the Pimlico Race Course.
His father, Herbert E. Klarman, worked as a public health economist at Johns
Hopkins University, while his mother pursued a career as a psychiatric social
worker. Unfortunately, his parents divorced shortly after their move to
Baltimore.
Entrepreneurial Ventures from a Young Age
Even as a young child, Klarman displayed a keen
entrepreneurial spirit. At the age of four, he transformed his room into a
makeshift retail store, complete with price tags on all his belongings. He even
delivered an oral presentation to his fifth-grade class about the intricacies
of buying stocks. As he grew older, he engaged in various small-scale business
endeavors, including running a paper route, operating a snow cone stand,
managing a snow shoveling business, and selling stamp-coin collections on weekends.
Introduction to Investing
Klarman's interest in investing was sparked at the tender
age of 10 when he purchased his first stock—a share of Johnson & Johnson.
This investment proved lucrative, as the stock underwent a three-for-one split
and eventually tripled in value, solidifying his belief in the potential of the
stock market. His decision to invest in Johnson & Johnson stemmed from his
familiarity with and trust in the company's products, particularly band-aids,
which he had used frequently during his childhood.
Early Engagement with the Stock Market
By the age of 12, Klarman was actively involved in
monitoring the stock market, regularly contacting his broker to obtain stock
quotes. His early immersion in the world of investing laid the foundation for
his future success as a prominent figure in the financial industry.
College Education and Early Career
Seth Klarman enrolled at Cornell University in Ithaca, New
York, where he initially contemplated majoring in mathematics. However, he
eventually opted to pursue economics as his major. In 1979, he graduated magna
cum laude with a degree in economics, accompanied by a minor in history. During
his time at Cornell, Klarman was a member of the Delta Chi fraternity.
Introduction to Investment Management
During the summer of his junior year, Klarman secured an
internship at the Mutual Shares fund, where he had the opportunity to work
alongside influential figures in the industry, including Max Heine and Michael
Price. This experience proved pivotal in shaping his career trajectory and
solidifying his interest in investment management. Following his graduation from
college, Klarman returned to Mutual Shares to work for 18 months before making
the decision to pursue further education in business.
Harvard Business School and Notable Classmates
Klarman continued his academic journey at Harvard Business
School, where he distinguished himself as a Baker Scholar, an honor reserved
for the top 5% of the graduating class. During his time at Harvard, he had the
privilege of studying alongside notable individuals such as Jeffrey Immelt,
Steve Burke, Stephen Mandel, James Long, and Jamie Dimon. This period of
rigorous academic study and interaction with accomplished peers further honed
Klarman's skills and prepared him for his future endeavors in the financial
world.
Founding of Baupost Group
Upon completing his business education in 1982, Seth Klarman
co-founded the Baupost Group alongside Harvard Professor William J. Poorvu and
partners Howard H. Stevenson, Jordan Baruch, and Isaac Auerbach. The name
"Baupost" is an acronym derived from the initials of the founders'
names. The firm was initially funded with $27 million, raised from the sale of
Poorvu's stake in a local television station. Klarman's starting salary was
modest at $35,000 annually, reflecting the early stage of the venture and the
perceived risk associated with his relative lack of experience.
Investment Strategy and Market Opportunities
In February 2008, Klarman seized upon a significant market
opportunity when he learned of the forced liquidation of assets by London-based
hedge fund Peloton Partners. Recognizing the potential for value investing in
the wake of the financial crisis, Klarman opened Baupost's fund to new
investors, raising $4 billion in capital, primarily from large foundations and
Ivy League endowments. He embarked on a strategy of heavy investment in
equities, often purchasing up to $100 million in stocks and other assets per
day. Amid the market downturn following the collapse of AIG and Lehman
Brothers, Klarman focused on acquiring distressed securities and bonds, which
proved profitable as the markets recovered.
Navigating the Financial Crisis
During the financial crisis of 2008-2009, Baupost faced
challenges like many other hedge funds, with returns ranging from -7% to -13%.
However, Klarman's strategic investments in equities and distressed securities,
particularly in the aftermath of significant events such as JPMorgan Chase's
acquisition of Washington Mutual, yielded positive results. Despite the fund's
overall negative returns during the crisis, Klarman remained optimistic about
the long-term potential for capital gains.
Diversification and Investments Beyond Finance
In addition to his investments in financial markets, Klarman diversified his portfolio by purchasing a minority stake in the Boston Red Sox in 2009, further expanding Baupost's investment reach beyond traditional finance sectors.
Distressed Credit Investments
In 2009, Seth Klarman capitalized on the aftermath of the
financial crisis by purchasing distressed credits, including bonds from CIT
Group, a financial holding company in New York City. Acquiring these bonds at
65 cents on the dollar with a yield rate of 15%, Klarman navigated the
company's prepared bankruptcy process strategically. When investor Carl Icahn
initially offered a $6 billion loan to CIT Group but withdrew the deal shortly
after, the bonds held by Baupost were propelled into prepared bankruptcy. This
move resulted in Baupost receiving securities valued at 80 cents to the dollar
for their debt in CIT Group.
Investments in Biotech
Following the CIT deal, Klarman diversified Baupost's
portfolio with investments in the biotech sector. He acquired a stake in
FacetBiotech, a new biotech company, at an average cost of $9 per share.
Notably, FacetBiotech possessed a net cash value of $17 per share. Klarman
capitalized on the opportunity presented by spin-offs from larger parent
companies, recognizing these stocks as undervalued and overlooked. When Biogen
attempted a hostile takeover of FacetBiotech, driving the stock price to $14
per share, Abbott Laboratories negotiated a settlement for acquisition at $27
per share. Baupost's fund saw significant gains, finishing the year up by 27%.
Fund Growth and Key Holdings
As of 2016, Baupost Group managed assets worth $31 billion,
reflecting the fund's continued growth and success under Klarman's leadership.
In 2020, eBay emerged as one of the fund's largest holdings, with a value of
$1.48 billion. This strategic investment underscores Klarman's ability to
identify value opportunities across various sectors and asset classes,
contributing to Baupost's sustained performance and prominence in the
investment landscape.
Baupost Group's Assets
Key Information: Seth Klarman leads the Boston-based hedge fund Baupost Group, which manages approximately $27.4 billion in assets as of March 2023.
"Margin of Safety" Pricing
High Demand: Klarman's book "Margin of Safety,"
revered by value investors, commands a high price in the market. It sells for
around $1,700 on Amazon, reflecting its cult classic status and enduring
popularity among investors.
Political Shift
Donation History: While previously a significant donor to
the Republican Party, Klarman made a public departure from supporting Trump in
2016. Since then, he has redirected his contributions towards the Democratic
Party, signaling a shift in his political affiliations.
The Intellectual Elegance of Value Investing
Seth Klarman's investment philosophy revolves around the
principles of value investing, a discipline he claims to have recognized as his
calling since his junior year of college. He perceives value investing as an
innate trait, suggesting that individuals either possess the patience and
discipline required for this approach or do not. For Klarman, the allure of value
investing lies in its simplicity and proven effectiveness. He emphasizes the
appeal of buying undervalued assets, which often outperform high-flying growth
stocks in the long run.
Staying True to Benjamin Graham's Teachings
A staunch advocate of Benjamin Graham's teachings, Klarman
criticizes the short-term mindset prevalent among many fund managers,
particularly during times of financial turmoil. He warns against the fallacy of
believing that current market conditions defy historical patterns, stressing
the importance of understanding economic cycles and their corrective nature.
Klarman adopts a conservative approach, holding significant cash reserves—up to
50% of assets—to weather market volatility and capitalize on mispriced
opportunities.
Unconventional Strategies and Consistent Returns
Klarman's investment strategy involves making unconventional
moves, such as purchasing unpopular assets at discounted prices, utilizing
complex derivatives, and investing in put options. During his early years at Baupost,
he focused on companies overlooked by Wall Street, prioritizing risk management
and maintaining a margin of safety. Despite these unconventional tactics,
Klarman has consistently delivered high returns by adeptly navigating
undervalued markets across various asset classes.
Seeking Value in Distressed Markets
Klarman's investment approach involves seeking out
undervalued companies facing challenges or experiencing low growth. For
instance, during the decline of energy stocks in 2015, Baupost actively sought
investment opportunities. Klarman's willingness to "bargain hunt" in
distressed markets has been a hallmark of his investment strategy, enabling him
to capitalize on undervalued assets and generate significant returns.
Long-Term Focus and Minimal Concern for Daily Fluctuations
In contrast to many investors who closely monitor daily
price fluctuations, Klarman maintains a long-term perspective and demonstrates
little interest in short-term market movements. He famously does not utilize a
Bloomberg Terminal, emphasizing his focus on fundamental value and the broader
investment landscape rather than transient market trends.
Venturing into Horse Racing
Seth Klarman, along with William Lawrence, has delved into the
world of horse racing since 2006 through their ownership of Klaravich Stables
Inc. Their notable achievements in the sport include victories at prestigious
events like the Preakness Stakes. Notably, their horse Cloud Computing clinched
the title at the 2017 Preakness Stakes, showcasing their prowess in the racing
world.
Recognition in the Racing Community
The success of Klarman and Lawrence's racing endeavors has
not gone unnoticed. In 2019, they received the Outstanding Owner award at the
Eclipse Awards, a testament to their remarkable achievements in the sport.
Their horse Bricks and Mortar played a pivotal role in securing this accolade,
highlighting their consistent excellence in horse racing.
Continued Triumphs
The duo's triumphs in horse racing have continued to
flourish over the years. In 2022, Klarman celebrated his 65th birthday with
another victory at the Preakness Stakes, as their horse Early Voting emerged
victorious. This win further solidified Klarman and Lawrence's standing as
prominent figures in the horse racing community, showcasing their ability to
achieve success on the racetrack.
Biography of Seth Klarman: Mastering the Art of Value Investing and Philanthropy
Private Life and Family
Seth Klarman is known for maintaining a low profile, often
avoiding public appearances and interviews. He resides in Chestnut Hill,
Massachusetts, alongside his wife, Beth Schultz Klarman. Their paths first
crossed during a Boston Harbor cruise in 1982, and since then, they have built
a life together, raising three children.
Family Connections
In addition to his immediate family, Klarman has familial
ties to academia. His brother, Michael Klarman, serves as a professor at
Harvard Law School. Despite his professional success and prominence in the
investment world, Seth Klarman values privacy and cherishes the time spent with
his loved ones away from the public eye.
Financial Status
According to Forbes, Seth Klarman's personal wealth is
estimated at approximately US$1.5 billion. He ranks as the 15th highest-earning
hedge fund manager globally, reflecting his significant success in the
investment industry.
Philanthropic Endeavors
Supporting Medical Causes and Jewish Organizations:
Seth Klarman initiated The Klarman Family Foundation,
managing $255 million in assets as of 2010. The foundation channels funds
towards medical research, Jewish organizations such as the American Jewish
Committee and Boston's Combined Jewish Philanthropies, and various initiatives
in Israel.
Chairmanship of Facing History and Ourselves:
Klarman assumes the
role of chairman at Facing History and Ourselves, an organization dedicated to
developing educational programs combating anti-Semitism and bigotry. Through
this position, he actively contributes to promoting tolerance and
understanding.
Advocacy for Israel:
Actively engaged in pro-Israel advocacy, Klarman supports
The Israel Project, an initiative that provides information on Israel to
journalists. His contributions of $4 million between 2008 and 2010 demonstrate
his commitment to advancing Israel-related causes.
Key Investor in The Times of Israel:
Klarman plays a
significant role as a leading U.S. investor behind The Times of Israel, an
online English-language newspaper reporting on Israel, the region, and the
Jewish world. His investment underscores his dedication to fostering informed
discourse on these topics.
Contributions to Education:
Klarman's philanthropy extends to education, with notable
donations including the funding of Klarman Hall at Cornell University and a
conference center at Harvard Business School. Additionally, his support helped
establish the Klarman Fellowships, a postdoctoral fellowship program at Cornell
University aimed at fostering academic excellence.
Recognition in the Investment Community
Hedge Fund Titan:
Seth Klarman has earned the moniker of a "hedge fund
titan" for his steady accumulation of fund capital and his understated
approach to investing. Despite maintaining a low profile, his impact on the
investment world has been substantial, positioning him as a key figure in the
hedge fund industry.
Quiet Giant of Investing:
Renowned for his reserved demeanor and remarkable success in
investing, Klarman is often referred to as the "quiet giant of
investing." His ability to generate significant returns while flying under
the radar has cemented his reputation as a formidable force in the financial
world.
Enigmatic Figure:
Described as an
"enigma in the investing world," Klarman's unconventional strategies
and discreet nature have added to his mystique. His unique approach to
investing and his reluctance to seek the limelight have contributed to the intrigue
surrounding his persona.
Comparisons to Warren Buffett:
Klarman has drawn
comparisons to legendary investor Warren Buffett, earning titles such as
"the Warren Buffett of his generation" and the "Oracle of
Boston." Buffett himself has publicly praised Klarman's investment acumen,
indicating the high regard in which he is held within the investment community.
Induction into Hedge Fund Manager Hall of Fame:
In recognition of his outstanding contributions to the hedge
fund industry, Klarman was inducted into Institutional Investors Alpha's Hedge
Fund Manager Hall of Fame in 2008. This prestigious honor places him among
esteemed peers and highlights his significant impact on the world of finance.
Authorship of "Margin of Safety"
- Key Publication: Seth Klarman authored "Margin of Safety: Risk Averse Investing Strategies for the Thoughtful Investor" in 1991. This seminal work reflects Klarman's approach to value investing, which is also evident in his hedge fund strategies.
- Critique of Retail Investing: In "Margin of Safety," Klarman critiques retail investors who rely solely on metrics like share price momentum, cautioning against speculative behavior and emphasizing the importance of value investing principles. He advocates for investing in stocks below their intrinsic value to capitalize on potential discounts.
- Cult Following: Despite its limited availability, "Margin of Safety" has garnered a cult following within the finance community. With only 5,000 copies sold initially, the book has become a sought-after relic, commanding high prices in the resale market.
- Rare and Valuable: Due to its scarcity, "Margin of Safety" is now out of print, making existing copies highly valuable. Used versions can fetch prices ranging from $700 to $4,000, reflecting its significance and desirability among investors.
- Editorial Contribution: In addition to his own publication, Klarman edited the sixth edition of "Security Analysis" by Benjamin Graham and David Dodd in 2008. This edition, updated under Klarman's guidance, continues to be a seminal work in the field of value investing.
Awards and Recognition
Hall of Fame Induction: Seth Klarman was honored with
induction into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame
in 2008, acknowledging his outstanding contributions to the industry.
Renowned Investor
Acclaimed Titles: Widely hailed as a "hedge fund
titan" and a "quiet giant of investing," Klarman's remarkable
prowess in the financial world has earned him high praise. Often likened to
"the Warren Buffett of his generation" and dubbed the "Oracle of
Boston," Klarman's investment strategies have garnered significant
admiration. Notably, even Warren Buffett himself has publicly commended
Klarman's investment skills.
Publications and Works
Authorship: In 1991, Klarman penned the acclaimed book
"Margin of Safety: Risk Averse Investing Strategies for the Thoughtful
Investor." Despite going out of print, the book remains highly sought
after, revered as a treasured relic within the finance community.
Editorial Contribution
Editorial Oversight: In 2008, Klarman undertook the task of
editing the sixth edition of "Security Analysis," a seminal work
authored by Benjamin Graham and David Dodd. This editorial endeavor further
solidified Klarman's influence and expertise in the realm of investment literature.
- May 21, 1957: Seth Andrew Klarman is born in New York City to a Jewish family.
- 1963: At the age of six, Klarman moves to the Mt. Washington area of Baltimore, Maryland, near the Pimlico Race Course.
- 1979: Graduates magna cum laude in economics with a minor in history from Cornell University.
- 1982: Founding of the Baupost Group alongside Harvard Professor William J. Poorvu and partners Howard H. Stevenson, Jordan Baruch, and Isaac Auerbach.
- 1991: Publishes the influential book "Margin of Safety: Risk Averse Investing Strategies for the Thoughtful Investor."
- 2006: Establishes Klaravich Stables Inc. and ventures into horse racing with William Lawrence.
- 2008: Inducted into Institutional Investors Alpha's Hedge Fund Manager Hall of Fame.
- 2017: Forbes lists Klarman as the 15th highest-earning hedge fund manager globally, with a personal fortune of US$1.50 billion.
- 2019: Secures the Outstanding Owner category at the Eclipse Awards with their horse Bricks and Mortar.
- 2022: Celebrates his 65th birthday by winning the Preakness Stakes with their horse Early Voting.
