Zweig:
The first question I
would like to ask you, Seth, concerns your work at Baupost. How have you followed
Graham and Dodd, and how have you deviated from Graham and Dodd?
Klarman:
In the spirit of Graham
and Dodd, our firm began with an orientation toward value investing. When I think
of Graham and Dodd, however, it’s not just in terms of investing but also
in terms of thinking about investing. In my mind,their work helps create a template for how to approach markets, how
to think about volatility in markets as being in your favor rather than as
a problem, and how to think about bargains and where they come from. It is easy
to be persuaded that buying bargains is better than buying over-priced
instruments.The work of Graham and Dodd has really helped us think about the
sourcing of opportunity as a major part of what we do—identifying where we are
likely to find bargains. Time is scarce. We can’t look at everything.
Where we may have deviated a bit from Graham and Dodd is, first of all, investing in the instruments that didn’t exist when Graham and Dodd were publishing their work. Today, some of the biggest bargains are in the hairiest, strangest situations, such as financial distress and litigation, and so we drive our approach that way, into areas that Graham and Dodd probably couldn’t have imagined. The world is different now than it was in the era of Graham and Dodd. In their time, business was probably less competitive. Consultants and“experts” weren’t driving all businesses to focus on their business models and to maximize performance. The business climate is more volatile now. The chance that you buy very cheap and that it will revert to the mean, as Graham and Dodd might have expected, is probably lower today than in the past. Also, the financial books of a company may not be as reliable as they once were. Don’t trust the numbers. Always look behind them. Graham and Dodd provide a template for investing, but not exactly a detailed road map.
Where we may have deviated a bit from Graham and Dodd is, first of all, investing in the instruments that didn’t exist when Graham and Dodd were publishing their work. Today, some of the biggest bargains are in the hairiest, strangest situations, such as financial distress and litigation, and so we drive our approach that way, into areas that Graham and Dodd probably couldn’t have imagined. The world is different now than it was in the era of Graham and Dodd. In their time, business was probably less competitive. Consultants and“experts” weren’t driving all businesses to focus on their business models and to maximize performance. The business climate is more volatile now. The chance that you buy very cheap and that it will revert to the mean, as Graham and Dodd might have expected, is probably lower today than in the past. Also, the financial books of a company may not be as reliable as they once were. Don’t trust the numbers. Always look behind them. Graham and Dodd provide a template for investing, but not exactly a detailed road map.
Seth A. Klarman is
president of The Baupost Group,LLC, Boston. Jason Zweig is a columnist for the Wall Street Journal,
New York City
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