Getting 20% annual returns for the last 40 years

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Today, we are talking about the investment legend Seth Klarman, the author of the iconic book “Margin of Safety.”

Sit back, grab your cup of coffee, and enjoy this one.

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Seth Klarman’s Investment Principles

Seth Klarman is the founder of Baupost Group and author of one of the most iconic investment books - “Margin of Safety.”

He launched Baupost Group as a private investment partnership back in 1982 and has used an approach similar to Warren Buffett.

His returns are astounding - 20% per year since 1983.

While most investment firms are betting big in bull markets, Baupost has remained conservative, keeping significant cash reserves and diversifying its assets.

Here are the three investment principles Seth Klarman lives by:

1. Focus on Value Investing

Like Warren Buffett, Klarman is also a proponent of value investing.

With Baupost, he focused on buying assets for less than their value.

He applied this philosophy back in the early 2000s.

At the time, the newsprint industry was suffering while digital media was rising, which created less demand for newsprint paper.

But instead of doing what the herd was doing - focusing on digital media, Klarman discovered a new opportunity - buying debt instruments of newsprint companies.

They were trading down because the newsprint companies had a higher likelihood of defaulting on their debt, so Klarman bought them for cheap.

2. Risk Aversion

People think of investors as these crazy risk-takers, but this view couldn’t be further from the truth.

Seth Klarman is the exact opposite.

His main goal isn’t to maximize his returns.

His goal is to avoid heavy losses in the market.

Back in the late 90s, during the peak of the dot-com bubble, Seth Klarman didn’t invest in any tech stocks.

At the time, this was seen as foolish because all the tech stocks were going up.

But soon, the bubble burst, and Seth Klarman has been proven right.

He also doesn’t use any leverage because it increases his risk profile.

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Now back to the lessons!

3. Diversification

Diversification is a key part of Seth Klarman’s strategy.

His company, Baupost Group, keeps significant cash holdings, so when an opportunity presents itself, they can act on it.

This is especially true for recessions and depressions where prices of a lot of assets fall.

This approach allows Baupost to invest in different assets beyond stocks.

They also invest in real estate and company debt.

If you want to become a better investor, Seth Klarman is one person worth studying.

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