Seth Klarman’s shareholder letter
Seth Klarman is a value-oriented hedge fund manager who has remained in business for over thirty years and currently had $27 billion under management at the end of 2013. I don’t know Mr. Klarman, nor am I familiar with his track record. Nevertheless, it seems to me that thirty+ years of staying alive in a brutally competitive business and $27 billion under management earn you at least a hearing.
Mr. Klarman has made the news recently, as a result of his yearend 2013 letter to investors (I’ve only seen excerpts from the financial press and on other blogs). In it he cites a long list of warning signals for stock and bond markets. They include:
–least year’s 30%+ gain in the S&P without a commensurate increase in earnings
–a near-tripling in stock prices from the market low in 2009
–record amounts of margin debt, high IPO activity
–nosebleed valuations for stocks like AMZN, NFLX, TSLA, TWTR…
–all sorts of speculative activity in the bond market, particularly in lower quality securities like junk bonds.
All these worrisome developments are the unfortunate consequences of a “Truman Show” environment orchestrated by the Fed in the aftermath of the financial collapse in 2008.
Mr. Klarman underlines his concern about the current state of Wall Street by informing clients that he will be returning (this has apparently already happened) a total of $4 billion of their money to them–forgoing a large chunk of annual management fees. If press reports are correct, Klarman has been running with 50% of his assets in cash and feels he can find nothing at today’s prices to buy. (In addition, if he is charging a management fee of 2% of assets (+ some percentage of profits), the big cash holding is clipping 1% yearly off his net return.)
a little arithmetic
As of December 31st, Mr. Klarman’s hedge fund held 4.9% of the outstanding shares of Micron Technology (MU). That’s after selling 20% of his holding during the December quarter. MU made up 32% of his publicly traded equity exposure at yearend …meaning his entire equity holding was about $3.8 billion on January 1st. This implies his non-equity exposure must have been just under $10 billion. So the stock market is the least of his professional worries. The bond market is his biggest potential risk.
his big concern
It’s the same as everyone else’s–can the Fed withdraw the excessive monetary stimulus that he believes to be (me, too) the root cause of the high degree of speculative activity without causing a great deal of direct damage to global fixed income markets and a lot of further collateral damage to stocks?
It’s not surprising that a traditional value investor would be having difficulty finding stocks to buy in today’s market. After all, stocks in general have almost tripled from the lows, with left-for-dead deep value names having done far better. MU, for example, is up by 10x from its late-2008 low.
In addition, in every market cycle, value works best in the early years. Than growth takes over. On top of that, I think that in the post-Internet world traditional value investing will work progressively less well as time goes on.
It’s not what Mr. Klarman is saying. It’s that I’m not ignoring it in the way I would have a year ago.