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Seth Klarman Sees Another Lost Decade For Stocks, "Artificial" Market Reminds Him Of A "Hostess Twinkie"

Tyler Durden's picture




 

Seth Klarman was speaking at the CFA Institute earlier, and in typical fashion cut to the chase: in summarizing the current market, the Baupost founder said he "sees few bargains in the current environment and
predicted on Tuesday that the stock market could suffer another
lost decade without any gains
." And the punchline: his description of market conditions which he compared to "a Hostess Twinkie snack cake because everything is being manipulated by the government and appears artificial."
Such facility with words, there is a reason the man runs a $22 billion fund and his book "Margin of Safety" has been out of print for years, and sells for a $1000 on ebay.

Some more of Klarman's relevant perspectives from Reuters, where we learn that he is neck deep in Constant Maturity Swaps:

"Given the recent run-up, I'd be worried that we'll have another 10 years of zero returns," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston.

"I'm more worried about the world broadly than I've ever been in my whole career," Klarman said.

Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.

The puts, which Klarman said he viewed as "cheap insurance," will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.

Typically, Baupost focuses on out-of-favor stocks and bonds. Klarman cleaned up in 2007 and 2008 buying distressed debt and mortgage securities that later recovered.

One area Klarman said he is currently scouring for potential investments is private commercial real estate below the top quality. Publicly traded real estate investment trusts, however, have "rallied enormously" and are "quite unattractive," he said.

And speaking of Baupost's $22 billion, Klarman said he may return cash to investors, as the fund is now 30% in cash and there are few immediately investable opportunities.

"We are thinking about actually returning it if it got higher," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston on Tuesday. "We are trying to walk a tightrope."

"I've always thought that size was a negative," he said, adding that bigger size often means investors become less nimble.

before the financial crisis hit markets, the firm opened up to new investors for the first time in years, Klarman said, deciding that more capital might be helpful to pursue certain investment opportunities. "We went to our wait list for the first time" in years, he recalled.

In hindsight, the move proved especially smart, as it would have been extremely difficult to raise new money at the height of the financial crisis, he added.

"We'd rather underperform a huge bull market than get clobbered in a bear market," he said.

For those who wish to read Klarman's massively popular and out of print Margin of Safety, they can find a pdf version here.

 

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Tue, 05/18/2010 - 18:56 | 359302 Hephasteus
Hephasteus's picture

Market casts. Investment of nothingness and stupidity.

Return on investment fizzles.

It's not every effective.

Tue, 05/18/2010 - 18:57 | 359303 Citizen of an I...
Citizen of an IKEA World's picture

Zombieland cometh nigh.

Tue, 05/18/2010 - 18:59 | 359313 RobotTrader
RobotTrader's picture

Bonds have vastly outperformed stocks in the last 10 years.

No matter how much we print, foreigners clamor for even more.

ANYTHING but foreign stocks, currencies, and commodities.

The 26-year old bull market remains in full force:

 

Tue, 05/18/2010 - 19:01 | 359316 Kat
Kat's picture

predicted on Tuesday that the stock market could suffer another lost decade without any gains."

 

Obviously talking about real dollars, then.  Because it'll take a wheelbarrow to cart enough money to the supermarket to buy a radish.

Tue, 05/18/2010 - 19:01 | 359321 John McCloy
John McCloy's picture

   You are kidding his book sells for 1,000 on Ebay. I find that remarkable and serves a reminder of prescience to both scarcity and the value of solid ideas. Thanks for that and I will give it a reading this week. 

On a side note Tyler I know you are chock full of server power as evidenced by your multiple crashes today as the market fell and the red pillers converged on Zerohedge but could you perhaps make an addition to ZeroHedge which allows the community to blog their own essays? I have used your site for cited works and references with my fellow economics & finance students in order to present them with a transparent interpretation of financial and political events and would love the ability to upload essays along with reading other commenter's essay in anticipation of seeing a new generation of financial realists.

Tue, 05/18/2010 - 19:14 | 359346 Tyler Durden
Tyler Durden's picture

we will consider it. in the meantime there is are forums for such purposes. we can add an essay section to it if there is enough interest.

Tue, 05/18/2010 - 19:17 | 359348 WaterWings
WaterWings's picture

Here's some notes on it prepared by a CPA:

http://www.rbcpa.com/Notes%20To%20Margin%20of%20Safety.pdf

Tue, 05/18/2010 - 19:08 | 359335 crzyhun
crzyhun's picture

Tyler

thanks for the book!! Not summer reading but burned into a cd it goes down well.

Also, reading this post and the former is bracing. Good luck all.

PS Anyone who has the patience should seek out the Zurich Axioms. Perfect for start outs.

Tue, 05/18/2010 - 19:16 | 359347 cougar_w
cougar_w's picture

"Twinkie market"

That's one that will survive the ages. Long after nobody can recall what a Twinkie was, they'll be talking about not going back to that useless Twinkie market that blew itself to ratshit.

Hostess Cakes can bite my hairy wanger, the skanky ho.

Tue, 05/18/2010 - 19:45 | 359396 chet
chet's picture

"That's one that will survive the ages."

Like a Twinkie.

Tue, 05/18/2010 - 19:46 | 359399 akak
akak's picture

Cougar, don't forget about "The bankers going Mongol on our asses".

I liked that one!

Tue, 05/18/2010 - 19:22 | 359356 AR15AU
AR15AU's picture

Well, let's say this Twinkie represents the normal amount of manipulation in the New York Stock Exchange. Based on this morning's sample, it would be a Twinkie... thirty-five feet long, weighing approximately six hundred pounds. 

Tue, 05/18/2010 - 19:41 | 359390 Citizen of an I...
Citizen of an IKEA World's picture

That's a big Twinkie.

Tue, 05/18/2010 - 20:17 | 359459 Stink_Pickle
Stink_Pickle's picture

Damn right, Winston.

Tue, 05/18/2010 - 20:17 | 359460 Turd Ferguson
Turd Ferguson's picture

I'm stunned that I'm the first to post this link...

http://www.youtube.com/watch?v=V13CZnUCOaQ

Tue, 05/18/2010 - 19:22 | 359358 Keith Piccirillo
Keith Piccirillo's picture

This is a very bad omen.

Tue, 05/18/2010 - 19:46 | 359398 anynonmous
anynonmous's picture

his 13f shows 1.7b in equities

http://www.secinfo.com/d12Pk6.rkHx.htm

Tue, 05/18/2010 - 19:51 | 359405 Gimp
Gimp's picture

The government is holding the pastry bag squeezing more sugar cream into the twinkie. Now that is the true state of the market today. Stand clear when it blows.

Tue, 05/18/2010 - 20:12 | 359420 anynonmous
anynonmous's picture

more Seth stuff

http://www.valuestockplus.net/seth-klarman

http://www.pdfgeni.com/book/margin-of-safety-seth-klarman-pdf.html

 

and this appears to be a very clean copy of the book at this link (PDF) it has less pages but all of the content seems identical i.e. somone appears to have OCR scanned or re typed the book.

http://www.filedump.net/dumped/mos1236882308.pdf

Tue, 05/18/2010 - 20:01 | 359428 Flounder
Flounder's picture

Vielen Dank für das Buch!

Tue, 05/18/2010 - 20:06 | 359435 whiteshadow
whiteshadow's picture

FOR MR. TYLER,

I find myself reading more of ZH even though I have my finals. no worries,,, having to recite what was taught is pretty easy,...but this summer i have 3 months of summer vacation so I was thinking may b i can join your team and learn as an intern...m very much interested in finance (but an accounting major) haha.

I see so many well written thoughts here so m assuming many readers here are in one way or another related to finance field...so yea if anyone has room for someone to become an intern as an anlyst or anything as long as we have mutual benefit, pls let me know,,,,

 

about the book..is it really $1000,,,how can students afford it,,,if the book really educates ppl..shouldn't it b printed more and at affordable level so that everyone can learn and become aware of what ever the author has to say...m sure the author can let go of few changes that comes from the book since he is already managing billions of $$...

 

thanks,,,

Tue, 05/18/2010 - 20:14 | 359451 silvertrain
silvertrain's picture

 Yeah, 1k is on up there..Although I havent read it, I did recently read another that was also very pricey. "Jesse James was one of his names"  I borrowed it from a friend but he said that he had paid upwards of $300 for that..Whoa!!

Tue, 05/18/2010 - 20:17 | 359445 Caviar Emptor
Caviar Emptor's picture

Today's developments should send a shudder of fear through every serious investor. The stakes just went up big time. And TPTB are gambling with the rent. 

Let's start with the Euro swan dive. The context is super important for gleaning an understanding. This is not the result of "market forces". Global central banks have been on this one for weeks, have met, discussed, schemed and put into action their plan. Therefore I believe the Euro is undergoing planned, strategic devaluation as a form of soft default. 

The trouble with this plan is no formal international accord has been devised that could defuse international tensions and assure smooth progress and execution, unlike the Plaza and Louvre accords. There's an ad hoc steering committee now in control of global currency and credit. 

And if that were not scary enough add today's command/control actions in Germany's markets (imagine the level of outrage if it had been French markets). It isn't hard to perceive a dangerous tilt toward autocracy spreading out from the heart of the European debt crisis, endorsed whole heartedly by our own Central Planning Committee errr Banking Comittee ie the Fed and elite bankers. 

So once again a situation has been created by TPTB which is a setup for the unexpected, the Black Swan. First because there is a decidedly secretive, autocratic political directive that is escalating. Germany's action is a rebuke to Wall Street and a step away from free market capitalism. China's markets crashed earlier this week in part because Euro devaluation. Rather than soothing, markets have turned nervous. The next steps in escalation would involve nationalizing banks and mission critical industries and corporations at the expense of shareholders. Given the zeal to control the markets, it is not an unreasonable fear.

 

Tue, 05/18/2010 - 20:23 | 359472 Landrew
Landrew's picture

Correction, margin of saftey 799.99 on E-bay. Used paperback, this I have to read!

Tue, 05/18/2010 - 20:48 | 359508 Sniper
Sniper's picture

I bet that is just GS pennying the offer at 800

Tue, 05/18/2010 - 20:48 | 359509 glenlloyd
glenlloyd's picture

ah the hostess twinkie, nothing real in the whole thing. uneaten twinkies will last forever, don't really know why they bother with a freshness date on those.

Tue, 05/18/2010 - 21:14 | 359564 buzzsaw99
buzzsaw99's picture

Market Reminds Him Of A "Hostess Twinkie"

 

Because it has a shelf life measured in eons?

Tue, 05/18/2010 - 22:27 | 359741 Instant Karma
Instant Karma's picture

Twinkie? Maybe a couple of Red Bulls.

Tue, 05/18/2010 - 23:22 | 359789 chindit13
chindit13's picture

This is a little known fact, but the main course at the Last Supper was, in fact, Twinkies, and JC had considered using them instead of bread for his little Body of Christ monologue, matching it with a Coke Classic. Apparently he felt the sugar would make it easier to attract converts. Even considered taking "gluttony" out of the Seven Deadly's just to accomodate the faithful.

In any event, in the bowels of the Vatican they still have the original Twinkie, and it is as fresh as the day it was made. During Vatican II, the cardinals actually tabled the idea of making twinkies the 8th Sacrament.

And go take a look at Da Vinci's painting. You can see right near Peter's hand the morsel in question. Hostess even paid Da Vinci a product placement fee.  Spielberg and Ron Howard are considering doing an amalgam film where Harrison Ford teams up with Tom Hanks to secure The Holy Twinkie, freeing it from the grip of those dastardly Opus Dei types.

Just thought you'd like to know.

Tue, 05/18/2010 - 23:48 | 359949 BlackBeard
BlackBeard's picture

sweet.  I had a Word version of Klarman's book, but the formatting was all fucked up.  This PDF just made my day.

Wed, 05/19/2010 - 02:48 | 360135 godfader
godfader's picture

What were Baupost's returns for 2008 and 2009? Any idea?

Sun, 05/23/2010 - 02:57 | 368349 drwells
drwells's picture

A buddy of mine worked at the factory where they made Twinkies. There were huge vats of that gunk that goes in the middle. There was so much that spores (or whatever) of it hung in the air, were sucked out by the fans and blown onto the roof. His job was to go up there and shovel that crap up.

While he was up there, he developed a theory. His theory is that maggots don't actually bother to turn into flies unless they're not able to get more food right where they are. If they have unlimited food without having to move, they just get bigger. And bigger...

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