Seth Klarman Expains When "Investing Is At Its Hardest" And Why He Is Not Joining The Momentum Trade

Tyler Durden's picture

If you thought that Baupost's Seth Klarman would be the next to join twitter (the New Normal Yahoo Finance), #timestamp his minute-holding trades, ignore the money-losing ones, trumpet his winners, always make money, scream at all those who don't agree with his "strategy", and otherwise become what is known these days as a (momentum) investor, we have some bad news: it's not happening. Here's why (from his most recent letter).

Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case. While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation, traders have confidence in Ben Bemanke because betting that his policies will drive equities higher bas been a profitable wager. Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation, though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today' s "clarity" will have dissolved, leaving only great uncertainty and probably significant losses.


Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals--recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.-- isthe riskiest environment of all.

And a word for those who believe that swing and/or momentum trading, about as effective as a coin toss in "forecasting" the future as a coin toss, is the way to go.

[O]nly a small number of investors maintain the fortitude and client confidence to pursue long-term investment success even at the price of short-term underperformance. Most investors feel the hefty weight of short-term performance expectations, forcing them to take up marginal or highly speculative investments that we shun. When markets are rising, such investments may perform well, which means that our unwavering patience and discipline sometimes impairs our results and makes us appear overly cautious. The payoff from a risk-averse, long-term orientation is--just that--long term. It is measurable only over the span of many years, over one or more market cycles.


Our willingness to invest amidst failing markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance. Buying as prices are falling can look stupid until sellers are exhausted and buyers who held back cannot effectively deploy capital except at much higher prices. Our resolve in holding cash balances--sometimes very large ones--absent compelling opportunity is another potential performance drag.


But we know that in a world in which being anti-fragile is good, what doesn't kill you can make you stronger. Short-term underperforrnance doesn't trouble us; indeed, because it is the price that must sometimes be paid for longer-term outperformance, it doesn't even enter into our list of concerns. Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient. Holding significant, low or even zero-yielding cash can seem ridiculous until you are one of the few with buying power amidst a sudden downdraft. Avoiding leverage may seem overly conservative until it becomes the only sane course. Concentrating your portfolio in the most compelling opportunities and avoiding over diversification for its own sake may sometimes lead to short-term underperformance, but eventually it pays off in outperformance.

He is, of course, right. But for now, the hedge fund of Ben Bernanke and his Federal Reserve Onshore Capital LP, who appear to have removed all the downside risk of the manipulated asset class known as stocks, are making hedge fund managers across the country seem obsolete, and scratch their heads in wonder asking: "is this even worth it?"

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Dr.Engineer's picture

Sage words of advice.  I actually needed to hear this. Not that my resolve was leaving but my inner-gambler was rising.

I keep a silver coin in my pocket to remind me daily about what is real and what is fiction held in a computer.  It helps.


orez65's picture


I've kept a silver coin in my pocket since I started buying precious metals.

Pladizow's picture

"Margin of Safety", Bitchez!!!!

Margin of safety PDF: - original copys can go for $2,000.

Pegasus Muse's picture

Good advice.  Here's some more from PCR. 


May 5, 1013

Paul Craig Roberts discusses the Government’s latest Employment (Non Farm Payroll) Report, published last Friday.  Explains the Federal Reserve’s purpose for orchestrating the big selloff in Paper Gold in the Futures Market two weeks ago and the unintended consequences of that act.  He talks about the European Union’s decision to deal with insolvent banks in Cyprus by forcing the Cypriot Government to steal Depositors’ Funds from their bank accounts.

Precious's picture

Hey Kito.  Push it down this time, you fucking tool.

As RT further reports, during the attack, one Israeli jet was reportedly shot down by Syria's Air Force, according to Hezbollah's Manar TV channel, citing security sources in Damascus."

Ted K's picture

"according to Hezbollah TV" Not a good starting point my friend. Members of Hezbollah regularly claim victory in their media/press directly after their own Mother was bombed and vaporized. You'd have better luck trusting your average FOX "news" broadcast.

Ponzi Pontiff's picture

I upped ya for the link - many thanks.

"When bond yields are low, share prices are likely to be high. Yieldseeking investors who rush into stocks when yields are low not only fail to achieve a free lunch, they also tend to buy in at or near a market top"

I wonder what will happen to liquidity - and this so called "market" - when the algos realise that the only way to win is not to play?

zjxn06's picture

Klarman is a sharp dude and a very successful value investor.  

If you need more Klarman, he wrote a book entitled "Margin of Safety". Book has long been out of print.  You can buy used copies on Amazon for as low as $1,050. No joke.  People willing to pay a lot of money to read what he writes.

Jim Grant is a good friend of Seth Klaman.  This is what Jim writes about Seth's book: "Seth is a brilliant investor who has written a brilliant investing book.  Consider it his gift to your net worth."

Seth acknowledges that Jim Grant convinced him, over the course of many conversations, that gold has utility in a world where currencies are being debased at a frenzied pace globally.  Seth has written more an more about gold in his letter in recent years. Only side references are made to gold in his book (published 1991).

Last time I looked at Seth's (Baupost Group) portfolio, he held several publicly traded gold miners.  One in Romania? looked quite interesting.

As for physical gold held for Baupost clients, can't be determined determine it since there are no filings.   

Tylers, thenk you for posting.

spine001's picture

For those who want to read it for free.

And you are welcome!

Until next time,


kito's picture

tyler, is this klarman post part of the same letter that you posted a few days ago on klarman?

MythicalFish's picture

It's actually not that hard. Buy physical gold and long-dated in-the-money (paper) puts. Reinvest dollar profits in bullion, roll protection. Sit back, have a drink, wait for shouts of "fire" in crowded theatre. I find cash a bit risky to be honest..

Gromit's picture

Don't forget that your puts will pay off in cash if they can weather the counterparty risk.

Good luck to us all.

sgorem's picture

The Infestment Market: Where you are guaranteed to make money for someone other than yourself. Buy high, Sell low. High Frequency Thievery. They don't call them BROKErs for nothing.

short screwed's picture

Bernanke's not going to reverse direction. It's going to be pedal to the metal until we blow a piston or drive off of a cliff.

andrewp111's picture

And Bernanke will be gone in 7 months. His successor will most likely be the one driving when the rod or piston blows off the machine.

short screwed's picture

Then he can come back and lecture us "a la Greenspan" about the dangers of bubbles and how monetary policy is no substitute for fiscal policy.

AGuy's picture

Japan May blow up next year from its new QE program. This might result in Negative US interest rates as it could trigger another Asian economic meltdown (aka 1998)

OtterWood on Japan:


A Japan crisis would likely triggler a major correction in US Stocks and probably all stocks globally. In a way it make sense for US centric (Proxy) nations to blowup first. In Rome it was the border providences (proxy states) that blew up first. Roman managed to carry on for sometime after it proxy states started collapsing. The same could be said of other previous empires, The Russian Soviet Empire, that lost control of its eastern European satellites, The British empire lost all of its big colonies (Canada, Austrialia, India, South Africa, etc). Japan and Western Europe are proxy states of the US empire since they mostly follow US policies.




chart_gazer's picture

central bank has never reversed. they let treasuries mature. no sense talking about reversing, they will keep QE and keep buying gov debt for a long time. they have to since there is no other buyer for the amount being issued. gov continues to run deficits---fed keeps buying the debt and the newly printed money goes to the primary dealers to prop up the stock market. you are dreamin if you think this will end anytime soon. its insane but reality

W T F II's picture

Basically, he is saying he has trouble picking MAJOR turns...!!

fonzannoon's picture

I don't think that is what he is saying....

kito's picture

fonz check out my response.....

JustObserving's picture

More than 70% of trading is HFT and 70% of volatility is generated by HFT and not news.  If you can generate volatility in the markets, you have a license to print money.  Goldman Sachs, JP Morgan and others rarely have a losing day in the markets.  What are the odds of that happening by chance?  What are the odds of a 7 or 8 standard deviation move in gold as we had the other day?  Maybe 100 billion to one by random chance.  So it is very clear that the markets are manipulated to suit the banksters.

Bring back the uptick rule which existed from 1938 to July 6, 2007 if you want fairness in the markets.  That will never happen in the corrupt, crony US markets.  

Winning is hard in a rigged casino.

resurger's picture

I really loved the post by the privateer, in one of the sections bill says that the people back then (i guess in the early 1900's) knew the Financial Markets were for the rich, and they did not bother with it because they were engaged in doing real trades buying goods etc...

Maybe they knew that the entire market was rigged to benefit the rich.


drdolittle's picture


I still have a 401 but am really thinking about cashing it in and paying my enormous tax bill. They're sure to be taken from us soon enough or expropriated or bailed in etc. I could pay off my mortgage, still have a pile of cash, my pms and money stashed for the kids college.

No good farmland close enough to buy. Live in WV.

For a dividend, assuming I've got pms for capital preservation, what could you all suggest?


Bam_Man's picture

3M (MMM). Great innovative company, conservatively run. Somewhat over-valued today, but what isn't? Their record of dividend increases paid for solely out of earnings speaks for itself.

cornflakesdisease's picture

CEF  Central Fund of Canada  50% gold and 50% silver vaulted in Canada, outside the USA.  With the PM dip, a great time to buy.

ONECK  a boring pipeline company that makes money in good or bad times moving propane, butane, and chemicals.

A 1916 D Mercury Dime PROOF.


tradewithdave's picture

Is the creature from Jekyll Island swapping out the carry trade for a bathing beauty or is Blythe Masters taking the fall for Too Big To Fail?

resurger's picture

"Cockroaches for the long run!"

Dylan Grice

joego1's picture

"On a long enough time line the survival rate for cockroaches goes to infinity"

Dealyer Turdin's picture

Katana Koan there. Aint no hero's edge at Zero Hedge unless it's trading the cliff for the ledge.

Waterfallsparkles's picture

I believe that when the Market starts to make wild swings from 150 down days to 150 up days that it is time to Sell.  I think about AAPL trading toward $700 it went parabolic to the upside.  Then just months later it was trading at $385.  It appears to me that when Traders want to Sell they push a Stock to its upper limits so they can Sell into strength.

Rory_Breaker's picture

Depends on where you are in the food chain. Squid at the top, everyone below the squid is going to get their asses kicked.

Waterfallsparkles's picture

What I find really interesting is that Bernanke said that he would "increase" or "DECREASE" purchases.  The Street only herd increase, but I think this was Bernanke's way to say he is going to start to DECREASE pruchases.  I am sure that the Reserve Board is having a really good laugh at the Market reaction to pump Stocks when the word DECREASE was introduced for the first time.

Dollar Bill Hiccup's picture

Bid me up, before you go go

This whole market is a lot of mo mo ...

Lost Wages's picture

Are we talking about that momentum trader with the shellac in his hair that frontruns the Fed in the stock market, says the rally is a sign of "growth stabilizing" and tells the Fed to get out of the goddamn way and let the strong dollar take the stock market to new heights? I'm expecting his company to go out of business by 2014, but I do like how his gold shorts put my bullion on sale.

Inthemix96's picture

Sorry for yet another thread jack folks.  For the past couple of weeks I have been posting shit that is happening this side of the pond and not staying on topic and apologise, but you lot wont believe this.

Our esteemed honourable peodophiles over here think porn should be included in sex education for our kids at main stream schools. I am fucking livid with this absolute debouchery these fucking insane criminal bastards are getting away with.  This is being pushed by all three major parties over here as 'Good For The Children'.

Not only do these fucking pyscopathic idiots want sex education compulsory for kids aged 5 up, but now they want kids looking at porn in school hours.  I am at a loss why we allow and put up with this out right criminality in our societies, when will we fucking do something about it?

I am hanging my head in shame here at my fellow countrymen, and whatever happens here, you lot get in short order.  These fucking beasts should be locked up and kept away from the legislature, never mind anywhere near kids.

This world is trully fucked up, and none of us done fuck all to stop it.

ISEEIT's picture

Relax bro.....No intro to keynesian 'thinking' would be complete without some kiddie porn.

It's just an economics class.

Now STFU and get back to the TV!

asteroids's picture

Be thankful it's not Keynesian (ie gay) porn.

nmewn's picture

Thanks for the info.

This why the government indoctrination camps should be under local control.

resurger's picture

In which country? The Not Great Britain

short screwed's picture

Are British tax payers paying for convicted murderers sex change operations like here in Massachusetts? I just want to know what to expect from our state politicians.

Inthemix96's picture

Not sure short,

But nothing, and I mean nothing would be off the cards for these maniacs.

Fucking class A mental over here now.

gwar5's picture

Homeschooling is a great option. The average score for 2 million of them here in the US is the 87th percentile, across all subjects. This is higher than any public or elite private education system in the world, by far. And just two 2 years out of public schooling and into homeschooling catches a kid back up and avoids the pedophiles. 


Happy Anecdote

One homeschooling family in Alabama has ten children. So far, the six oldest have already gotten into college by the age of 12.  All the others are well on their way to doing the same thing. They expect it of themselves. They are not prodigies and neither are their parents. They are smart enough, but it is their homeschooling that has maximized and accelerated their learning. The 17 year-old is writing a book how to do it.


Timmay's picture

How ironic, show them how to reproduce and then abort the children. Wonder who is really funding this "effort"?