From an interview from 2009 Ivey Investing Class with Seth Klarman
Baupost 3 main principles
- Principle 1: Focus on Risk before Return
To focus on multiple scenarios, what can go wrong, how much can I loose
Risk is not Beta (as taught in academics), it makes no sense. Volatility is not risk, volatility creates opportunities.
Risk is the probability of losing and how much you can loose
Wallstreet wites more bullish than bearish, but when they do think about other scenarios, they to oversimplify, i.e. single point estimate instead of a range of possible outcomes
- Principle 2: Focus on absolute returns, not relative
The world is oriented to relative performance, giant weakness that all the big mutual funds are focus on competing against each other, e.g. relative number focus -> market is up 20%, "our" fund is up 21%. If you perform well or if you avoid the bottom quartile of all performers or if you are in the top half, you almost never get fired and your firm is successful and profitable!
Wealthy individuals or established institutions, due to their risk aversion are interested in absolute returns (not losing people money), and if you are focused in relative returns, you are happy with losses as long as you are not losing more than everyone else!
The relative approach gets people into closing into the index, you don't want to be far away from the index or look very different from the index, because if you underperform, by taking a chance of being different, you can lose a lot of your assets under your management.
These managers track the index and want to be very close to the index, so you will not severe underperform, but not outperform either
The goal is not to lose less, it is to make money
- Principle 3: Be Bottom-up, not Top-down
Most of the investment world has a top-down orientation, they think about how the economy will do or how foreign currencies will do. You want to have that in mind, ut you analyze investments bottom-up all the time
Top-down investors like Soros, have a view, e.g. that the pound is overvalued or that FED will cut rates, which in turn drives their decision making and lead them to specific areas of investing and specific companies within those areas and they try to take advantage of those themes.
Seth and Baupost's view is that it is incredibly difficult to do and he doesnät know anybody with a really good long term demonstrated record of success with macro forecasting and beyond that. You not only need to be good at macro forecasting, but you also have to translate it correctly in the industries and companies and you need to be early, so the prices have not moved yet before you invest
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