The Genius Investor No One Is Following

Monday was the deadline for investment managers to publicly disclose their end-of-second-quarter holdings. Financial reporters typically report on the changes in the portfolios of a small group of well-known investors, completely overlooking one of the greatest investors of the last 30 years because of his low public profile (he is followed by a small number of bloggers).

19% annualized over 27 years!
Seth Klarman founded the Baupost Group in 1982. In his oldest fund, Klarman compounded money at an annualized average rate of 19% over the 27-year period through 2009 (the most recent reliable number I could find). That's an extraordinary record, and Klarman achieved it with no leverage and while frequently maintaining substantial cash positions.

Finding value in 2 large-cap names
So what did Klarman do in the second quarter? Baupost's most significant action was establishing sizeable positions in two well-known names: Microsoft (Nasdaq: MSFT  ) and BP (NYSE: BP  ) . At the end of the second quarter, the combined positions were worth almost $600 million, or roughly a quarter of the aggregate value of reported holdings. Note that BP never got as cheap during the second quarter as yesterday's closing price; for Microsoft, the maximum discount to yesterday's closing price didn't even reach 7%. Both investments dovetail with the theme of high-quality large-cap stocks, which appears to finally be gaining some purchase in the market.

  • Add Microsoft to My Watchlist.
  • Add BP to My Watchlist.

He's pretty good on the macro picture, too
As a bottom-up fundamental investor, Klarman focuses on individual stocks. Nevertheless, the credit crisis and its aftermath have forced value investors to pay more attention to macroeconomic factors. On that front, Klarman is proving a quick study. During an interview in May 2010 (PDF link), he warned:

...we can be lulled into thinking all is well, that the United States will always be rated triple-A. Treasury Secretary Timothy Geithner speaks as if—at least in his public statements—he has been lulled into thinking that the United States will always be triple-A. That kind of thinking guarantees that someday the United States will no longer be triple-A.

Looking for more high-quality names? The Fool has identified 13 High-Yielding Stocks to Buy Today.

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (16)

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  • Report this Comment On August 17, 2011, at 3:57 PM, djemonk wrote:

    I follow Seth Klarman. The dude is just super-sharp and a lot of fun to listen to/read. One of the finance girls at my last job gave me a printout of "Margin of Safety" for my birthday, and it was one of the best birthday presents ever.

  • Report this Comment On August 17, 2011, at 5:11 PM, Quaker08 wrote:

    I too follow Seth Klarman. It might be important to note that he maintains a sizable cash position and has less than 20% of his portfolio in equities. Many of his most profitable investments have been in distressed debt and mispriced spinoff situtions. For instance, he has recently added to his position in PDLI, a pharma royalty spinoff.

  • Report this Comment On August 17, 2011, at 5:22 PM, mikecart1 wrote:

    Did Seth achieve these returns early on in the 80's and what you listed is an average that includes the disastrous last 4-5 years or did he consistently do this? I want Motley Fool to show me the man who isn't Buffet who can make 15-20% every year any year during any time with a history of doing so. That man is who I consider the world's best investor. Buffet, Seth, and whoever they don't impress me much. I have a feeling Seth made bank of Microsoft and the last 10 years hasn't really done nothing much more than break even.

    HoLLA!

  • Report this Comment On August 17, 2011, at 5:43 PM, xetn wrote:

    It would certainly be interesting to see the annual gains (losses) for the years 2007-2010.

  • Report this Comment On August 17, 2011, at 6:58 PM, ShrikeTheFoolish wrote:

    Mikecart1,

    I'm not being critical of your statements as I tend to agree with most of what you've said. However, please don't let yourself fall into that special group of people that think Buffett is only so-so. The man started with $100 to his name and then managed to create billions of dollars in shareholder value throughout his life. Nobody needs to agree with Buffett's recent politics, but you can't discount the fact that he is a top-notch builder of wealth.

  • Report this Comment On August 17, 2011, at 6:58 PM, crca99 wrote:

    What does it mean, "the maximum discount to yesterday's closing price didn't even reach 7%," because I've stared at that and can't tell if it's good or bad or what it is. Tell us in future article plz.

  • Report this Comment On August 18, 2011, at 1:14 AM, Gondite wrote:

    I think its a good idea to give Fools Like Us (FLUs) attractive investing celebrities to model, but Baupost is offered the most esoteric and complex investing opportunities currently being peddled. Opportunities FLUs don't get. But the advice Klarman gives on fundamental research (read the footnotes) and most uniquely, portfolio construction - always trying to find cheap insurance unique to certain exposure, disciplined position size within and across securities and assets, and just a general scientific skepticism and appreciation for the limits of what an investor can know. Those are lessons he happily passes on to anyone willing to listen.

  • Report this Comment On August 18, 2011, at 10:39 AM, Langtima wrote:

    thanks for the link to the interview. I'm looking forward to reading it.

  • Report this Comment On August 18, 2011, at 11:43 AM, TMFAleph1 wrote:

    @crca99:

    It means that the lowest price achieved during the second quarter represented less than a 7% discount to the current price.

    Alex Dumortier

  • Report this Comment On August 18, 2011, at 1:44 PM, Nahzuul wrote:

    Mikecart1,

    The nature of markets is such that no one is going to make 15-20 percent every year, year in and year out, all of their lives.

    And yeah, I can say that "Abraham Lincoln doesn't impress me, a real leader would have won the civil war faster or with fewer casualties, but that wouldn't change his place in history, would it? More likely I would just be displaying my own lack of knowledge.

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