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Why Did Seth Klarman's Hedge Fund Cut Its British Petroleum Position in Half?

Every quarter, large money-managers have to disclose what they've bought and sold via 13F filings. While Fools don't always (or even usually) follow what the big money does, we can often glean an idea or two by tracing their footsteps.

Seth Klarman's Baupost Group has been one of the most successful hedge funds since its founding in 1982, reportedly averaging mid to high teens in annual returns during a period when the market has averaged closer to half that. Klarman has managed these consistently excellent returns by focusing more on preservation of capital and eschewing risk. Let's take a look at Baupost Group's activity with energy giant British Petroleum  (NYSE: BP  ) -- the fund sold 44% of its holding sometime in the first quarter. 

Buying low and selling high
As I wrote in February, Baupost has a history of buying and selling large parts of its stake in British Petroleum on an almost quarterly basis during the past couple of years. The evidence makes it look like -- on a net basis -- Klarman has been really good at selling high and buying back low. Here's a table showing the quarters in which Baupost was a net buyer or seller, along with the price of British Petroleum shares during the period (green arrows represent quarters when Baupost was a net buyer, and the red arrows represent quarters when it was a net seller):

BP data by YCharts.

And here's where the stock ended up in the most recent quarter reflected in the 13F:

BP data by YCharts

Again, it looks like Klarman bought and sold at the right time. I think it's worth reiterating what I wrote last quarter: Just because the fund was a net buyer or seller during a quarter doesn't mean Baupost only bought or only sold in any given quarter. On the contrary, I can almost guarantee that Baupost did some of both every quarter. 

Big fat caveat 
The thing is, knowing that Baupost has taken advantage of British Petroleum's price movement is not the same as being able to replicate that success. The data in the 13F is tantalizing, but it's not really that valuable for these reasons, among others:

  • There's no transactional data. When exactly did Baupost buy or sell?
  • We don't knowwhyBaupost bought or sold. What metrics are they using to trigger transactions?
  • Most importantly, the scant information you get is as much as three-and-a-half months old. Using it to time the market is pointless.

It's better to focus on the fundamentals 
There's a lot of evidence showing that market timing is one of the most destructive actions that investors take. Klarman has an incredible track record, and investors can learn from his actions, but the lesson to learn isn't about market timing; it's about risk management. 

The BP that was involved in the Gulf oil disaster was focused more on growth than anything, and that lack of discipline resulted -- at least in part -- in one of the worst oil spills in North American history, causing billions in losses and damage, serious harm to BP shareholders, and the loss of human life. Today's British Petroleum is a smaller, more focused company that puts safety first and has become incredibly disciplined in how it invests its capital under CEO Bob Dudley. 

Net income fell in the most recent quarter but was within analyst estimates, and British Petroleum continues to pay a strong dividend -- it yields 4.6% at recent share prices. Additionally, the company has bought back some $7.5 billion in shares since 2013 and intends to buy back at least $500 million more. 

Final thoughts: You're not Seth Klarman 
And neither am I. The point? Don't get too caught up in trying to play a game that most investors are terrible at: timing the market. The better path to long-term wealth is long-term ownership of great companies. Does that mean British Petroleum is a great company? It definitely has some traits of one, like solid financials, tenured and skilled leaders who are focused on disciplined capital allocation, and access to a product that will only see more demand in coming decades. 

Does it fit your portfolio? That's your call.

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Jason Hall

Born and raised in the Deep South of Georgia, Jason now calls Southern California home. A Fool since 2006, he began contributing to in 2012. Trying to invest better? Like learning about companies with great (or really bad) stories? Jason can usually be found there, cutting through the noise and trying to get to the heart of the story.

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