感谢www.distressed-debt-investing.com，
很多都选自塞思·卡拉曼撰写的基金报告中，有些语录，精彩绝伦
Wisdom from Seth Klarman - Part 1

Seth Klarman and Baupost are in the news lately regarding the CIT Group Inc (CIT) bailout. While I do not want to delve into specifics, I will say that, outside the chance of fraudulent transfer / conveyance / some other quirky bankruptcy ruling dealing with the rescue financing, I would buy the new L+1000 loan (3% floor) all day long...especially if I was getting a 5 point advance fee. Currently in the grey market (when-issued) it is trading at 104-105 without the fee.

As we have not discussed Klarman or Baupost in the past few months, I thought I would take a few moments to pull out some of the more educational quotes from his fund letters through 2004-2007 (note: I do not have the fund letter from 2008...just the portions that were posted in a recent issue of Value Investor Insight).

Before I start pulling out some of my more favorite Seth Klarman quotes, I want to point our reader to a post by Sivaram Velauthapillai, at his contrarian investment blog, where he discusses Seth Klarman's performance in relation to Warren Buffett (WEB). Now admittedly, Sivaram admits he does not know much about Seth Klarman, and really was pulling information from a document I alerted readers to a while back: old Seth Klarman Fund Letters. A few comments have already corrected him, but just to reiterate: As of the end of 2007, Klarman was CRUSHING the S&P since the inception of the fund. The lowest return of the three classes of his funds, from inception, was 5903.7% cumulative return (10434.2% for the largest inception return). And no I did not place the decimal in the wrong point. The S&P in the same period return came in at 1828.4%. So despite lagging the S&P in the go/go years of the 90s, he maintained his capital base when the market gave a lot back in 2000-2002 and the rest is history. In 2008, press reports stated that Klarman was down low double digits. I can neither confirm nor deny this. Nonetheless, the S&P was down ~38.5% ... further extending Baupost's lead.

In response to the blog post specificially: I understand the point about Klarman under-performing the S&P in the go-go years. I get it. But, the problem in looking at any one's record at any one point in time is that the past is the past. If you had looked at John Paulson's merger arbitrage flagship fund in the beginning of 2007 you may say to yourself: "Well, this fund...you know, it has been just doing OK" ... and then he goes out and throws a +50% net to investors year in 2007 versus a nearly flat market. On the flip side you could look to any number of funds that were putting up annualized returns in the high 20s to low 30s up to 2008 and were down 50-60% last year bringing their cumulative returns to mere marginal levels.

Extending this to fundamental analysis, take a guess who's returns these are:

1991: 14.9%
1992: 28.1%
1993: 27.7%
1994: 22.3%
1995: 11.3%
1996: 21.2%
1997: 22.1%
1998: 19.2%
1999: 16.1%
2000: 15.9%
2001: 11.7%
2002: 15.7%
2003: 17.7%
2004: 17.0%
2005: 15.2%
2006: 18.3%
2007: 1.8%

They are the reported return on equity of Bear Stearn （贝尔斯登）(as reported from Bloomberg)...right up until the very end. As Seth Klarman writes in his 2004 letter, "While others attempt to win every lap around the track, it is crucial to remember that to succeed at investing, you have to be around at the finish."

Now onto some more Seth Klarman wisdom. I am going to a few quotes from each letter (2004-2007) that I find particularly insightful regarding the investment and portfolio management process.

From the Baupost 2004 letter:

"By holding expensive securities with low prospective returns, people choose to risk actual loss. We prefer the risk of lost opportunity to that of lost capital, and agree wholeheartedly with the sentiment espoused by respected value investor Jean-Marie Eveillard, when he said, "I would rather lose half our shareholders...than lose half our shareholder's money..."持有昂贵的低潜在回报的股票，人们选择了甘冒损失的风险。我们宁愿失去机会，也不愿意损失资本，我们非常同意深受尊敬的价值投资者Jean-Marie Eveillard的观点：我宁愿失去我们一半的客户，也不愿失去我们客户一半的钱。

That is just a spectacular quote (both Klarman's and Eveillard's). It's also why, as my readers are more than aware, I prefer current paying, senior-secured bank debt. Risk of permanent capital is low, I am getting paid to wait, there is a definite catalyst in emergence, and I have some control over the process. More quotes from the 2004 letter:

"We continue to adhere to a common-sense view of risk - how much we can lose and the probability of losing it. While this perspective may seem over simplisticor even hopelessly outdated, we believe it provides a vital clarity about the true risks in investing."

Another great quote from Seth Klarman. Risk is not beta or standard deviation...it is how much you can lose on an investment and what the chance is that "loss" scenario is going to play out.

And finally, from the 2004 letter (I am going to jump around on this one for full effect):

"Markets are inefficient because of human nature - innate, deep-rooted, permanent. People don't consciously choose to invest with emotion - they simply can't help it. 因为人的天生的、根深蒂固的、永恒的本性，所以市场是非有效的。人们不是有意识地情绪化投资，是因为人们无法控制自己。

"So if the entire country became securities analysts, memorized Benjamin Graham's Intelligent Investor and regularly attended Warren Buffett's shareholder meetings, most people would, nevertheless, find themselves irresistibly drawn to hot initial public offerings, momentum strategies and investment fads...People would, in short, still be attracted to short-term, get rich quick schemes.(在投资智慧中曾选译）

"In short, we believe market efficiency is a fine academic theory that is unlikely ever to bear meaningful resemblance to the real world of investing."

Wisdom from Seth Klarman - Part 2

Last week, we posted some quotes and commentary on the Baupost 2004 Letter to Investors penned by Seth Klarman. We continue our wisdom / quotes from the Baupost 2005 letter.

First of all, they posted a return of 11.22% for the year, with 3.32% of the gain coming from "non-performing debt."不良债券 Further this position represented ~15% of the NAV at year end. When the odds are in your favor, you bet big. Most people in the distressed debt can guess what this position is...My personal guess is Enron. There was a video floating around on the interweb, where Seth Klarman gave a speech to Columbia business school students, where he mentions Enron. From Gurufocus (via Alex Bossert's Value Investing Blog):

"Baupost invested in Enron’s senior debt 优先债and he said that would be an example of his favorite type of investment. The situation had a lot of complexity, hard to analyze, a lot of litigation, uncertainty and no one wanted to be associated with anything Enron creating a huge mispricing. Baupost bought the debt for 10-15 cents on the dollar. It comes down to assessing assets minus liabilities. After a few years most of Enron’s assets were cash $16-18 billion but the liabilities were extremely complicated, with over 1,000 subsidiaries. Baupost had one analyst focus solely on Enron for over 4 years and try to figure out its liabilities and how much they would get back on the bonds. Baupost believed that the people liquidating Enron were low balling what they would get back on the bonds. The people liquidating Enron were very pessimistic and they originally estimated that the bonds would get back 17 cents on the dollar at the same time the debt traded for 14-15 cents, Baupost estimated that the debt would recover 30-40 cents and as of now they believe it will be more then 50 cents."

My old fund had a large position in Enron, in which I was the analyst, and the time frame pretty much matches with the movements of the bonds. We owned the Class 4's with S (if you do not know what that means, don't worry about it). I do not know the exact vehicle Baupost would of invested, but it looked like they made a nice chunk of change (as many distressed funds did).

Back to the Baupost letter now.

"For most investments, much can go wrong, including numerous factors beyond an investor's control: the economy, the markets, interest rates, the dollar, war, politics, tax rates, new technology, labor problems, competition, litigation, natural disasters, fraud, dilution, accounting gimmicks, and corporate mismanagement. 在大多数投资中，很多都发生问题，下面的很多因素都不是投资者能控制的：经济、市场、利率、美元、战争、政治、税率、新技术、工会问题、竞争、诉讼、自然灾害、欺诈、稀释、会计暗算、公司管理不当。Some but not all of these risks can be hedged, often only imprecisely and always at some cost. Other factors are under an investor's control, but are not always controlled: discipline; consistency; remaining within your circle of competence; matched duration of client capital with underlying investments; prudent diversification; reacting rationally to news or market developments; and of course, not overpaying"其它一些因素是投资者可以控制的，但却经常不被控制，如，纪律、一致性、待在能力圈、谨慎多样化、根据客户资金的使用期来匹配投资、对新闻和市场，当然，还要买得不要太高。

One of the characteristics that has impressed from reading Klarman is how consistent he seems. He does not seem to waver from his strategy. I know he has used options and very tight CDS (specifically sovereigns) to hedge his portfolio. Those factors where he commented that are under our control...well we should spend 90% of our time thinking about them and not worrying if the market will finish higher a month from now. For our next quote, Klarman discusses Baupost's investment returns:

"Is or past success the result of skill or luck? Is it replicable, or merely a lengthy run of good fortune? We are confident that our success has not been the result of a favorable spin of a roulette wheel or a timely roll of the dice. It has been truncated, not heightened, risk. Our gains over the years have been earned, banked, redeployed into the next advantageous investment, and thereby compounded, again and again. With sound investment principles, a committed and dedicated investment organization, a healthy and vigilant awareness of what can go wrong, and a strong sell discipline, investing is more akin to a high-yielding, periodically volatile, and non-guaranteed bank account than a game of chance. Can gains be lost? Of course they can, through laziness, sloppiness or hubris. Buck such a reversal is hardly inevitable, especially when one is aware of these risks. We work assiduously to maintain our gains, emphasizing as always the preservation of capital and, only when attractive opportunities become available, its enhancement."

One of the reasons I like this quote is because it pretty much puts to rest the buy and hold argument. Klarman buys, and when the offered return vs downside risk is against him, he banks the gain and waits for another attractive opportunity. Too many times, hedge fund managers get sucked into a story of a never ending bullish sentiment on a particular stock. Yes, intrinsic value changes throughout the life of an investment. But when a stock is trading at 125% of your IV target, it's hard not to bank some of those gains. And in the final sentence, Klarman again differentiates the return of capital vs return on capital, something that I talk about way too much on this medium.

A few other sets of quotes I really liked:

"While you know that our investments often stand apart from those of the crowd, you may not be aware of how deeply this contrarianism permeates our activities. Our investments can be remarkably contrary; we regularly search the "new low" list for investment ideas, while shunning names on the "new high" list. We purchase what the crowd is dumping. We typically buy stocks in the face of Wall Street "sell" recommendations, and reduce positions in their "buys" We eagerly assess financially distressed companies for opportunity while the world experiences revulsion. For us, analytically complex, litigious, stigmatized, and shunned situations bought at the right price form the backbone of a limited risk portfolio of opportunity."

Contrarian for the win. Some more nuggets:

"Rather than ratchet up risk, our approach has been to hold cash in the absence of opportunity, accepting a minor diminution in expected return where, and only where, the historic returns have been particularly out sized for the risk. There was never any logic, for example, behind the consensus industry annual return targets of 20% or more on bankrupt bonds or private investments. At times, an expected 15-18% return is ample, given the qualify of the underlying assets, the conservative nature of the assumptions made, and the limited spectrum of things that can go wrong. Other times, even a projected 25-30% return might be inadequate, where the quality of the assets is suspect, the return is earned in a risky and unhedged currency, and the downside risk is larger than usual. The quality of management must be factored in. The expected duration of an investment may also play a role; a short-dated investment earning inadequate return is over soon, and one can move on to better opportunity. Long duration mistakes are the gifts that keep on taking, locking you in to low returns, or significant capital losses if you exit early."

And finally:

"We believe that while investors need to focus great attention on the fundamentals, they must simultaneously answer the question: What's your edge? To succeed in today's overcrowded environment, investors need an edge, an advantage over the competition, to help them allocate their scarce time. Since most everyone has access to complete and accurate databases, powerful computers, and well-trained analytical talent, these resource provide less and less of a competitive edge; they are necessary but not sufficient. You cannot have an edge doing what everyone else is doing; to add value you must stand apart from the crowd. And when you do, you benefit from watching the competition at work."

This 2005 Letter may need a second post. Seth Klarman offers many more nuggets of wisdom. Stay tuned.