Seth Klarman - Contrarian Investing, Discipline, and Building Baupost

Michael Mauboussin (0:01)

Welcome to a new edition of the Value Investing with Legends podcast. My name is Michael Mauboussin, and I'm an adjunct professor at Columbia Business School, and a faculty member at the Heilbrunn Center for Graham and Dodd Investing. My co-host, Tano Santos, the Robert Heilbrunn Professor of Asset Management Finance at Columbia Business School and the Faculty Director at the Heilbrunn Center couldn't join us today, but we'll be back soon. If you had to pick a time for the birth of what we call value investing, you could do worse than selecting the moment when Ben Graham started teaching Advanced Security Analysis at Columbia about a century ago. Our guest today is not only one of the most successful and visible practitioners of the value investing, he's also made major contributions to the field through his writing and commentary, including directly to the Columbia Business School community. He combines the sensitivity of a great value investor with modern tools and approaches. We are delighted to welcome Seth Klarman. Seth is the Chief Executive Officer and Portfolio Manager of the Baupost Group, a firm with approximately $22 billion of assets under management. He has overseen the firm's investments since it was founded in 1982 After graduating from Harvard Business School, where he was a Baker Scholar, Seth was brought on at Baupost Inception to manage the wealth of its four founding families. The name Baupost is an amalgam of those family names. Before graduate school, Seth worked as an analyst at Mutual Shares, one of the great Value Investing firms founded by Max Heine and eventually run by Michael Price. He graduated magna cum laude from Cornell University with a degree in economics. His lasting contributions to the Value Investing community include his book, Margin of Safety, published in 1991 and now offered at Amazon for the bargain price of $2,500, as well as his role as the editor of and contributor to the Seventh Edition of Graham & Dodd's Security Analysis, published in 2023 Seth is a member of Harvard Business School's Board of Deans' Advisors and an active philanthropist through the Klarman Family Foundation. Welcome, Seth. Thank you for joining us today. Lots of topics we're keen to discuss.

Seth Klarman (2:10)

Thank you so much, Michael. Thanks for having me.

Michael Mauboussin (2:12)

Let's start at the beginning. You moved to Baltimore, Maryland when you were a little kid and lived not too far from the Pimlico Racecourse, a famous horse racetrack that may come up later in our conversation. What were you like as a little kid and is there any inkling at that time that you were going to be a budding value investor?

Seth Klarman (2:29)

That's a great question. I was always interested in business, starting little businesses. I remember I was a paperboy for the Baltimore Sun, the afternoons and Sunday. I went into the business of shoveling snow and raking leaves and mowing lawns. I did little carnivals in our yard for neighborhood kids. I remember starting to collect coins. My dad would bring home whatever coins he had accumulated during the day and I'd go through his change. And over time, realized that, for example, we had stopped putting silver in our quarters. I remember taking us to high school. It was a public bus. A lot of throw their quarters and dimes into a slot. And I realized that some of those were silver. Some of those, in fact, were mercury dimes, which were out of circulation and had gained a premium valuation over the face amount. And I became friends with the bus driver and negotiated for him to pull the rare coins, the collectibles out of the bin at the end of his route. And he would come the next day and say, I could sell you $3 worth of silver half dollars or silver quarters in exchange for $3. And so I had a growing collection in my mother's spice rack of the quarters and dimes that I had been arbitraging the silver in. So I always had a draw to the opportunities to make money to understand business better.

Michael Mauboussin (3:54)

That's a beautiful example of arbitrage right there, about as good as it gets. So you go on to Cornell, you have an interest in studying originally mathematics, but end up as an economics major. But as an undergraduate, you secured an internship at the legendary value investing firm Mutual Shares, which you subsequently joined after graduation. How did that come about? And what was it like to work with Max Heine, who's a legend, and Mike Price, who was also a legend? Did it have lasting impressions or imprint on you professionally?

Seth Klarman (4:22)

It sure did. I remember it like it was yesterday in many, many ways. First of all, I had no prior work experience except driving a delivery van for a pharmacy. So it was a wonderful opportunity to learn a new field, but a field that I've been interested in since I bought my first stock at age 10