Value Investing Legend and Warren Buffett Disciple Seth Klarman

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

**Barry Ritholtz** (0:16)
What can I tell you about this week's banger, Seth Klarman, legendary value investor out of Boston at the Baupost Group? What a fascinating discussion about risk, about the current environment, about the Boston Red Sox, about just about anything that affects portfolios, distress assets, stocks, bonds, real estate. I thought this was fascinating and I know you will also, with no further ado, my conversation with Seth Klarman.
Seth Klarman, welcome to Bloomberg.

**Seth Klarman** (1:02)
So great to be here, thank you, Barry.

**Barry Ritholtz** (1:04)
Thank you so much. I've been looking forward to this for forever.
Before we get into your investment philosophy and the development of Baupost, I have to roll back a little bit to your early days. Economics from Cornell and MBA from Harvard, what was the original career plan?

**Seth Klarman** (1:27)
So I was always drawn to investing. Even when I was a very young kid, I was interested in the baseball statistics. I became aware that there were these other columns of numbers in the newspaper and asked my neighbor what those were, and started to understand and follow the stock market a little bit. So of course, I had no idea what I was doing, but I was paying attention from quite early age. I didn't really ever develop a career plan, but I was drawn to the stock market.
I think I'm drawn to puzzles, Barry. I like doing word puzzles every day. I like solving math puzzles. I subscribe still to something called a math puzzle book published by Dell.
And the stock market's a big puzzle. The financial markets are a big puzzle. How does it all work? And how does the performance of the companies get reflected in stock prices? And how can an investor outperform everybody else? And so all of that is a piece of what drew me in.

**Barry Ritholtz** (2:27)
So I'm interested in how you first found that beyond the newspaper stock price pages. You grow up in Baltimore. Your parents divorced when you were relatively young. Mom was an English teacher, later a psychiatric social worker. Dad was a health economist at John Hopkins and NYU.
Was it just simply thumbing through the sports pages, literally, to the next set of pages where the stock pages?

**Seth Klarman** (2:56)
That's literally the numbers on the page attracted my attention.
I would say, you know, I think my origin story is a lot like other people who ended up in the investing business, like Warren Buffett, like I think Todd Combs, like many others, drawn to small businesses, wanted to make money, so I was delivering newspaper route for the Baltimore Sun Papers. I had a snow cone stand in my driveway one summer. I mowed lawns, I raked leaves, I shoveled snow. I did little carnivals for the neighborhood kids, whatever. I sold candy at religious school on Tuesdays and Thursdays because the kids were starving after school and I would buy it up over the weekend and bring it to school and sell it for an arbitrage profit. So it was just a pattern of being drawn to small business and making money. And over time, that led to an interest in the stock market. I bought my first stock with some bar mitzvah money when I was around 10 years old.

**Barry Ritholtz** (4:00)
Well, it couldn't have been bar mitzvah money if you were 10

**Seth Klarman** (4:02)
It wasn't bar mitzvah money then it was a present, but then bar mitzvah money continued to be piled in.

**Barry Ritholtz** (4:07)
10 years old and...

**Seth Klarman** (4:09)
I bought a share of Johnson & Johnson.

**Barry Ritholtz** (4:11)
Still have it?

**Seth Klarman** (4:12)
Do not still have it. It split three for one, but ultimately I presumably have traded that in for something else that I like better.

**Barry Ritholtz** (4:20)
So let's fast forward a little bit to the Baupost origin story, which isn't that far ahead. You're only 25 The urban legend is you co-found Baupost, but reality, you were brought in to manage money for the four founding families.
Still, at 25, that's a kind of shocking thing. Oh, we have all this wealth. Let's bring in this kid to run our portfolio.

**Seth Klarman** (4:48)
Right, and I would say the same thing.
If I were in their seats, I would wonder, how does this kid know how to do that?
So I don't think people should generally be starting investment firms at age 25, and of course I really didn't start the firm. The firm was in the process of being created. The four clients of the firm that came together, the founders, had the idea that they would build a firm that might go and make investments itself, might hand money to others who were in the business already of making investments. So I think they wanted to build kind of an institutional structure, a framework, for how to make sure the money got managed well, given what was then, back in the early 80s, a highly fraught time, as you know, from history.