How Seth Klarman Invests: He Plays Defense and Offense at the Same Time | Exploring Markets

How Seth Klarman Invests: He Plays Defense and Offense at the Same Time

You must read about the investing legends of history. And study their ways. Don't copy them, but learn from them. What makes them successful? How do they think and approach the stock market?

Seth Klarman is a value investor and founder of the hedge fund Baupost. This special segment comes from one of his rare letter to clients. In it, he explains how he looks at the market each day:

"Last year, a friend asked us whether Baupost can play offense and defense at the same time. Our answer: we not only can, we must and at all times. This is core to a value investing approach. Investors can't observe the market to tell where it's going. The market is often a tease. When it's acting well is usually the worst time to invest and when it acts poorly is usually the best.

True investors don't continuously dart in and out of the market, the invest for all seasons. But they still must calibrate between offense and defense, which is the hard part. A value investing approach is defensive by nature, emphasizing preservation of capital through the purchase of investments with a margin of safety.

Our strategy is to hunt for bargains, and we typically find more when the market is weak, fewer when it is strong. This is our way of going against the grain, owning less not because of a hunch or feeling about the market when there is observable less worth doing, and owning more when there is clearly more to do. Calibration remains essential because excessive risk takers eventually pay a high price for their folly while excessive caution has a cost that is measured in foregone returns.

The pursuit of investment gain always involves incurring risk. Thus, to compound capital over time and do so safely, we must multitask, combining a strong defense with a nimble and versatile offense."

- Seth Klarman