Have It Backwards
June 16, 2009
For value investors, last fall’s crisis provided an unprecedented opportunity. Down markets are a great time to buy securities, as Graham and Dodd said in Securities Analysis, since the average investor can usually only get them “at prices that the future may cause him to regret.”
For Seth Klarman, founder and president of the Boston-based Baupost Group, last fall was a period that offered many of those opportunities. He delivered the keynote lecture at the annual meeting of the Boston Security Analysts Society last week. Klarman also was the lead editor of and authored the preface to the sixth edition of Graham and Dodd’s Securities Analysis, published in 2008.
In that speech, Klarman praised his team for remaining clear-headed amid exceptional market volatility and positioning the firm’s portfolio to deliver superior long-term performance for its investors.
Unfortunately, Klarman said, clear, long-term goals are not the norm throughout the industry. Before detailing the most attractive opportunities created by the crisis, Klarman first addressed a fundamental conflict within the investment management industry that he said is at odds with investor objectives.
Investment managers, such as pensions and endowments, exist in perpetuity and should be focused on long-term wealth creation. Yet performance is almost universally evaluated using short-term results – managers are compared using quarterly, monthly, or even daily returns, creating extreme short-term pressures. “Managers who do well in the short term are rewarded with more assets,” he said. “Those who do not do well in the short term often don’t survive to see the long term.”
“Money managers know the Sword of Damocles is poised to fall on them next,” he added, which forces them to sacrifice long-term wealth creation to pursue short-term gains.
Klarman strives to avoid such counterproductive incentives, mostly by investing for clients – like endowments – with a long-term focus, and avoiding others – like funds-of-fund and unsophisticated investors – whose goals may be at odds with his own.
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