Seth Klarman: How To Increase The Likelihood Of Achieving Sustainable Gains With Limited Downside Risk Over The Long-Run

Johnny HopkinsInvesting Strategy, Seth KlarmanLeave a Comment

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In his latest Baupost Sharholder Letter, Seth Klarman provides some great advice for investors on how to increase the likelihood of achieving sustainable gains with limited downside risk over the long-run saying:

“We believe another key element in portfolio management is curtailing the duration (the weighted average life) of one’s portfolio through exposure to investments with catalysts for the realization of underlying value.”

“Catalytic events shift the outcome of investments from a reliance on future market multiples and macroeconomic developments (which are not at all under your control) to a dependence on your assessment of the outcomes, probabilities, and implications of announced or anticipated corporate events, including mergers and acquisitions, bond maturities, debt restructurings, bankruptcies, major corporate asset sales, spinoffs, and tender offers.”

“No strategy can avoid all risk of loss. But we believe our approach should increase the likelihood of achieving sustainable gains with limited downside risk over the long- run.”

“To put it differently, a portfolio of near infinite duration (such as an all equity portfolio without catalysts) can trade just about anywhere. With such exposures, if stock prices plummet, the odds go up that an investor will feel pressure to do the wrong thing and sell into market weakness.”

“A limited duration portfolio, both because of the hopefully truncated downside in a bad market as well as the beneficial cash inflows (buying power) that catalysts usually generate, is hugely advantageous in navigating through turmoil.”

You can read more notes from Baupost’s latest shareholder letter here – Baupost 2018 Year End Shareholder Letter.

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