In his 1995 Baupost Group Letter, Seth Klarman concluded that it is not possible to reliably predict when difficult times will occur and that the cost of performing well in bad times can mean relative underperformance in good times. Here’s an excerpt from the letter:
Dangerous lessons are being learned by many investors. Warren Buffett has pointed out that legitimate theories frequently lie at the root of financial excesses; good ideas are simply carried too far.
Today, virtually everyone “knows” that over the long-run, stocks will outperform other investment alternatives. Of course, almost no one thought of this as the market made cyclical lows in 1974 and 1982.
So after a record-setting thirteen year bull market, proponents of this viewpoint are ignoring the high price they must now pay to purchase equities.
Another dangerous notion is that dips in the market always represent buying opportunities. We firmly believe that one of Baupost’s biggest risks, and, needless to say, that of other investors, is that we will buy too soon on the way down.
Sometimes cheap stocks become a whole lot cheaper; it simply hasn’t happened lately. (And when that happens, expensive stocks will fare far worse.)
We have said before and will repeat here that you do not really need Baupost to invest your money in bull markets.
An index fund could likely perform better. The true investment challenge is to perform well in difficult times. It is unfortunately not possible to reliably predict when those times might be. The cost of performing well in bad times can be relative underperformance in good times.
We have always judged that a worthwhile price to pay.
You can read the entire 1995 letter amongst a collection of Baupost Letters here:
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