Seth Klarman wrote the book, Margin of Safety. I’d link you to it but I’m worried I’ll get sued. You can use Google to find it online or you can pay over $1000 on ebay for a copy. Its a good book. Read it. Seth is a very good hedge fund manager. He has $27 billion under management after giving back $4 billion last year. The Baupost Group is his fund. Seth says he’s about 60% in cash right now.
Seth’s end of year letters don’t usually leak out but the 2013 letter just did. Its on Zero Hedge (link below) and well worth reading. Here are my notes:
Reasons to be bullish if congentitally inclined:
- PE’s aren’t horribly high
- Deficits shrinking
- Consumers are lowering their personal debt
- Housing is recovering
- US energy independence is under way
- Bond yields are still so low that equities are the only place to go
- It doesn’t matter that the S&P has tripled since 2009, interest rates spiked or the Fed is tapering
- QE worked.
- The Fed will come to the rescue again if necessary
- The Bernanke/Yellen Put is intact
- No bubbles are in sight
But if you have the worry gene, are more focused on downside than upside and more interested in return OF capital than return ON capital ... in other words, if you are a Ruler there are serious questions to be answered:
- Near zero interest rates distort reality so what are the consequences going to be?
- Can the Fed end QE without a crash?
- Deficit spending propped the economy and inflated earnings and it can't keep going, can it?
- Schiller PE is over 25. The three prior times were 1929, 2000 and 2007. Isn't that scary?
- Junk bonds are now in a bubble so when does the bond bubble pop?
- Credit quality going down and so are more and more small banks. Scary?
- Margin debt to GDP near all-time high so isn't that a problem?
- IPO’s are near a record number, Twitter is at a 500 PE, Netflix PE is at a 181, Tesla PE is 279. Signs of a top?
- Lowest proportion of Bears since 1987 - another sign of a top?
- Europe isn’t fixed. Greece’s debt to GDP is higher now, Germany’s is, too. So will they just inflate the Euro?
- Europe has 7% of population, 25% output and 50% of its social spending so will it finally crash?
- Bitcoin prices went through the roof while gold fell 28%. Isn't that weird?
- We live in The Truman Show in a plexiglass bubble built by the Fed. When will we discover it?
- The Fed purchased 90% of all eligible mortgage bonds in November. What happens to interest rates when they stop?
- What is fake cannot be made real, can it?
- Fed can change how things look but not how they are, right?
- Hasn't the Fed has become enabler of what it was created to prevent, ie, massive volatility in the economy?
- When the show ends, who will be broke?
- Won't financial markets have to decline someday?
Here are Seth's conclusions:
- Rising stock markets stop being government policy
- QE will end and money won’t be free
- Corporate failure will be permitted
- The economy will turn down
- Investors will lose money
- Capital preservation will be favored over speculation
- Interest rates will be higher
- Bond prices will be lower
- The Return from bonds will be commensurate with risk
- Fear will return and spread like wildfire
- Few will be prepared.
My thoughts on Seth’s thoughts:
Your values are not what you say. Your values are what you do. Talk is cheap. I’m half in cash for a reason. What I can do while waiting for 'the end' is try to find businesses I’d want to own even if there was no stock market. And hope to be nimble enough to dance out when the time comes.
Fear is our friend. Greed, jealousy, lack of patience and the need to do something are our enemies. Try to be ready for the fear by fighting off the greed gene, exercising patience and go play.
LINK TO KLARMAN’S LETTER ON ZERO HEDGE:
Now go play.