Seth Klarman.Getty Images/ Scott Olson
Seth Klarman warned investors about speculation and complacency in his yearly letter. The Baupost CEO listed inflation and higher interest rates among his major concerns for markets. Klarman emphasized the value of hedging and sounded the alarm on political strife in the US. Sign up here for our daily newsletter, 10 Things Before the Opening Bell. Billionaire investor Seth Klarman underlined the risks to investors of speculation, complacency, and both inflation and interest-rate hikes, in his latest annual letter to clients, a copy of which was obtained by Insider.
The Baupost CEO — nicknamed the “Oracle of Boston” because he invests similarly to Warren Buffett — also highlighted the importance of hedging, explained why he wants volatile markets, and bemoaned the state of American democracy.
Here are the 11 best quotes from Klarman’s letter:1. “We see today’s market as characterized by stretched valuations, deep complacency, and a host of looming risks.”
2. “We believe that mounting inflation and the related possibility of materially higher interest rates are posing a real danger to financial markets.” (Klarman noted that Baupost has purchased hedges to protect itself.)
3. “Against a backdrop of relentless money printing, a very active Federal Reserve, and fiscal largesse, many investors have been lulled to sleep, unaware of and unfocused on risk. They are like the cat that didn’t jump on the hot stove.”
4. “The buying frenzy of the past 12 years has lured many market participants into speculative holdings that someday will seem like roach motels, easier to get into than get out of.”
5. “It is said that bull markets always climb a ‘wall of worry’ as the cautious are left behind while the intrepid get ahead and the reckless lead the pack. But the opposite may also be true — bear markets must inevitably descend a mountain of overconfidence and hubris.”
6. “We often have success searching through the ‘abandoned property’ bins of the market.”
7. “Because it is a driver of opportunity creation, volatility should more properly be considered a value investor’s best friend.”
8. “It generally makes sense to insure your home against fire even though it probably won’t burn down. No one reasonably laments having paid a modest insurance premium for a casualty that didn’t occur. You don’t hedge or insure to achieve gains, but rather to hang on to what you have.”
9. “It only takes one moment of overconfidence, distraction, or sloppiness to undo a lifetime of painstaking compounding.”
10. “Democracy is a precious gift that we have inherited from our forebearers. Unfortunately, it comes without operating instructions or a warranty. As with anything breakable, democracy must be handled with care. It’s time to once again heed Benjamin Franklin’s prescient warning about the government that the Founding Fathers were creating: ‘A Republic if you can keep it.'”
11. “An ever-more polarized America, incapable of peacefully bridging our divides, may someday cease to be a reliable destination for investment capital.”
Read more: Value-investing titan Seth Klarman opens up about rising inflation, Trump, and ballooning opportunities for his $31 billion Baupost