måndag 12 september 2016

Klarmans brev till investerare 2015.

Jag minskar innehavet i Betsson markant, eftersom jag bedömer att fair value ligger kring 100-110 kr. En stor del av uppsidan har hastigt realiserats och därmed minskar jag innehavet. Jag tror Q3 kommer vara förhållandevis bra och det är det hela placeringen bygger på, men jag vet ej att så är fallet.

(Klarman har i min mening uppnått en markant bättre riskjusterad avkastning än Buffett. Klarman har i genomsnitt suttit på kassor i storleksordningen 30%, samtidigt som Buffett indirekt belånat portföljen genom försäkringsbolags float.)

Hela Bauposts årliga brev till investerare för föregående helåret läcktes på EN hemsida, men länken togs ner efter någon dag. Som tur är finns det PDF-filer.  

Nedan följer betydande delar av brevet:

2015 In Review
Did we ever mention that investing is hard work – painstaking, relentless, and at time confounding? Separating relevant signal from noise can be especially difficult. Endless patience, great discipline, and steely resolve are required. Nothing you do will guarantee success, though you can tilt the odds significantly in your favor by having the right philosophy, mindset, process, team, clients, and culture. Getting those six things right is just about everything.

Complicating matters further, a successful investor must possess a number of seemingly contradictory qualities. These include the arrogance to act, and act decisively, and the humility to know that you could be wrong. The acuity, flexibility, and willingness to change your mind when you realize you are wrong, and the stubbornness to refuse to do so when you remain justifiably confident in your thesis. The conviction to concentrate your portfolio in your verybest ideas, and the common sense to nevertheless diversify your holdings. A healthy skepticism, but not blind contrarianism. A deep respect for the lessons of history balanced by the knowledge that things regularly happen that have never before occurred. And, finally, the integrity to admit mistakes, the fortitude to risk making more of them, and the intellectual honesty not to confuse luck with skill.

(...)Value investors must be strong and resilient, as well as independent-minded and sometimes contrary. You don’t become a value investor for the group hugs. Indeed, one can go long stretches of time with no positive reinforcement whatsoever. Unlike some other fields of endeavor, in investing you can do the same thing as yesterday but achieve completely different reported results.

(...)While value investing is a demonstrated strategy for long-term investment success, it isn’t like being handed a treasure map. Rather, the value approach teaches you how to make your own map. And even then, the map doesn’t tell you precisely where to dig for treasure: it just points you in the proper direction.

(...) Greed, too, is deeply rooted within people. It is expressed through the drive to acquire more and more and the related angst felt when others are succeeding while you are not. This is what J.P. Morgan meant when he said “Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” Or as Gore Vidal dryly noted, “Whenever a friend succeeds, I die a little.” The positive reinforcement from repeated stock market success can be a kill switch for risk aversion in that it tempts people into paying up and then holding on too long. A recent article in Vanity Fair about a looming bubble in Silicon Valley noted, “Collectively these start-ups have helped promote a culture of FOMO – or ‘fear of missing out,’ in Valley parlance – in which few [venture capitalists], who have their own investors to answer to, can afford to ignore the next big thing.”

Fear of missing out, of course, is not fear at all but unbridled greed. The key is to hold your emotions in check with reason, something few are able to do. The markets are often a tease, falsely reinforcing one’s confidence as prices rise, and undermining it as they fall. Pundits often speak of the psychology of markets, but in investing it is one’s own psychology that can be most dangerous and tenuous.

Several years ago, a friend outside the industry asked me to mentor him in Graham and Dodd, and I provided voluminous reading material and coaching. He was intrigued and energized, he said, and declared himself a value investor. Three months later, he informed me that he was giving up. It didn’t work, he had determined. It turns out that not everyone has the patience and discipline to follow the one approach that has been demonstrated to deliver excess returns with limited risk over the long run.

(...) Discipline isn’t something an investor should be turning on and off. There’s no point in being disciplined most of the time, only to toss the fruits away in a weak, distracted, or greedy moment. And there’s no such thing as being almost disciplined – even one moment of weakness can invite the wolves in, and it can also send a message. If you expect the members of a team to be disciplined, then letting down one’s guard on occasion is at first confusing, and then demoralizing, as the benefits from prior discipline are squandered. If excessive risk-taking is rewarded even once, there will quickly be no discipline at all.

(...)  When this relentless, policy-driven bull market comes to an end, one would expect not a mild retreat but shock, dismay, and tumult. No matter the precautions, hedges, or cash position held, there is risk in being long anything at the top, and further risk to investing cash too soon on the way down. All investors must wrestle regularly with the bull market challenges of rising valuations and a dwindling opportunity set, always absent insight into the magnitude or timeline of any potential reversal. Striking the right balance between action and inaction, between making new investments and holding cash, is extremely challenging. You can’t sit on your hands forever waiting for peak opportunity, nor can you ignore the ebullience all around you. While Baupost consistently held on to significant cash balances throughout 2015 (averaging 43% of AUM), our long equity positions significantly underperformed the relevant market indices. While we wish that every month or quarter could be a positive one for Baupost, we know that the price of avoiding all down periods would likely be missing many up markets as well, the result of which would be decidedly lower returns in aggregate over the long term.

In the moment, public market investors have no ability to control investment outcomes, but they can control and improve their own processes. We never shoot for high near-term investment returns. Trying too hard to earn positive results, or assessing performance too frequently, can drive anyone into short-term thinking, herd-like behavior, and incurring higher risk. We do our utmost not to allow this to happen. We believe that by remaining focused on following a well-conceived process, we will make good risk-adjusted, long-term investments. And we know that if we do that, we will indeed earn good returns over time.

As with Pavlov’s dogs, in a bull market investors find certain actions repeatedly rewarded; their behavior thus becomes deeply ingrained. Amidst a relentless rally, almost anything you come close to buying but ultimately pass on goes higher, inducing you to be more aggressive. Similarly, anything you sold you probably sold too soon, even if it had met your price objective. In a bull market, focus on downside risk ceases to be shrewd discipline and instead becomes an albatross. Many are seduced into raising their appraisals, because doing so is rewarded. As if missing out on returns weren’t itself painful enough for “Type-A” money managers, it also causes underperformance that can frustrate clients and raise career risk. Bull markets don’t typically end until most have capitulated, at which point there is almost no one new left to buy.

Bear markets, of course, offer their own false “lessons,” but in the opposite direction. As prices fall, anything you previously sold turns out to have been a good sale; anything you bought was premature accumulation. When securities become “value-ish,” they at once become too tempting for the value-starved to avoid, yet still potentially toxic to one’s financial health. It takes a great deal of fortitude to set the bar at the consistently right place in all market environments. A bar that fluctuates with the tide is, in effect, no bar at all. Trading losses in a down market can turn investors into Mark Twain’s proverbial cat who once jumped on a hot stove: to this feline, all future stoves are also assumed to be worth avoiding. We haven’t been in a broad-based bear market since early 2009, although numerous sectors now seem to have entered one. We believe that value investing principles, great patience and discipline, a flexible mandate, a time-tested process, and the ability to hold cash, as well as decades of experience in a multitude of market environments, should serve us well in navigating through.

What May Lie Ahead
Baupost doesn’t make market or macroeconomic forecasts. We are long-term oriented, bottom-up investors, sorting through opportunities one at a time. We invest based on the micro, although we do worry about the macro. We don’t go long when we’re optimistic and short when we’re not. We’re not convinced that anyone can consistently excel at such market timing; we know that we can’t. But the stock market’s ongoing gains in the face of disappointing economic fundamentals and growing market stresses has us quite nervous. It would be rare for a small number of beloved stocks to lead the market higher indefinitely.

(...)It is likely that we will one day experience lower multiples being applied to lower earnings, which would lead to significantly lower equity prices.

The U.S. economic recovery since 2009 has been built on a shaky foundation of epic on and off-balance sheet federal debt, resulting in a subpar and now tenuous rebound. Debt-to-GDP ratios are now higher for all major sovereigns than they were in 2007. We wouldn’t be surprised if the sovereign debt markets in general, and eurozone sovereigns in particular, were ground zero for the next financial crisis.

Countries, businesses, consumers, and markets have been gorging on an all-you-can-eat buffet of low interest rates for the last seven years. This, along with limited opportunities for organic growth, has driven a record wave of corporate mergers and acquisitions. In 2015, the value of mergers worldwide totaled a record $4.7 trillion, with the U.S. accounting for half of that, also a record. European Central Bank President Mario Draghi continues to signal additional eurozone stimulus, pledging to “do what we must to raise inflation as quickly as possible.” Central bankers continue to be all-in on policies that, in fact, haven’t worked as planned. It’s astonishing that even as central bankers try to conjure up inflation, investors now accept it as normal and reasonable for interest rates to be meaningfully negative – not only in seemingly impregnable Germany and Switzerland, but even in Italy and Portugal. Interest rates have never dropped this far below zero; bondholders are not accustomed to paying for the privilege of investing. Today, about €2 trillion in European sovereign bonds have negative yields. Approximately $20 trillion in worldwide government bonds yield under 1%.

We have long believed that the choice to manipulate interest rates to near zero would not be without its consequences; indeed, these are now becoming more apparent. (...) Compounding the problem, near-zero rates have driven a worldwide hunt for yield, and many have found it, or thought they had, in junk bonds, the MLP space, and alternative investments. Each of these areas has, until recently, experienced capital inflows that in aggregate may have been more than could be attractively invested, leading to lower lending standards, eroding credit quality, diminishing returns, and excessive risk taking.

(...)A recent detailed report by Ellington Management Group noted, “These same hallmarks of the subprime mortgage bubble – outsized lending to riskier borrowers, record low interest rates, dubious underwriting practices and collateral valuation assumptions, misalignment of incentives between managers and investors, and weakening fundamentals – are all present today in highyield corporate debt markets.”

(...)As journalist Jim Grant recently wrote, “[ultra-low interest rates] pull consumption forward in time and push failure backward in time.” When this extraordinary period ends, interest rates will be considerably higher. Those who chased yield in the bond market will be poorer. And issuers of this debt will be scrambling to meet looming maturities in the face of considerably more expensive (or non-existent) refinancing options.

(...) Until the uptick on December 16, the Fed had failed to raise interest rates for nearly a decade. This has left it in the position going forward where it will lack one of the key tools (interest rate reductions) normally at its disposal when it seeks to respond to the next financial emergency. Maybe the Fed has already picked up the last cigar butt of monetary policy and smoked it. There’s just nothing left. And it’s not just a problem for the U.S.; because of the repressive effect of QE policies in Europe, credit spreads between the strongest and weakest countries there are artificially low. Normal market mechanisms have not been allowed to function, and misleading signals abound, likely leading to growing distortions in economic activity and interest rates. As Jim Grant has said, “Interest rates are prices. Far better that they be discovered in the marketplace than administered from on high.”

Grant also recently termed the Fed “America’s problem and the world’s obsession.” Watching it has become a popular spectator sport, with investors constantly sifting through Federal Reserve missives for clues regarding future actions. Oddly, central bankers, in Grant’s words, the “bailers-out of markets, suppressors of interest rates and practitioners of money conjuring,” think increasingly about the markets. Is there too much speculation? Apparently none that the Fed can see, though they may not be looking too hard. We are in a stare-down, where both investors and the Fed are determined to take the others’ actions into account, to the point where no one can separate the behavior from its mirrored influence. As such, today’s Federal Reserve tea leaves are unreadable.

(...)While China’s economic slowdown is no surprise, an unexpected downturn there would be highly
consequential. China, for example, consumed 6.6 billion tons of cement between 2011 and 2013. By contrast, the U.S. used 4.5 billion tons over the entire 20th century. Were China’s economic tide to go out, the entire world could find itself swimming naked. China has a looming problem with bad debt, and Chinese stocks began 2016 by plunging 7% (i.e., limit down) twice in the first week of trading.

Another area that has been especially bubbly is venture capital, resulting from highly visible and rapidly growing companies like Uber, now “ubervalued” at $70 billion. A voracious appetite for tech startups has driven prices sky-high, giving rise to the term “unicorn,” meaning privately held firms worth $1 billion or more. In today’s overheated environment, “unicorns” are no longer a rare breed: there were an estimated 143 extant at year-end, up from 45 two years ago.

(...) Frustration at the lack of progress has evidently increased voters’ desire for political outsiders, no matter how improbable, zany, extreme, or divisive, as presidential candidates. Amidst heated rhetoric over wealth inequality and pent-up anger at the big banks and brokerage firms for the 2008 collapse, concern about inequality of opportunity for all is lost. It’s difficult not to be concerned about the rising risk of serious social unrest and a political tilt to demagoguery.

(...)In fairness, though, it’s easy to rattle off a worry list. Some of these concerns may be resolved simply by the passage of time, either when reasonable heads prevail, or when crises become sufficiently acute. Our country has survived worse. And there is also considerable good news. Living standards have been lifted across the world through the spread of free enterprise. Silicon Valley is unique in the world as the locus of creative destruction, a place where human ingenuity and drive meet entrepreneurial capital and experience. It’s another reason to be optimistic about the future. Also, thanks to scientific advances, government-funded research, and targeted philanthropy, human health is also improving globally. Indeed, we seem to be on the brink of a genomic revolution that could precipitate unprecedented breakthroughs for tackling disease and increasing human life expectancies.

It’s obviously far better to be alive today than 50 or 100 years ago. But optimism isn’t an investment strategy. Growth isn’t always profitable growth, and the returns from investments are typically determined more by the price paid than the growth rate. Whether any of these favorable trends are fruitfully investable is unclear. While we may all be better off decades from now, it’s reasonable, in light of the numerous concerns discussed earlier, to expect a bumpy ride.