Seth Klarman, the Oracle of Boston

In 1982, Seth Klarman was 25 and had just finished Harvard Business School.

A Harvard professor handed him $27 million to manage. Starting salary: $35,000 a year, less than most of the other offers he had.

More than 40 years later he manages $30 billion and has compounded at 20% a year. One losing year in his entire career.

Warren Buffett is called the Oracle of Omaha. Klarman is called the Oracle of Boston.

His teacher was Max Heine, not Buffett

Most accounts say Klarman is a student of Benjamin Graham. True, but it skips something more important.

In his third year at Cornell, Klarman interned at Mutual Shares, one of the best value funds of the 1970s and 1980s. Eighteen months learning from Max Heine and Michael Price, two masters of distressed debt and special situations, not plain Buffett-style equity.

That explains why the Baupost Group does not just buy cheap stocks. He buys bankrupt bonds, post-crisis debt, abandoned spinoffs, distressed real estate. He learned from people working the most complicated deals in the market.

After HBS, a Harvard professor, William Poorvu, gave him $27 million from the sale of a stake in a local television station. The Baupost Group was born. Klarman took $35,000 a year, but with equity in the fund and the freedom to run his own philosophy. He chose to build for the long term.

"Loss avoidance must be the cornerstone"

This is the sentence that explains his entire philosophy: "Loss avoidance must be the cornerstone of your investment philosophy."

Buffett sees a great business and buys it to hold forever. Klarman assumes he could be wrong, and looks for enough margin of safety to absorb the error before it becomes a disaster.

The arithmetic is simple: lose 50% and you need 100% to get back. Never lose 50% and compounding does the work. That is why Baupost has had one losing year in over 40.

He values everything through three lenses at once: the NPV of future cash flow, liquidation value if the company were wound up today, and stock market value if the company were sold to someone else. When all three say the price is cheap, he has the conviction to bet large.

Fifty per cent cash, and what sets him apart from every other fund

99% of fund managers hold less than 5% cash because they want to be "fully invested". Klarman is comfortable at 30–50% cash, sometimes more, when he cannot find an attractive opportunity.

His logic: "Rather than ratchet up risk, our approach has been to hold cash in the absence of opportunity."

This is not laziness. It is the most active strategy available. Hetty Green did it in the nineteenth century. Rainwater did it before 2008. Klarman has done it for 40 years.

In February 2008, Klarman noticed a London fund being forced to liquidate more than $1 billion of assets. He decided to open Baupost to new investors, raising $4 billion mostly from large foundations and Ivy League endowments, just before the crisis broke. After AIG and Lehman collapsed, he deployed $100 million a day, while everyone else panic-sold.

That preparation did not happen in 2008. It happened across years of holding cash when no good deal was available.

Hunting in "the most inefficient parts of the market"

Klarman does not compete on Apple, Microsoft or the large caps where hundreds of analysts read the same report. He looks for "the most inefficient parts of markets in the world."

Four kinds of opportunity he favours: distressed debt, bonds of companies in or near bankruptcy. Spinoffs, subsidiaries separated from a parent, force-sold by institutions whose mandate no longer covers them, ignored for being too small. Post-bankruptcy equities, shares after a company emerges, while people are still afraid. Forced selling, when institutions must sell because of a mandate, not because of fundamentals.

Specific deals: CIT Group bonds bought at 65 cents, recovering 80 cents after bankruptcy. Lehman Brothers debt, held nearly ten years until resolution. Icelandic bank debt after the crisis. Puerto Rico debt from 2015. Each one is a position someone else was panic-selling or could not hold.

And unlike Schloss with his hundred diversified stocks, Klarman concentrates: the top five positions are 47% of the portfolio, the top ten more than 75%. He diversifies across asset classes, equity, debt, real estate, private, not across a hundred stocks in one asset class.

"Fans of fear", and why fear is an advantage

"At Baupost, we are big fans of fear, and in investing, it is clearly better to be scared than sorry."

Where Wall Street projects confidence, Klarman projects fear. He has been described as "a world-class worrier."

Why is fear useful? Because fear forces you to think about the downside. Confidence makes you think only about the upside. Markets are deeply emotional places, and that emotion walks you quietly into mistakes.

In 2021 he compared investors to frogs in boiling water: they do not notice risk rising around them because a long bull market has acclimatised them to a higher level of it. By the time they notice, it is late.

He also warned about information: "The constant availability of information is a great danger to an investor. It is a great temptation to constantly fiddle." Smartphones and Bloomberg terminals make people trade more, not better.

The $2,000 book, and a lesson about edge

In 1991, aged 34, Klarman published Margin of Safety. It sold 5,000 copies at $25 and was considered a failure. HarperCollins stopped printing it.

Over time the book became a cult classic. Today it goes for $1,200–$2,000 on Amazon. PDFs circulate all over the internet.

Klarman could make several million dollars by reissuing it. He has not.

Like Charlie Allen without a website, like Rainwater with his single television appearance, Klarman understands that an edge needs silence. If everyone can read his method, the method stops working. Discretion is not modesty. It is protecting a competitive advantage.

The QuietVC lesson

Klarman does not teach how to make money. He teaches how not to lose it. Four core lessons:

First, start with "what could go wrong?" before asking "what could go right?" Loss avoidance is the cornerstone, not return maximisation. The margin of safety is the room to be wrong and still not lose money.

Second, cash is a strategic weapon. 30–50% cash is not laziness; it is preparation for the next opportunity. When you cannot find a good deal, sit still. This is exactly why the greatest investors all had cash when the crisis came.

Third, hunt where the fewest people are looking. Distressed debt, spinoffs, post-bankruptcy equities, foreign markets in distress. Where nobody wants to be is where the largest margin of safety can exist.

Fourth, an event-driven bias: not just cheap, but cheap with a catalyst. A cheap stock with no reason for the market to recognise the value can stay cheap forever. A catalyst, a bankruptcy resolved, a spinoff completed, a restructuring finished, is what pulls value back toward price.

Buffett buys great businesses and holds forever. Klarman buys what others are panic-selling, bankrupt bonds, abandoned spinoffs, distressed real estate, and holds until the market recognises the value.

Both started with Benjamin Graham. Both compounded into billionaires.

Only Klarman calls himself a "fan of fear."

And that may be the most important difference.

Silent discipline. Compound value.