Seth Klarman's Big-Time British Bet

Published in Investing on 15 August 2012

Two tech stocks and a British oilie make up 40% of this legendary investor's portfolio.

Most investors who've heard of hedge fund manager Seth Klarman -- which isn't all that many, given his stellar track record -- know simply that second-hand copies of his book Margin of Safety, long out of print, change hands on eBay for thousands of dollars.

Read it, and it's instantly clear where Mr Klarman, 56 this year, draws his inspiration from. Indeed, the title -- Margin of Safety -- pretty much gives the game away. In short, Mr Klarman, and Baupost Group, which he's run for 30 years, are Benjamin Graham-style value investors extraordinaire.

But despite running the ninth-largest hedge fund in the world -- and one of the five most successful in terms of investing returns -- Mr Klarman keeps a low profile. Boston-based, he values his distance from Wall Street, steadily paddling his own contrarian canoe.

Upside

As with Warren Buffett, the only glimpses into his thinking come with his periodic quarterly 13-F filings to America's Securities and Exchange Commission.

And earlier this week, Baupost posted its latest 13-F, covering the three months to 30 June. Not having updated myself on his holdings for a few months, I thought I'd take a look. Key questions:

  • Which are his biggest current holdings?
  • Has he been buying anything new?

Both questions have value -- literally. For when value has been outed, Mr Klarman doesn't hang about, but sells and moves onto the next prospect. And if he doesn't see such a prospect, he stays liquid, with cash sometimes making up as much as 50% of his portfolio. Equally, if he's buying into a new position, that's a sure-fire indicator that this legendary value investor has sniffed a stock with potential upside.

BP

Baupost's biggest holding is oil giant BP (LSE: BP), which makes up 14.2% of his portfolio, fractionally up from three months before.

Beaten down in the wake of 2010's Gulf of Mexico fallout, and the ongoing squabbles with its Russian partners, veteran value investor Mr Klarman obviously sees in BP the potential upside he seeks.

Trading on a forecast price-to-earnings (P/E) ratio of just 7, and offering a forecast dividend yield of 5.2%, BP self-evidently has 'cheap' written all over it. Granted, Russia could yet go wrong, but Mr Klarman is clearly betting that it won't -- confident that when investors realise this, the shares will rocket.

Hewlett-Packard

Virtually the same proportion of his portfolio -- 14.1%, again little changed from three months before -- is made up of another beaten-down stock: Hewlett-Packard (NYSE: HPQ.US), which has also attracted its share of unflattering headlines in recent times.

Making up one of a very few American manufacturers to which the epithet 'iconic' can genuinely be attached, Hewlett-Packard has genuinely fallen on hard times.

Trading on a historic 12-month P/E ratio of 7.4 -- versus an industry average of 18.5 -- it's not difficult to see what Mr Klarman sees. Indeed, on a five-yearly basis, Hewlett-Packard's P/E of 19.8 is virtually indistinguishable from the industry average of 20. And while waiting for the value to out, there's a dividend yield that's almost twice the industry average of 1.5%.

Oracle

What does it take for Mr Klarman to make a share his third-biggest holding -- out of nowhere? Bargain-basement pricing at Oracle Corporation (NASDAQ: ORCL.US), seems to be the answer.

Now standing at 12.2% of his holding, it seems that he has taken advantage of a temporary trading range of $26 or so to build a stake -- and a stake that is already likely to be showing a profit of 20% or so, given Oracle's present price of $31.

Granted, for investors wanting to follow suit, the usual value indicators aren't flashing 'buy' to the same extent: a trailing 12-month P/E of 15.9, for instance, is only marginally below the industry average, as are Oracle's price-to-book and price-to-free-cash-flow metrics.

One to watch, then, to see what Mr Klarman does next.

Closer to home

Since its inception in 1982, Baupost has clocked up gains of close to 20% annually, with only two negative years -- 1998, and 2008.

Another investor worth taking a look at, of course, is the equally legendary Neil Woodford, who is the subject of one of free special reports: "8 Shares Held By Britain's Super Investor".

For Mr Woodford, too, can boast a stellar long-term record. On a dividend re-invested basis over the 15 years to 31 December 2011, he's delivered a return of 347%, versus the FTSE All‑Share's distinctly more modest 42% performance. Not surprisingly, with a track record like that, he looks after two of the country's largest investment funds, and runs more money for private investors than any other City manager.

Download the report -- which profiles eight of his largest holdings -- and see for yourself the shares that are powering his portfolio, as well as the investing logic behind them. It's free, and can be in your inbox in seconds. So what have you go to lose?

Want to learn more about shares, but not sure where to start? Download our latest guide -- "What Every New Investor Needs To Know" -- it's free. The Motley Fool is helping Britain invest. Better.

More investing ideas from Malcolm Wheatley:

> Malcolm holds shares in BP, but not in any other company mentioned here.

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Comments

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F958B 15 Aug 2012 , 2:58pm

Another successful investor who prefers concentrated portfolios - along with Fool favourites Buffett and Woodford.

So exactly who out of the market's best and brightest is recommening highly diversified portfolios?

Diversification seems to be pushed by the (often-second-rate) advisers who can't earn decent money investing in the markets, so they earn money from giving investment advice to fee-paying clients, while pretending to be an expert.

goodlifer 15 Aug 2012 , 3:33pm

I have to plead guilty to diversifying.
Here's why:

It's not too difficult to pick a share that's likely to do well'
To pick one that's certain to do so is,.for anyone like me, out of the question

If you hold fifteen or more different holdings you can probably live with it if the odd one goes pear-shaped.

As the poet says,
Down to Gekenna or up to the throne,
He travels fastest who ravels alone.

pjkimber 15 Aug 2012 , 5:56pm

Hi F958B,

Having been a Fool since May I find your take on articles to be extremely insightful, and you often contribute more than the article itself. I mostly agree with you on this point, but my likely future purchases will mostly follow Goodlifer and his example above.

I would never purchase anything to simply tick a box on a sector, which I think is sometimes how diversification comes across. Any new share purchase would have to be because I think it has a better chance of growth/bigger dividend than an existing holding.

Simply put 'Professional' Traders should have better knowledge than the likes of me, so should have a stronger conviction to hold big % chunks of their portfolio in individual companies or sectors.

jackdaww 15 Aug 2012 , 6:33pm

i hold 12 stocks, would be happy with 10.

for ordinary mortals 6 may be the bare minimum.

dpeddlar 15 Aug 2012 , 6:48pm

Jackdaww

Which Ten?

jaizan 15 Aug 2012 , 9:17pm

Interesting to read this anlaysis on Seth Klarman.
However the Neil Woodford part is wearing very thin now.

jackdaww 15 Aug 2012 , 10:24pm

dpeddlar

i have - with average price paid -

imps@1955
bats@1668
vodafone@153
glaxo@1156
rdsb@1617
bg@1082
bhp@1353
tesco@380
morrisons@275
unilever@1493
diageo@973
greggs@453

could drop imps and morrisons to give 9 fairly diversified global stocks plus greggs.

goodlifer 15 Aug 2012 , 10:37pm

jackdaww
"i hold 12 stocks, would be happy with 10."

Great Uncle Ben recommends between ten and thirty, but the more confident you are, the fewer you need.

Anyone cocky enough to think he's infallible only needs one.

goodlifer 16 Aug 2012 , 6:28am

Further thought on diversification.

The more shares you own, the greater the probability that Mr Market will take an irrational fancy to one of them and try to buy it at a stupid price.

jackdaww 16 Aug 2012 , 8:14am

goodlifer

thanks

i am in fact sticking with 12 and would add compass if the price were a bit better.

my 12 could be seen as a closet ftse100 tracker - the question for me is will they do better than a tracker over say the next 10 years - as they should if they turn out to be better than average.

dpeddlar 16 Aug 2012 , 9:43am

Jackdaww

Thanks for sharing, it is always interesting to see what shares someone is holding when it is a concentrated (high conviction) portfolio.

Tri2000 16 Aug 2012 , 12:19pm

Any one wishing to know more about Seth Klarman's "Margin of Safety" can read a summary here, http://www.marketfolly.com/2012/04/notes-from-seth-klarmans-margin-of.html

goodlifer 16 Aug 2012 , 1:44pm

jackdaww

Interesting..
FWIW, I've got all yours except

imps and bats (anti-smoke prejudice)
glaxo, dge (recent profitable sales - hoping they'll come down again)
bg, morrisons, unilever, greggs (never cheap enough when I've had money to spend)

I've also got

anto
azn
av.
barc
bp
cna
cwc
hfd
man
mks
ng
rb
rio
sbry
shrs
vod

Built up over the last three years, mainly now by reinvesting dividends.

"Will they do better than a tracker over say the next 10 years"

Let's be honest.
If you can't do better than a tracker you've got to be pretty bad.

MDW1954 16 Aug 2012 , 2:05pm

If you can't do better than a tracker you've got to be pretty bad.

Hello, goodlifer.

This is a recurring theme, isn't it? Don't forget, half the shares in the index will underperform it.

Malcolm (author)

goodlifer 16 Aug 2012 , 2:41pm

Thank you
"If you can't do better than a tracker you've got to be pretty bad."

True ?
Or not?

jaizan 16 Aug 2012 , 8:52pm

If you can't do better than a tracker, you are likely to be at best fractionally below average, as trackers should (approximately) match the market average, minus fees.

Personally, I've got a mixed bag of just over 40 stocks, including some Investment trusts and overseas stock holdings. However, 30% of it is in just 2 investment trusts.

In the past, I concentrated a smaller portfolio to the point where over 50% of it was in 3 brewery stocks. Much better than buying into the tech bubble at the time.

ANuvver 17 Aug 2012 , 7:40am

Who needs to beat a tracker anyway?

I just focus on planning for my personal needs and beating (thrashing, actually) available savings rates, by embracing a personally acceptable level of risk. And minimising costs and tax. Being your own analyst and accountant gives you a couple of percentage points head start. If you operate in the boring end of the markets as I do, it's really just the equivalent of being able to pull your kitchen to bits and fix a leak yourself.

At least until such time as the banks collapse, we all lose more than half our capital and even stalwart dividends come under the equivalent of martial law. But that's risk for you!

If you really want to beat the indices, you have to screw your courage to the sticking post and fish babies out of bathwater (must stop mixing metaphors, tsk). And always have the resources on hand to do it. The second bit is harder than the first. An opportunity might as well not exist if you're not in a position to take advantage of it.

Warren Buffett's latest repositioning! _Click here to read_
Actually, don't bother - it's not Tesco, it's cash.

Cisk999 20 Aug 2012 , 12:50pm

I probably hold too many stocks, around 60 at the moment.

However over half I invest in each month, at least 10 are unit / investment trusts / ETFs and the top 10 holdings are probably around 40-45% of the portfolio.

Having had a few go belly up over the years, I would prefer to diversify myself to protect against this in the future.

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