Seth Klarman – 1929 Taught People a Lesson, 2008-2009 Did Not


Super successful/elusive Boston hedge fund manager Seth Klarman (Baupost Group) spoke recently at the Ira Sohn Conference (gathering of value investors – e.g. buffet types).

In his excellent talk, he covered many topics including value investing, the economy, and various opinions. One interesting observation – he compared public reaction to crisis in 1929 to the public reaction to difficulties during 2008/2009. He pointed out that in 1929 people learned a lesson – save more/avoid excessive debt (where for years after, the savings rate in the US was strong); whereas last year, people learned nothing (from Barrons):

The government rescue will inflate the next financial market bubble. He said that while many learned to shun leverage as a lesson from the Great Depression, “the bailout has endowed a generation without any long-lasting lesson.” Huge deficits with no end, entitlements and the beneficence of foreigners mean no margin of safety. “We are kicking problems down the road,” he and many others at the conference said, and he added that if the government doesn’t rein in spending, a disaster like war or a currency collapse would leave the nation in great trouble. Slower economic activity with a margin of safety will help, and will take time. “No rational investor would want to rely on prayer,” Klarman says.

Here is an example of the new attitude where people have no qualms about not paying their debt – from the New York Times:

NY Times -Don’t Pay Don’t Fret

Seeing things like this, I disagree with Seth on one point – people did learn a lesson in 2008/9 – a lesson particularly taught by our government:

If you spend too much and you have friends in Washington we’ll bail you out.

If you run a company into the ground, but politicians need your money or votes we’ll bail you out (beneficiaries: GM, GS).

If you do the right things – save money, keep bills low, and don’t get in trouble, we’ll raise your taxes, give you ZERO interest on your bank account, and cause your savings to lose value to inflation (affected parties: most senior citizens and a few other fools dumb enough not to spend into oblivion and get a bailout)

There seems to be a rapidly falling level of care to shirk one’s bills and take a handout – something I think that government has fomented. If an increasing number of people feel less responsible, that bodes ill for our country. With the behavior of our “leaders,” I can understand why people are increasingly feeling this way (“if ‘they’ they a bailout, I should get one too” – people are saying)- though it still worries me. Time will tell what happens – we can only ignore or prepare…In the meantime:

Before I finish, I thought you’d enjoy more comments from Seth Klarman.

One bit of market wisdom from Seth:

“We’d rather underperform a huge bull market than get clobbered in a bear market” (from Reuters)

Also – here is a speech that Klarman gave at MIT in 2007 – he reflects on patient value investing and discusses the problems at the time and the dangers in the credit market (before the crash). This is good stuff!