Seth Klarman’s Collective Wisdom: Risk Analysis Is The Key To Investment Success

Please note this article is based on publicly available information, however ValueWalk just received Baupost's 2018 letter moments ago and will have exclusive coverage shortly.

Seth Klarman is widely regarded as one of the best value investors the world has ever seen. Over the past few decades, his hedge fund, the Boston-based Baupost, has achieved annualized returns for investors in the region of 20%, sometimes with as much as 20% of assets under management in cash.

There are two main pillars to Klarman's investment strategy. Every single investment he contemplates must be trading at a significant discount to his estimate of intrinsic value, or, in value investing parlance, a wide margin of safety. They must also be negligible risk associated with the prospective investment. Risk, in this case, is defined as the chance of a permanent capital impairment. Klarman will only consider buying an investment if he calculates the risk of a total loss is zero.

Risk focus

Klarman is so focused on risk he once told his investors, "We continuously worry about what can go wrong with each investment and the portfolio as a whole; avoiding and managing risk is a 24/7/365 obsession for us."