Seth Klarman is an outlier. For more than forty years the founder of the Baupost Group has steered clear of the blow‑ups that swallow many hedge fund managers. He has done it with one stubborn idea: never risk what you cannot afford to lose. A recent conversation at Goldman Sachs offered a long, candid look at how that idea plays out day after day. The discussion spans valuation, patience, market psychology, and the habits that keep Baupost on course.
A Margin of Safety That Never Gets Old
“Value investing is buying things at a discount,” Klarman said at the start. “What counts as a discount, and how big it should be, is always up for debate.”
Early in his career Klarman relied almost entirely on balance‑sheet math—net‑net stocks, cash bargains, and discount‑to‑liquidation scenarios straight out of Ben Graham. Over time he realized that certain businesses can lock in profits far beyond what their plant, property, or patents imply. He calls that “franchise value.” It shows up in durable brand equity, privileged distribution, network effects, or customer switching costs that keep competitors at bay long after the original capital is spent. Think global payment rails, indispensable software, or a niche industrial supplier that sets industry standards.
Klarman now asks three questions when he sees a candidate for this kind of value:
- Pricing Power: Can the company raise prices or keep share even if input costs rise?
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