Seth Klarman, the renowned value investor, is the founder of the Baupost Group. He is the author of the very famous book, "Margin of Safety: Risk-Aerse Value Investing Strategies of the Thoughtful Investor." As a very conservative investor, he often holds a lot of cash in his investment portfolio. In 2006, he spoke pessimistically about the stock market, which makes me wonder, what if I invest in the top five common stocks of the Baupost Group? Will my returns beat the market? Will I achieve high returns as he has achieved even though I do not keep a high percentage of cash and bonds in my portfolio? This is the coattail investing strategy that mimics the trades of well-know and historically successful investors. I have already done similar research for Warren Buffett and Don Yacktman, where I have found that you can beat the market handsomely by investing in their top holdings.
Seth Klarman said that there are three stages of value investing. The first is to invest in distressed companies at distressed prices. The second is to invest in high quality companies at low prices, and the third is to invest in high quality companies at fair prices. He is still at the first stage, he said, while Warren Buffett is at the third stage.
You can see the holdings of the Baupost Group and see what companies Seth Klarman has been buying, selling, adding and reducing from GuruFocus.com.
I set Jan. 3, 2006, as my start date since he was bearish on the market in 2006 and it was the earliest date I can find the complete stocks’ adjusted prices.
Assumptions and Facts
1. We had $10,000 to invest on Jan. 3, 2006, and invested equally into the top five holding of the Baupost Group.
2. We would compare our market value of top five holdings each month with the market value if we invest directly into SPDR S&P 500 ETF (SPY).
3. The dividends we got would reinvest into the same stock immediately.
4. All the prices we used in this research were adjusted close prices for splits and dividends.
5. If any of our top five holdings were being acquired, we would reinvest this money equally into the newly added top five holdings.
Scenarios
1. We invested our money in the top five holdings of the Baupost Group on Jan. 3, 2006, and held these common stocks until Jan 2, 2013.
2. We followed exactly the same top five holdings of the Baupost Group since Jan. 3, 2006, and made adjustments quarterly until Jan. 2, 2013.
Data and Results
The following table 1 shows the top five holdings of the Baupost Group since Jan 3, 2006:
Source: Database of GuruFocus.com, LLC
Scenario 1: Hold until 01/02/2013
From Table 1, we can see we invested $2,000 equally in Omnova Solutions Inc. (OMN, Financial), News Corp Class A (NWSA, Financial), News Corp (NWS, Financial), USA Mobility Inc. (USMO, Financial) and Alliance One International Inc. (AOI, Financial) on Jan. 3, 2006. Without rebalance, we would hold these stocks until now. The following Table 2 shows our investment strategy and portfolio’s components quarterly.
In this way, we add all the money of our top five holdings and got the total assets of portfolio 1 each month. Instead of investing the top five holdings of the Baupost Group, we could invest our $10,000 directly into SPDR S&P 500 (SPY), and see our returns. Compared with values of portfolio 1 and SPY, as well as the returns of portfolio 1 and SPY, we could easily see whether our portfolio can beat the market.
The results are as follows:
Sources:
http://finance.yahoo.com/
Database of GuruFocus.com, LLC
Chart 2 shows how much our portfolio 1 could outperform the S&P 500 based on the asset value. It is calculated by (Value of Portfolio/Value of SPY-1). From Chart 1 and Chart 2, we can see our portfolio 1 clearly outperformed the market from November 2006 to August 2007. From July 2009 to May 2005, the value of our portfolio 1 and the market are pretty close. Other times, we underperformed the market. Chart 3 indicates the monthly return we could earn. We can see our portfolio 1 followed the market trend, yet outperformed it when the market was up and underperformed it when the market was down. The total return for investing SPY is 32.18%, and the total return for investing in portfolio 1 is 29.39% if we held stocks until now.
The Table 3 shows the annualized performance of S&P 500, portfolio 1. We can see our portfolio 1 had relatively high returns in 2006, 2009 and 2012, yet did a really bad job in 2007 and 2008. The extremely high return of 2009 is only because our portfolio went down so much in 2007 and 2008.
Overall, this portfolio underperformed the S&P 500.
Scenario 2: Rebalance Each Time the Top Five Holdings Changed
Unlike the investment strategy we discussed earlier, we followed exactly the same top five holdings of the Baupost Group since Jan. 3, 2006, as shown on Table 1, and made adjustments quarterly. We call it portfolio 2.
The results are as follows:
Sources:
http://finance.yahoo.com/
Database of GuruFocus.com, LLC
From Chart 4 and Chart 5, we can see our portfolio 2 only outperformed the market from November 2006 to September 2007. After that, we underperformed the market by wide margins until now. From Chart 6, we can observe the similar result as of Chart 3 that our portfolio 2 followed the market trend, yet outperformed it when the market was up and underperformed it when the market was down. The total return for investing in SPY is 32.18%, and the total return for investing in portfolio 2 is 8.71% if we held the stocks until now.
The Table 4 shows the similar result as of Table 3. We can see our portfolio 2 had relatively high returns in 2006, 2009, 2010 and 2012, yet they suffered far greater losses in 2007 and 2008. And the losses directly lead to the low seven-year return of our portfolio 2.
Conclusion
The above results are surprisingly different from what we had for Warren Buffett and Don Yacktman. Both strategies underperformed the market. And it is even worse when we actively tracked the top five holdings and rebalanced when the top five holdings changed. Seth Klarman is well respected as a value investor. He may keep good return records for the Baupost Group, yet we did not find his top holdings outperforming the market during 2006 to 2012 compared with Warren Buffett and Don Yacktman. His portfolio kept a large amount of cash and bonds. He also invests heavily in real estate and other non-liquid assets. Those might have helped his returns.
Compared with Warren Buffett and Don Yacktman, Seth Klarman’s holdings are usually smaller companies with weaker financials. We do not have his recent returns. But coat-tailing his stock picks does not seem very rewarding.
Seth Klarman said that there are three stages of value investing. The first is to invest in distressed companies at distressed prices. The second is to invest in high quality companies at low prices, and the third is to invest in high quality companies at fair prices. He is still at the first stage, he said, while Warren Buffett is at the third stage.
You can see the holdings of the Baupost Group and see what companies Seth Klarman has been buying, selling, adding and reducing from GuruFocus.com.
I set Jan. 3, 2006, as my start date since he was bearish on the market in 2006 and it was the earliest date I can find the complete stocks’ adjusted prices.
Assumptions and Facts
1. We had $10,000 to invest on Jan. 3, 2006, and invested equally into the top five holding of the Baupost Group.
2. We would compare our market value of top five holdings each month with the market value if we invest directly into SPDR S&P 500 ETF (SPY).
3. The dividends we got would reinvest into the same stock immediately.
4. All the prices we used in this research were adjusted close prices for splits and dividends.
5. If any of our top five holdings were being acquired, we would reinvest this money equally into the newly added top five holdings.
Scenarios
1. We invested our money in the top five holdings of the Baupost Group on Jan. 3, 2006, and held these common stocks until Jan 2, 2013.
2. We followed exactly the same top five holdings of the Baupost Group since Jan. 3, 2006, and made adjustments quarterly until Jan. 2, 2013.
Data and Results
The following table 1 shows the top five holdings of the Baupost Group since Jan 3, 2006:
Source: Database of GuruFocus.com, LLC Scenario 1: Hold until 01/02/2013
From Table 1, we can see we invested $2,000 equally in Omnova Solutions Inc. (OMN, Financial), News Corp Class A (NWSA, Financial), News Corp (NWS, Financial), USA Mobility Inc. (USMO, Financial) and Alliance One International Inc. (AOI, Financial) on Jan. 3, 2006. Without rebalance, we would hold these stocks until now. The following Table 2 shows our investment strategy and portfolio’s components quarterly.
In this way, we add all the money of our top five holdings and got the total assets of portfolio 1 each month. Instead of investing the top five holdings of the Baupost Group, we could invest our $10,000 directly into SPDR S&P 500 (SPY), and see our returns. Compared with values of portfolio 1 and SPY, as well as the returns of portfolio 1 and SPY, we could easily see whether our portfolio can beat the market.The results are as follows:
Sources:
http://finance.yahoo.com/
Database of GuruFocus.com, LLC
Chart 2 shows how much our portfolio 1 could outperform the S&P 500 based on the asset value. It is calculated by (Value of Portfolio/Value of SPY-1). From Chart 1 and Chart 2, we can see our portfolio 1 clearly outperformed the market from November 2006 to August 2007. From July 2009 to May 2005, the value of our portfolio 1 and the market are pretty close. Other times, we underperformed the market. Chart 3 indicates the monthly return we could earn. We can see our portfolio 1 followed the market trend, yet outperformed it when the market was up and underperformed it when the market was down. The total return for investing SPY is 32.18%, and the total return for investing in portfolio 1 is 29.39% if we held stocks until now.
The Table 3 shows the annualized performance of S&P 500, portfolio 1. We can see our portfolio 1 had relatively high returns in 2006, 2009 and 2012, yet did a really bad job in 2007 and 2008. The extremely high return of 2009 is only because our portfolio went down so much in 2007 and 2008.
Overall, this portfolio underperformed the S&P 500.
Scenario 2: Rebalance Each Time the Top Five Holdings Changed
Unlike the investment strategy we discussed earlier, we followed exactly the same top five holdings of the Baupost Group since Jan. 3, 2006, as shown on Table 1, and made adjustments quarterly. We call it portfolio 2.
The results are as follows:
Sources:
http://finance.yahoo.com/
Database of GuruFocus.com, LLC
From Chart 4 and Chart 5, we can see our portfolio 2 only outperformed the market from November 2006 to September 2007. After that, we underperformed the market by wide margins until now. From Chart 6, we can observe the similar result as of Chart 3 that our portfolio 2 followed the market trend, yet outperformed it when the market was up and underperformed it when the market was down. The total return for investing in SPY is 32.18%, and the total return for investing in portfolio 2 is 8.71% if we held the stocks until now.
The Table 4 shows the similar result as of Table 3. We can see our portfolio 2 had relatively high returns in 2006, 2009, 2010 and 2012, yet they suffered far greater losses in 2007 and 2008. And the losses directly lead to the low seven-year return of our portfolio 2.
Conclusion
The above results are surprisingly different from what we had for Warren Buffett and Don Yacktman. Both strategies underperformed the market. And it is even worse when we actively tracked the top five holdings and rebalanced when the top five holdings changed. Seth Klarman is well respected as a value investor. He may keep good return records for the Baupost Group, yet we did not find his top holdings outperforming the market during 2006 to 2012 compared with Warren Buffett and Don Yacktman. His portfolio kept a large amount of cash and bonds. He also invests heavily in real estate and other non-liquid assets. Those might have helped his returns.
Compared with Warren Buffett and Don Yacktman, Seth Klarman’s holdings are usually smaller companies with weaker financials. We do not have his recent returns. But coat-tailing his stock picks does not seem very rewarding.
