Seth Klarman wrote the book, Margin of Safety.  I’d link you to it but I’m worried I’ll get sued.  You can use Google to find it online or you can pay over $1000 on ebay for a copy.  Its a good book.  Read it.  Seth is a very good hedge fund manager.  He has $27 billion under management after giving back $4 billion last year.  The Baupost Group is his fund.  Seth says he’s about 60% in cash right now.


Seth’s end of year letters don’t usually leak out but the 2013 letter just did.  Its on Zero Hedge (link below) and well worth reading.  Here are my notes:


Reasons to be Bullish if Congentitally Inclined:

  1. PE’s aren’t horribly high
  2. Deficits shrinking
  3. Consumers are lowering their personal debt
  4. Housing is recovering
  5. US energy independence is under way
  6. Bond yields are still so low that equities are the only place to go
  7. It doesn’t matter that the S&P has tripled since 2009, interest rates spiked or the Fed is tapering
  8. QE worked.
  9. The Fed will come to the rescue again if necessary
  10. The Bernanke/Yellen Put is intact
  11. No bubbles are in sight


Serious Questions for Rulers:

But if you have the worry gene, are more focused on downside than upside and more interested in return OF capital than return ON capital … in other words, if you are a Ruler there are serious questions to be answered:


  1. Near zero interest rates distort reality so what are the consequences going to be?
  2. Can the Fed end QE without a crash?
  3. Deficit spending propped the economy and inflated earnings and it can’t keep going, can it?
  4. Schiller PE is over 25.  The three prior times were 1929, 2000 and 2007.  Isn’t that scary?
  5. Junk bonds are now in a bubble so when does the bond bubble pop?
  6. Credit quality going down and so are more and more small banks.  Scary?
  7. Margin debt to GDP near all-time high so isn’t that a problem?
  8. IPO’s are near a record number, Twitter is at a 500 PE, Netflix PE is at a 181, Tesla PE is 279.  Signs of a top?
  9. Lowest proportion of Bears since 1987 – another sign of a top?
  10. Europe isn’t fixed.  Greece’s debt to GDP is higher now, Germany’s is, too.  So will they just inflate the Euro?
  11. Europe has 7% of population, 25% output and 50% of its social spending so will it finally crash?
  12. Bitcoin prices went through the roof while gold fell 28%.  Isn’t that weird?
  13. We live in The Truman Show in a plexiglass bubble built by the Fed.  When will we discover it?
  14. The Fed purchased 90% of all eligible mortgage bonds in November.  What happens to interest rates when they stop?
  15. What is fake cannot be made real, can it?
  16. Fed can change how things look but not how they are, right?
  17. Hasn’t the Fed has become enabler of what it was created to prevent, ie, massive volatility in the economy?
  18. When the show ends, who will be broke?
  19. Won’t financial markets have to decline someday?


Here are Seth’s conclusions:

  1. Rising stock markets stop being government policy
  2. QE will end and money won’t be free
  3. Corporate failure will be permitted
  4. The economy will turn down
  5. Investors will lose money
  6. Capital preservation will be favored over speculation
  7. Interest rates will be higher
  8. Bond prices will be lower
  9. The Return from bonds will be commensurate with risk
  10. Fear will return and spread like wildfire
  11. Few will be prepared.


My Thoughts on Seth’s Thoughts:

Your values are not what you say.  Your values are what you do.  Talk is cheap.  I’m half in cash for a reason.  What I can do while waiting for ‘the end’ is try to find businesses I’d want to own even if there was no stock market.  And hope to be nimble enough to dance out when the time comes.


Fear is our friend.  Greed, jealousy, lack of patience and the need to do something are our enemies. Try to be ready for the fear by fighting off the greed gene, exercising patience and go play.


To learn more about Rule #1 Investing click the button below to download my FREE 6 Principles to Market Crushing Investing today. Now go play.

free video series




Now go play.

About Phil Town – Phil Town is currently recognized by the American Association of Individual Investors as their #1 investor in the world. Phil is an investor, a hedge fund manger, a best-selling author, and a teacher. He spends much of his time teaching “Rule 1 Investing” – The #1 strategy for successful investing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

135 thoughts on “KLARMAN’S 2013 LETTER HAS A DIRE WARNING”

    Yet Another Mike says:

    I agree with the general points of this post, but I’m having trouble reconciling “Interest rates will be higher” and “Bond prices will be lower” because I would think that investors will pile into bonds in a bid to preserve their capital, which would drive rates lower and prices higher, right?

    Also, I don’t see how the Fed can meaningfully raise the funds rate or why they would want to with the government et. al. so indebted.

    What am I missing?

    Tuna says:

    Anyone use seeking alpha PRO? How much is the subscription?

    Garrett says:

    Here’s some trends and things:
    BP’s Earnings come out tomorrow. I’ll be looking forward to reading the CEO’s quarterly transcript.
    Panera took a bit of a drop today prior to earnings – makes me wonder if someone leaked bad news. I don’t own Panera, however, I have traded in and out of it at times.
    Visa also took a little hit on the downside.
    Buffett’s IBM was still frustrating the street’s expectations for more revenue after posting their quarterly results. What Mr. Market doesn’t seem to understand is IBM is undergoing a significant shift in their business model. Read ALL of the articles on Seeking Alpha written by “Early Retiree”…he’s really good at teaching while he’s writing articles.
    One of the guys I mentored over the years recently sold a bunch of Jan 2016 PUT contracts on Under Armor at $27.50 (UA’s current price is about $46.74) I think that’s a great price is to own UA, but I replied back in an email that I suspect between now and Jan 2016 Mr. Market will have a nice correction and I didn’t want to be lock up too much cash for that long a period. If UA goes up in price, he’ll probably close it out well before expiration.
    Bed Bath and Beyond (BBBY)is flooring up nicely at around $62.00 after their quarterly earnings report.
    As is a favorite of mine, DeVita HealthCare (DVA) – another significant Buffett holding. They’re in a short-term trading range until earnings come out again.
    To Your Wealth!

    Garrett says:

    Hi there Anne!

    Joe M., / Rulers
    Good article Joe M. I’ve read some of that in the past regarding Warren’s option strategies. Pretty cool when you can sell enough premium that you can use THAT money to invest in other equities.
    I did something similar today…obviously not nearly on such a grand scale!
    I’ll share it with the Rulers here and then take a quick look at “Seasonal Patterns” in Mr. Market.
    I have X amount of Shares of XYZ. I needed some additional cash to invest in an apartment complex. I didn’t want to sell any of my shares in order to raise the cash I needed.
    So what I did was I sold a Covered Call out in the future. I sold just enough of them that I collected the cash I needed to invest in the apartment complex.
    In the meantime, my shares are still making me money because I’m collecting a dividend and now I have the cash working in another investment. If the stock should drop significantly due to a Market Sell-off, I have a margin of safety because I sold the CALL which can help offset a decrease in the per share price.
    I’ve moved a lot of money out of the Market into cash and taken profits off the table recently. I’m about 60% to 100% cash in all our accounts and I’m attempting to build significant position in two or four companies if I can get Mr. Market to cooperate with a little volatility.
    On another note:
    There are definite Seasonal Patterns in the markets that traders have used to their advantage. One common expression is “Sell in May and Go Away” (Go away till about September)
    I have a book on Seasonal patterns that is quite interesting. And because a lot of people believe these things, they are kind of self-fulling prophecies.
    Here’s an example:
    “If you use the Dow Jones Industrial Average and go back to 1950, the statistics are simply staggering. Hypothetically, had you invested $10,000 but only owned stocks between November 1st through April each year, on April 30th of 2013 that $10,000 would have been worth $775,055. That’s pretty awesome. Now, had you done the exact opposite and purchased the Dow Industrials every year on May 1 and sold on Halloween, you would have actually lost $687 over the past 63 years.”
    So for me, my goals and the companies I owned, it was a reasonable and rational time to take profits and get out of the Market after 2013’s meteoric Fed Induced ride.
    I suppose someone is going to tell me that I’m attempting to time the market…No, honestly, I’m just closing a few large positions that were profitable and had reached a higher PE Multiple. Their future earnings would have had to have been rather exceptional to justify the higher PE Multiple. I just didn’t think the up-side potential was worth risking the greater downside of a correction.
    To Your Wealth!

    Anne (iloveangels) says:

    Thank you so much for sharing that Joe!
    All the Best to You!
    :) Anne (iloveangels)

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>