Heard in the Village: June 2010

The villagers agreed with what was said in an interview in the Wall Street Journal from Seth Klarman, President of Baupost Group that has averaged nearly 17% over the past decade. He also wrote “Margin of Safety” in 1991. He seldom speaks in public but he did this interview with Jason Zweig.

Some comments he made were:

He had compared the financial markets to a Hostess Twinkie. He meant there is nothing natural in the markets today. Everything is being manipulated by the government. He was also doubtful the European bailout will work.

“The government is now in the business of giving bad advice. ...By holding rates at zero, the government is basically tricking the population into going long on just about every security except cash. … People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate.

“We didn’t get the value out of this crisis that we should have. The Great Depression gave our grandparents a mentality to be thrifty with their money and prudent with their investments. This crisis was only a mentality of a few bad weeks.” “I am more worried about the world, more broadly, than I ever have been in my career.” You can make good investing decisions and still end up with bad results.

Money will be worth less if governments keep intervening anytime there’s a crisis. To protect against a decline in purchasing power is to buy what is out of favor. Gold, currencies and other hedges are already expensive. He would stay out of them.

He said bottom up stock picking of undervalued securities is likely to be better than top-down views on what is going to happen in the world at large. Wait until things get scary cheap and then buy them.

“Sometimes, when you can’t figure out a good defense, the best thing to do is to go on offense.”

The villagers liked the last idea the best. They had already figured part of their defense was to buy and trade good quality dividend stocks to grow a future income stream. Trading gave them good cash percentage for defense while stocks gave them income and some protection on the declines.