Seth Klarman on finding value and maintaining discipline

The only way to invest well long term is to be differentiated from the crowd. And the only way to kind of die as a business is to be too differentiated from the crowd. And at the same time, the only way to outperform is to be different.

Welcome back to Talks at GS, where we speak with pioneering leaders about their careers and the future of their fields. In a live conversation, Goldman Sachs' John Waldron spoke with Seth Klarman, CEO and portfolio manager of the Baupost Group. This session was recorded on May 27th, 2025 at Goldman Sachs headquarters in New York City. Let's listen in to the Talks at GS now.

Morning, everyone. Welcome to another session of Talks at GS. Today, I'm delighted to be joined by Seth Klarman, who is the chief executive officer and portfolio manager, still portfolio manager, of the Baupost Group. Baupost, which Seth has overseen since the company's inception in 1982, manages around $22 billion on behalf of individual and institutional clients. Baupost invests in a wide range of asset classes, publicly and privately traded debt, equity securities, real estate, and private equity. Seth is famously the author of Margin of Safety, a book that highlights his value investment philosophy that we're going to talk a little bit about shortly. Seth is a member of Harvard Business School's Board of Dean's Advisors and serves on the board of the Broad Institute.

He is vice chair of Beth Israel Hospital's Board of Managers and a member of their board of trustees. He's a member of the American Academy of Arts and Sciences and is co-chairman of the Klarman Family Foundation. We have so much to discuss today. Why don't we all give Seth a warm welcome to Goldman Sachs. Thank you very much for being here.

Thank you for the opportunity.

So I want to start back with the book. 1991, you wrote this book called Margin of Safety. And it talks about your investing philosophy, particularly around value investing, which I think has become your hallmark and your calling card. Just talk about how you thought about value back in 1991 and has your definition of value investing and value as a concept changed over the years?

Yeah, so I think value investing is kind of an idea that you're buying things at a discount. What exactly is a discount and what the right amount of discount is debatable has always been debatable. So to me, I probably was pretty literal in following some of the principles of value investing from Ben Graham and then from Buffett in the early days of my career. So probably looking at least as much at book value, tangible asset value as I was at franchise value or about growth of a business. And I've evolved for sure over time, realizing that if you're going to buy value, first we've got to be right about it. Then you've got to think, how are you going to get the value? Is there a catalyst? What's going to cause value to be realized?

So I've gone through an evolution. Margin of safety is a principle that I've not deviated from. Margin of safety is simply the idea that you want room to be wrong. A lot of things are going to happen in the world. You're not going to be able to predict all of them. So if you buy at a big enough discount, you've got that built-in margin of safety. And we construct our portfolios always focusing on downside protection, on catalysts for value realization, and other things that give us a degree of protection no matter what happens.

Is margin of safety still in your underwriting philosophy? Do you characterize it and value it and price it the way you think about it today?

Yeah, so I think the way I would describe it is we don't add up a margin of safety and say that's a big enough margin. But what we do think about is how well protected is this investment or is this portfolio of investments? What are the elements of risk? What is it going to cost? I'll ask the team sometimes when they're pitching me an idea, 'If we're wrong, and three years from now we're sitting down, or two years from now we're sitting down on this name and going over what went wrong, what are we going to be talking about?'—trying to suss out that maybe we already know today where the biggest risks are and have we effectively valued that or taken that into account. We try to have a portfolio where we've got downside protection from hedges, from some amount of cash that we might hold that gives us some kind of buying power in the worst of moments:

Senior debt instruments that tend to have less downside, structural seniority in our investments or put rights in our investments, some of our private investments. So, in a myriad of ways, we're protecting the downside. The downside doesn't always come, but when it's there, we tend to thrive in those moments. Yeah, for sure.

All right, so just maybe a little bit more on valuation. So, a lot's changed. I mean, in 1991, we had a much different macroeconomic environment, valuation environment. We're in a world where people tend to want to believe valuations are more stretched. There's a growth mindset in many parts of the market today. How do you think about traditional metrics? What metrics do you look at? Obviously, different by different asset classes, but just give us a little bit more on valuation: how you think about valuation, how you think about fundamental value?

So, our investing is based bottom-up, situation by situation. So, even in an expensive market, you can still find bargains. You need to verify that they are bargains. I think, for me, I try to always have the balance. We like our investments, but we need to understand maybe what vintage this is likely to turn out to be. So, in an era where valuations are particularly high, back four, five, six years, when rates were held at zero for a decade, I think that we kind of in our heads knew that's not sustainable, that's never happened before, it probably will never happen again. While it's here happening, our job is still to find good investments. Are there things we can do? And so I'm always balancing: we like what we own,

But if the bigger picture, such as where we are in a historic valuation framework, is extended, it's a time maybe to pull back, a time to demand a little more of your investments and maybe hold a little more cash. So we're always balancing that, but we're really driven bottom-up, but we will have a layer of worry around the top-down.

And metrics that you're kind of more reliant on than not today versus in the past, are there things that you're more inclined to look at today?

We look probably somewhat more at private market value, at what price would a takeover of this business happen, where have recent comps been, or trading comps. The thing is that those comps are not absolute value; they blow with the wind, too. When financing is less available or when buyers realize they were too optimistic, things get reset lower often. And so you have to look at something. You can't just say, 'I am making up a level that I'll buy things, and if they don't hit here for 30 years, I don't care.' You do care. It's beyond the human frame. It's beyond your client's tolerance—many, you know, way beyond. And so you've got to find things to do within some manageable timeframe. And so I try to comfort myself that we're protected in the various ways I mentioned—that we are senior or we have a catalyst or something that will drive an outcome—because waiting for things to reprice cheaper to get in...

At some point, it's beyond the timeframe you or your clients or your employees will have. And at the same time, you don't want to just have no regard for valuation and essentially blow up at the first sign of trouble. And that's another—we create guardrails in the portfolio, so we don't leverage the portfolio. And we try to diversify into a number of different asset classes, different countries, different industries. So we're not making a singular bet on one or two things holding up for our entire outcome. Yeah.

So you're pretty famously patient. And one of the things I've observed about you is you're not afraid to hold cash. You're not afraid to just wait. And to your point, you can't wait forever. But I'm interested in how you think about that—your ability to be patient and observe and maybe withstand lower returns than peer firms or other market instruments because you don't like what you see. Maybe just talk a bit about that.

Yeah. Look, to be a value investor, sometimes I think you need a bit different wiring—wiring that makes you want to buy in a down market, where most people are scared and are selling into a down market, makes you want to sell into a really strong bull market, where most people are getting more excited the longer it goes on. So I think I probably have backwards or certainly differentiated wiring. That's a critical thing. I think that being patient... First of all, we were formed by our clients. We were formed in 1982. Three families had sold assets. They had investments in Channel 5 in Boston, the ABC affiliate, and another one had a computer software type of business. They were sold. They were trying to figure out what to do with their money.

So they were around 50 years old. They'd made $10 million each, give or take. And they didn't want to blow through it. They didn't want to have to, you know, re-earn the $10 million and have to start over. They were focused on wealth preservation. So we started with the risk aversion. I was probably a good match for that. But also, like, I think that value investing is such a perfect discipline for not blowing up. You know, when you think about Warren Buffett, people talk about his record and his philanthropy and his annual Woodstock of Capitalism. But one thing he really did amazingly is never blow up and never really go through even a rough period. And it was some combination of having a structure from the capital being permanent

and having the discipline in what he's doing. And the combination of that made him relatively unique. Like, I don't think there'll ever be another Buffett, partly for the longevity, but partly because many people could never sustain that kind of return without blowing up. So I think it's... I am patient in that—my biggest worry most of the time is that I'll never find another good idea. If I never find another good idea, life will go on. I'll have some net worth. We'll return the capital to clients. We'll go on. But there's a European value investor who said, "I'd rather lose half my clients than lose half my clients' money." That's the willingness I have, that I'd rather be out of favor, I'd rather be disappointing people than doing things that I believe are not safe with their capital.

So maybe I'm a good fiduciary, if at times an incompetent fiduciary. I don't think it's incompetence. I think it's protecting their wealth. Well, that's what I was going to say. People think they're hiring a manager to make them money, but probably they're hiring a manager to keep them out of trouble and maybe fight their own instincts sometimes.

All right. So you once said, "The analyst needs to fall in love with positions. As portfolio manager, I just date their ideas." So expand on that.

Yeah, so first of all, it was just to me a common-sense observation that it is a high bar for somebody to look through all the securities out there, come to a conclusion that this is the one, the reason it's mispriced, the valuation being proper, and having the courage to come to me and some of the other partners in the firm and say, 'I think we should do this.' So, in a way, they've been dating that idea for a long time, and then they decide to get engaged and propose it. And the job of a PM is different, and I realize that there are things—there's freight attached to them loving it so much that they are comfortable recommending it, including behavioral biases that we all know that exist. They'll anchor towards their belief that it's going to work out.

They will like having some names in the portfolio. 'How am I going to prove to Seth what a talented investor I am without names? How am I going to ever get paid if I don't have names?' So they want to have names. I want to have profits, and they're not always the same thing. So I will ask more questions. I will probe and challenge regularly, not because I disagree, but because I think it's always important to know that they're not just filtering information selectively or that they're locked in. Maybe it's gone down. And while I don't care if it's gone down—I mean, half the names are going to go down before they work out—but if they are locked in, maybe irrationally, they're not accurately taking in new information, or we're not realizing, 'Hey, if we didn't own this, would we actually be buying it?'

That's kind of the same thing. And if we wouldn't, then what's it doing here? So I think just that's the ability of the PM to see things differently, which is when I gave that quote.

What is the investment process like at Baupost? How many times does an idea get pitched? How long does it take to make a decision? You know, how broad a group? Just maybe unpack that a little bit for us.

Yeah. So it depends on the situation. Typically, a partner will work with one or two analysts. So they'll be in the room. I'll be in the room. If it's an equity, the co-heads of equity will also be in the room. And often Jim Mooney, who's our president, will be in the room. So four or five, sometimes six. They will have sent something in advance, often at alarmingly late hours the night before that no one will have fully read. Sounds like Goldman Sachs. Perhaps on purpose, but often well ahead. And so depending on what it is, and depending on how differentiated it is from other things we've done, the conversation might go to the risks of this new area that we haven't been in before. And often we've booked an hour.

Sometimes that's plenty. Sometimes it's not nearly enough. I'm trying to delegate more as I think longer term around succession planning stuff. So trying to give people rope, but if it scares me or I don't think they've really thought it through accurately or it's just not enough return for the risk or our liquid capacity is limited, then I'm more likely to be tough on the idea. If I'm super excited about it, it's naturally easier. And then there'll be some significant probing around: Have they thought about the risks? Have they thought about the downside? You know, I'll ask them, like we said before, 'If in two years we're sitting down wishing we'd never heard of this, what will have gone wrong?'

Partly because it forces you to think again about what's the thing you're sloughing off? What's the thing you're not as worried as maybe you should be? But there's a lot of things, and we'll also ask before we even buy it, 'Where would you sell it?' If they say, 'Well, I'd like it at 70, but I'd sell it if it got to 80,' it's like, 'You're that sure that it's going to move 15% and that it's...' because what if it goes to 50 before it goes to 80? Maybe it's not the right entry point. So, we're just debating everything, and it tends to be a very good back-and-forth. I think that it... is giving our young people, and we'll have the youngest person in the room presenting if they've been there more than a week or two.

So, I think it also is pushing our responsibility. The senior person can come over the top, they can add thoughts, but I want my people to be good at presenting, good at making arguments for, and sometimes even against, their own ideas.

And I assume it's a culture of, you know, saying, 'I don't like this' is more than okay. It's—people aren't feeling like they have to be pro, other than maybe the presenter.

It's more, I don't want people slinging stuff around, but yeah, it's definitely okay. And often the decision will be, 'Let's wait for a lower price,' or, 'Let's check out this, this, and this and come back again in a couple of days.' Right. Makes sense.

So, value investing is often thought of as a lot about human psychology, and you've touched a bit on this, but you're an astute observer of human psychology around investing. What have you learned about human psychology in terms of the investing business?

So, I kind of think that if there's one thing that differentiates Baupost from many other firms, it actually is how important psychology is in our process, both in terms of downside protection, as I described. That the ability to not be the deer in the headlights, the ability to not be getting margin calls, not be having redemptions, not be scared out of your mind when something's gone against you, is probably the most enhancing thing to long-term returns. That if I can buy on days that my smartest competitors are on the sidelines or even selling to me, is a great day to be buying. It's also, by the way, a great time to be chatting with your friends because on a down day, everybody's willing to share their best ideas because they're not working for them.

So, you can kind of get more ideas just by picking up the phone. So, there are benefits to being open-minded and well-positioned on days like that. I think Daniel Kahneman does an incredible job in Thinking, Fast and Slow, delineating the ways that all of our... every one of us has cognitive biases and that we live with them to some greater or lesser extent. And those have to do with loss aversion, being unwilling to take a loss, with anchoring to what you used to think, whether or not it still makes sense to think it. And there's just a myriad of those. So, seeing them in action is another... It's unavoidable, but the better investors are able to... box those in and not have them dominate their thinking.

And then, finally, I think trying to understand... I mean, one of the observations I had years ago, we were looking at Federated Department Stores, financial distress, and Macy's, and I thought, 'People just can't wait to get out of those bonds, but they're not thinking about around the corner, those companies will come back out of bankruptcy, produce good profits again, and they'll be back in the S&P.' And so, what goes around comes around in investing. And I think psychology of whether it's the selling behavior around a spinoff, or it's the buying demand for particular asset classes people can't get enough of, that bubbles form and things get oversold. And that's what a value investor lives for, is moments when you can sell stuff at great prices and moments when you can buy things at great prices.

Do you change your mind a lot? Are you good at changing your mind? How do you deal with your own biases?

My biggest bias is probably around holding things too long—that waiting for them to turn out, even though we know investments don't owe you anything, it's easy to think, 'Well, I really don't want to sell this because it might be about to work out.' But at some period of time, it's time to let it go. So I push myself, knowing that that's a place where I can sometimes fall short. Everybody has susceptibility to biases. I think I and my partners do a really good job of not falling for it too much. But even the best investors press too hard in certain markets when the market's away from you, when nothing is distressed. It's hard not to press. The challenge is whether you can invest in things that won't be too bad on the day when the market turns.

We know markets are going to turn, and I, at least, don't think we have any ability to know when they're going to turn or how bad it will be. So we try to own a portfolio that we're going to like all of the time enough and that won't get us in any real trouble.

All right, let's shift a little bit to the market today. So you were just talking about distress, right? You like investing into distressed situations. Doesn't feel like a particularly distressed market right now, but you must be searching and finding things to do. How would you characterize the opportunity for distress right now, Seth?

Yeah, so as everybody probably has some sense, we will be in the four areas that we mostly traffic in, which is public equity, public credit, private investments, which will be equity and credit, and commercial real estate on a private basis. And so because we slosh capital bottom-up into the areas by finding individual investments, so we end up with more distressed when there are more names that are distressed that we're looking for. We don't force money. We don't have top-down asset allocations. So our distressed exposure was probably low- to mid-single-digit in the late 'teens. It then probably got to 22% or 24% by about 2023. It's dwindled a little bit from there, but we found enough off-market, weird credit stuff that it's probably still around 20%.

So that's where it is today. A lot of the categories, we're normally concentrated in one area. We hope it's when it's distressed or other credit because our record in credit is better than all our other. We do well over time and everything, but credit is easily our best area. So we would love for more credit to be around. Do what you can to help us. But all of the areas, it's a very balanced portfolio. Privates, 22% to 24%; credit in the 20 range; equities, low 20s; real estate, mid-teens; hedges are several; and maybe cash of low teens as well.

So just let's talk about credit for a second. Where would you predict we might see cracks in credit and where, if you were projecting where you might see distress, you know, on the forward, because we've had an extraordinary credit cycle for quite a long time, actually.

Yeah. This is not a strength of mine to say what's going to happen, because I'll predict 10 of the next two recessions. But the private credit seems like a vulnerable area. It's not exactly been tested. With rates moving up, with the bond market acting really funny on down days for equities, it suggests that maybe the US has reached sort of the peak amount of debt the markets can handle, at least for now. It's possible, and I say this is only possible, that the DOGE effort of trying or acting like you're trying to reduce our spending and then failing might actually accelerate a reckoning internationally. Like, 'Look, they did all of that and couldn't reduce their deficit at all.' And of course, the tax cuts raising it back to 8% or something, GDP sort of—

Unheard-of kind of numbers for the US other than an extreme environment. We're almost, like, causing our own extreme environment. So I think things could break. I'm not sure everybody has adjusted to that. These interest rates are also historically normal. They're not high rates. We've seen rates into the double digits and much higher. So I don't know what's going to break. Commercial real estate—the logjam is starting to break a little bit. There are a lot of legitimate sources of stress, but that's a lot of paper, a lot of stuff coming due. And so I could imagine more selling there. We're seeing more to do there than we are in the other areas right now.

Anything you do from a leadership perspective to prepare your teams for what's a pretty dynamic and volatile environment? I mean, is there a lot of learning and kind of preparation that goes on in advance of when the real distress opportunity shows up?

Yeah. So I think that... the younger people on the team have only seen the markets that they've been—you know, when you're in college, most people aren't staring at the market. So the 26-, 27-year-olds just haven't seen anything really bad. So we talk about it a lot. I get other people to talk about it, not just me, so other partners or even outsiders, just to remind people that it won't always be like this. Stocks don't always trade in a narrow range. People don't always buy the dips. And truly bad things can happen in the world and not immediately fix—they can stay bad. So trying to help people just have a bit of a perspective. We also try to make it easy to be in that environment. You know, we don't expect people to do anything on their own fully.

We want them to be communicating. We want them—and this is probably one of the most important things—never to let a bad position cause them to... screw up their psychology, kind of like the relief pitcher that gives up the game-winning home run in the bottom of the ninth. You want them tomorrow not thinking about that, but thinking about, 'How am I going to get this guy out today?' I mean, in April, we were probably in a bit of a place where we were so concerned about tariffs that we were running analysis of every investment we have, 'What's the implication of tariffs?' But it kind of makes you a little bit less willing, maybe, to swing the bat at the next pitch. Yeah, agreed.

Let's talk just about—I mean, the firm has been extraordinarily successful. I think 42 years you've been at this. You've talked a bit about this, but the keys to success and longevity for that long. And then the second question is, what continues to drive and motivate you?

Yeah, so keys are never big-time screwing up—that you don't get to have 42 years if you screw up at year 10 or year 15. So keeping your nose to the grindstone, staring at risk obsessively and trying to manage it, and limiting the drawdowns. We've had, like, five down years in our history, the worst of which was 12%, and only one other one was double digits. Managing risk that way has let us thrive. Having great clients and reminding them all the time, almost like educating them through our client communications, that the need for a long-term orientation, the need to be going against the grain, to be pulling back in strong markets and to be buying into down markets. I also would just say, I think our greatest accomplishment is not—our record's fine, but I don't think it's our greatest accomplishment.

I think our accomplishment is the impact we've had on people's lives, the impact we've had helping people have 40-year, 30-year, 20-year careers, and the impact we had on the local economy, on the philanthropic economy—like the values that Baupost has distilled in its people. We actually have a philanthropy committee that I don't have any partners on. I kick them all off. So people from IT and accounting and tax and front desk serve on our philanthropy committee, and I get, whenever they finish their three or four years of service, I get notes from them that that was the most meaningful thing they did in their time at the firm. And I love that, right? You don't have to be a partner in an investment firm to know how to help people through philanthropy.

So all of that. And what was the second half? What motivates you to keep going? Three things: I love our people and I love interacting with them, mentoring the people. I like serving our clients. It's kind of a calling at this point. And I like the personal philanthropy that I can do by continuing to deliver for everybody else. Philanthropy has just become very meaningful to me and my wife and we're proud of the work we've done.

Let's spend a minute on your philanthropy. I said at the outset some of the things that you're involved in, but just talk about your priorities, how you and your wife thought about it. How do you organize it? You must have a process because everything you do has a process. So what's the process?

You know, she goes every day to our foundation. She doesn't run it anymore, but we have a great head and about 20 employees there. We're organized into a number of areas, but like Baupost, we structure mostly with generalists. And the foundation world is like the academic world, a little bit slow-moving, narrowly siloed. And I just don't think you're at your best when you organize that way. So they're more a team of generalists. They're the best team we've ever had at this point. So we can move capital around, closing areas and moving into other areas. American democracy and, to some extent, global democracy is our number one, where we're just worried about all the things that are happening that are undermining, whether it's a free and fair vote, getting people out to vote, election systems, what would lead to a better outcome.

And so that's number one. We do a lot in medical research, both in the U.S. and in Israel, and then just a lot in the local Boston area of people in the greatest need. That's spectacular. Horse racing, another passion. Can you spend a minute on horse racing? I have two sports passions. One is horse racing, and I grew up in the shadow of Pimlico Racetrack in Baltimore when I was a kid. And the other is baseball, where I'm a small investor in the Boston Red Sox. They're both just like investing in that they're deeply analytical pursuits, taking in lots of data and information, trying to sort it out in a way that finds market inefficiencies. Can you figure out which horse to buy? Can you figure out what race to enter?

Can you figure out the right strategy in the race to give you the best chance of winning? So I guess I just love all the data and all the analysis of trying to find a path through.

You strike me as a lifelong learner, like you're constantly curious and always, you read voraciously. Maybe talk about that—like, how are you wired? Give us some coaching on being a lifelong learner.

Yeah, I mean, I'm pretty sure everybody at Goldman Sachs is a lifelong learner, too. You know, I've noticed it most significantly in our life journey. I think that trusting that you're on a journey and wanting to navigate it as well as you possibly can, I think I also just am drawn, I'm really curious, I read a lot. Used to be more books, now it's sadly more articles, like all of us on our phones. But, you know, it's partly having access. I'd like to think it's because they're better articles, but I'm not sure about that. And in a way, that's why we go to school in the first place, is not to learn. None of us remember the physics or whatever the hell we learned in sociology. It's to learn how to learn.

So when life dishes something out, you can get smarter about it.

Anything you're reading, not an article necessarily, but any books or other things you're reading that you think are...

We should be reading? Oh, yeah, for sure. So the first one, the best book I read in the last couple of years was a memoir by a woman named Kathryn Schulz, who's at The New Yorker, who wrote... It's called Lost and Found. It starts out as a profile of her dad, who was always forgetful and losing things. Then he started to lose his memory. Then he got Alzheimer's. Then he died. So first you lose things, and then you lose your memory, and then you lose your dad, and, and then she found her life partner. It's beautiful. It's beautifully written. I actually was reminded of it the other day because I heard Ezra Klein at a private event, and he named it as the book he's in the middle of. I wanted to go up and say, "Yeah, you should ask me."

I would have sent it to you earlier. So my habit is when I find a great book, I go and see what else the person wrote. Sometimes it's one-off. Sometimes they wrote others. She wrote something called Being Wrong that I actually think everybody in investing should read. It's beautifully written, and it talks to experts on being wrong, on behavioral, economic stuff. There's a lot to being wrong, to admitting you're wrong, to recognizing when you're wrong. There's no actual state called "I am wrong," because by the time you realize you're wrong, now you're right. That's right. So really, really interesting stuff. So share it around. Okay. I will. And then I also read a book called The Light Eaters, which is about plants who eat light.

And it's fascinating. Plants have an intelligence far greater than almost anybody in this room probably understands. And I was told that it's not that good and that I should read the book about fungus, so I'm in the middle of that book. Mushrooms, perhaps, better than plants. But it is unbelievable what plants do in response to stimuli. And, you know, as somebody who knew a lot of... I mean, my mother had a green thumb. We had plants all over the house. I mowed lawns when I was a teenager, and I didn't know anything about plants till I read the book. So it was The Light Eaters.

All right, Seth, you've been extraordinarily generous with your time and your insights. We thank you for being a good client of the firm. We thank you for spending time with us today, and we wish you many, many more years of success.

Thanks for joining us for another episode of Talks at GS, recorded on May 27th, 2025. If you enjoyed the show, we hope you follow on your platform of choice and tune in for another episode. The opinions and views expressed in this program are not necessarily the opinions of Goldman Sachs or its affiliates. This program should not be copied or published without the express written consent of Goldman Sachs. Each brand mentioned in the program is the property of the company to which it relates and is not used to imply any ownership or license rights. Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this program. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of any information contained in this program.