Seth Klarman's Thoughts On Investing Risk In The Trump Era

Seth Klarman, the billionaire manager of hedge fund Baupost Group, recently penned a letter to investors that included his thoughts on President Donald Trump's potential impact on financial markets. Klarman typically avoids the media spotlight, but the registered independent publicly supported Hillary Clinton prior to the election.

Globalization And Protectionism

According to a New York Times piece from Andrew Ross Sorkin, Klarman is skeptical of the general market enthusiasm for Trump. He sees Trump as a significant threat to economic stability. In addition, Klarman sees Trump’s protectionist policies as a futile attempt at fighting natural economic globalization.

“While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off,” Klarman wrote.

High Volatility Under Trump

Klarman noted that Trump’s leadership style is also inconsistent with the type of attitude that encourages investment.

“The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty.”

Related Link: How To Invest Like Seth Klarman

Klarman pointed out that the extended bull market has stock valuations at extremely high levels, a recipe for disaster should Trump make political missteps.

“If things go wrong, we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation, and global angst,” he warned.

Unfortunately, Klarman’s letter didn’t provide any insight into which stocks he has been buying or selling since Election Day. However, Klarman did share some interesting insight about the future of value investing.

ETFs

He believes the rise of ETF investing and the recent underperformance of hedge funds has created market opportunities for long-term value investors.

“One of the perverse effects of increased indexing and ETF activity is that it will tend to ‘lock in’ today’s relative valuations between securities,” Klarman explained.

“This should give long-term value investors a distinct advantage. The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become,” he concluded.

Baupost Group currently manages roughly $30 billion, and the fund has only had three losing years since 1982.

Prior to the election, Klarman’s top investments included Cheniere Energy, Inc. LNG, ViaSat, Inc. VSAT, Synchrony Financial SYF, Allergan plc Ordinary Shares AGN and Antero Resources Corp AR.

Image Credit: By James Mattis - 170127-D-GY869-004, Public Domain, via Wikimedia Commons