Seth Klarman: 'Little Evidence Of Thought' Behind Stock Market Rebound

Billionaire hedge fund value investor Seth Klarman is extremely skeptical of the stock market rebound off the March lows.

In his recent second-quarter letter to investors Klarman, who manages the $30 billion hedge fund Baupost, said a combination of faulty investor psychology and an enabling Federal Reserve are driving stock prices higher while the real economy sputters.

The SPDR S&P 500 ETF Trust SPY is now up 48.6% since March 23, yet the economy has lost more than 1 million jobs per week for 20 straight weeks. S&P 500 earnings are down 35.7% so far in the second quarter, while revenue is down 9.6%.

Psychology And Economics: In his letter, Klarman said investing is a combination of psychology and economics, and the two factors have diverged significantly in the past few months. He said investors seem to be relying on some vague idea that the US economy is “opening up” as a green light to buy stocks without even considering valuations.

“There is little evidence of thought as to whether the price of a security already reflects current and projected future news flow, or whether the opening up of the economy might be premature, a sign not of strength, but of impatience, lack of resolve, and poor judgment,” Klarman said.

Since 1982, Klarman has been one of the most consistent investors in the market, delivering gains in 31 of his fund’s first 34 years.

Fed To Blame: Klarman is known for his long-term, value-oriented investment style. Because he rarely comments publicly or grants interviews, followers must piece together his philosophy based on tidbits of insight he has provided throughout the years.

Klarman was also highly critical of the Federal Reserve in his letter, accusing the Fed of enabling irrational investors.

“Investors are being infantilized by the relentless Federal Reserve activity. It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene,” he wrote.

Impatience Fueling Rally: Klarman also proposed a hypothesis that the impatience investors seem to be demonstrating may be a result of months of isolation at home.

“People generally crave a return to normalcy and are intent on getting back to their lives as before, brazenly ignoring the risks of prematurely doing so,” he said.

Despite a generally pessimistic view of current market valuations, Baupost’s most recent 13F filing revealed Klarman still owns plenty of stocks. Here are Baupost’s five largest holdings:

• eBay Inc EBAY
• Liberty Global PLC LBTYK
• Fox Corp FOXA
• ViaSat, Inc. VSAT
• Alphabet Inc GOOG
• Benzinga’s Take: The behavior of the market and the Fed in 2020 is certainly frustrating for value investors like Klarman, with shares of distressed and even bankrupt companies often leading the rallies. The closure of many casinos during the economic lockdown may have also produced a new wave of stock market gamblers in 2020 that are temporarily distorting certain stock valuations.

Related Links:

Why Warren Buffett May Have Changed His Tune On Berkshire Buybacks

Q1 13F Roundup: How Buffett, Einhorn, Ackman And Others Adjusted Their Portfolios