Baupost’s 2014 Letter To Investors: A Tale Of Two Halves

Baupost’s 2014 Letter To Investors: A Tale Of Two Halves

2014: A tale of two halves

2014 was a tale of two halves for Baupost. After a strong first half, the fund struggled in the second half with few resounding successes and several minor mistakes. Overall, Baupost’s partnerships gained approximately 7 to 8% for the year, lagging the S&P 500 but outpacing the broader Russell 2000.

Depending on how you measure this performance it was either a great success or minor failure. However, it should be kept in mind that value strategies rarely outperform in a bull market. With the S&P 500 pushing to a new high almost every month during 2014, Baupost’s value-driven investment strategy was always going to struggle to keep up with the wider market.

“ … I must remind you that value investing is not designed to outperform in a bull market. In a bull market, anyone…can do well, often better than value investors. It is only in a bear market that the value investing discipline becomes especially important…it helps you find your bearings when reassuring landmarks are no longer visible …” — Seth Klarman commenting on the market in a letter to partners published during the dot-com bubble.

Baupost has never aimed to outperform the wider market. The fund’s main goal has always been capital preservation and over the past 32 years, it has accomplished this with only two down years.

“We don’t mind being out of sync with the herd, and we don’t let that get to us. While we enjoy the challenge of analytically complex situations, we begin by looking for low-hanging fruit while eschewing the “high-hanging” kind.” — Seth Klarman 2014 letter.

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