Investmernt guru opines that all asset classes are overvalued.
From Alan Abelson's column in "Barron's".
SETH KLARMAN IS NOT your run-of-the-mill Wall Streeter. For one thing, except figuratively, Seth isn't a Wall Streeter at all; he hangs his hat in Boston. More to the point, Seth's a gentleman and a scholar, a great money-maker, an all-around fine fellow. He's the main man at the Baupost Group, which runs a clutch of hedge funds with sterling records, and not just last year.
We've known Seth a bunch of years and always found him, whatever the subject, to be informed and insightful. He was early in the distressed-securities game -- the field today is increasingly crowded, but since the number of companies getting into trouble grows apace, it never lacks for opportunity. We apologize for this unwonted try at saying something nice about another human being, and a hedge-fund manager, at that, but Seth's annual letter to his limited partners just came across our desk, and it was such a good read that it made us want to share with you at least a sampling of Seth's prose and measured view of the investment scene.
Like us, Seth is struck by the fact that the rampant bullishness that inspired the gross market excesses of the 1990s is back. "If this is not another full-blown mania," he says, "it's a fairly good facsimile." And he's puzzled by "what today's speculators could possibly be thinking."
"Perhaps," he postulates, "they imagine they are due, that the market owes them." It's conceivable, too, he believes they're "emboldened by their own survival; despite a serious bear market, they were not wiped out and thus live to trade another day." And he wonders if perhaps speculating is just another form of compulsive gambling and they can't stop on their own.
History suggests, Seth relates, that a market bottom will not have been made until investors turn truly bearish.
"If three years of losses did not expirate investor greed," he muses, "it seems likely only truly excruciating circumstances will do the job."
Seth tartly describes the current overheated environment, "where the daily new-low list" has virtually ceased to be; "short sellers are again aging in dog years"; investors are buying high, on nothing more than the hope -- or prayer -- stocks will go even higher so they can get out with a profit; government bonds offer little value and the lowest yields since the 1950s; junk-bond spreads over Treasuries have narrowed sharply as the focus is on return, forget about risk; and "real estate is increasingly popular with investors despite generally dreadful fundamentals because it provides a higher current yield than most alternatives."
All of which prompts Seth to pose an interesting question: Could just about every asset class be overvalued?
That's almost a rhetorical question. For institutional investors especially have been obsessed with burying the sorry memory of their dismal performance during the bleak opening years of this century and are set on expiating their sins by outperforming one benchmark or another -- you know, a small-cap index or the S&P 500 or one of the more exotic equivalents.
That in itself, Seth asserts, "typically requires them to think from a relative, and not an absolute, valuation perspective."
Driven by poor showings in the not-so-distant past and a burning urge to score big, they've felt a powerful compulsion "to do something with all that capital at their disposal." In the process, they've bid up virtually everything in sight-whatever the particular variety of asset -- to breathtaking valuations.
Seth also has a cautionary word or two on the boom in hedge funds. "When large numbers of 30- and 40-year-olds in any profession become wealthy beyond imagination," he says drily, "a contrarian would expect an adverse change in conditions." And he warns that many of the new hot-shot fund managers "seem almost certain to disappoint the hordes of investors throwing bundles of money at them."
We can only add, amen. |
