Seth Klarman Excerpt

Relax, said the nightman
We are programmed to receive
You can check out anytime you like
But you can never leave
--Eagles

Wanted to record this excerpt from Seth Klarman's recent letter to shareholders for posterity:


When the markets reverse, everything investors thought they knew will be turned upside down and inside out. "Buy the dips" will be replaced with "What was I thinking?"

Just when investors become convinced that it can't get any worse, it will. They will be painfully reminded of why it's always good to be risk averse, and that the pain of investment loss is considerably more unpleasant than the pleasure from any gain.

They will be reminded that it's easier to buy than to sell, and that in bear markets, all too many investments turn into roach motels: "You can get in but you can't get out."

Correlations of otherwise uncorrelated investments will temporarily be extremely high. Investors in bear markets are always tested and retested. Anyone who is poorly positioned and ill-prepared will find there's a long way to fall. Few, if any, will escape unscathed.

Six years ago many investors were way out over their skis. Giant financial institutions were brought to their knees when untested structured products that were too-clever-by-half turned toxic and collapsed. Financial institutions and institutional investors suffered grievous losses. The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.

But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to many markets and asset classes, and where caution seems radical and risk-taking the more prudent course.

Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.