The Exchanges

Q Where did that take you as you got older and went through college?

A So I was really fortunate. My uncle Paul, my mother's brother, lived in New York, and he was a tax attorney and an old, old friend of Max Heine, who was the founder, head of Mutual Shares. My uncle introduced me to Max when I was junior In college, and I got a job for the summer, and then ultimately an offer to come back full time when I graduated, which was in January of 79. So that's how I got to mutual shares in my history there. I continued to hold stocks, trade stocks, and read, but the key was getting that job. It was a value investing mutual fund. Mike Price had started by then, and was Max's protege, and running a lot of the activities day to day. It was like being let in on a secret that you could read about it all you want, but when you actually start doing analysis and you see individual companies trade at a discount from what they're pretty obviously worse, it's easy to get excited. There's some inefficiency here, and you have a chance to really add value and do well.

AI assessment note: “My uncle introduced me to Max when I was junior In college”

Q What investment mistake have you made that you'll never make again?

A This isn't a profound one, but it's my first one, and I don't know that anybody knows about it. I've never talked about it, but in the earliest days of Baupost, we had this great idea that was a closed-end publicly traded mutual fund that had omitted some dividends, and it was in arrears, and as you know, they have to clean those up before they can pay common dividends, and this company had announced that they were going to be cleaning them up and paying a giant dividend, and the stock went up a lot to what I thought was full value. So I sold it. And then I realized I was two weeks away from going long term. So giant mistake just from sloppiness. Now I have an operations team that would never let that happen. Back then I didn't. I knew it, but I didn't stop and check. So it just made me realize again how you have to check every detail.

AI assessment note: “And then I realized I was two weeks away from going long term.”

Q As you're learning at Mutual Shares back in the day, how'd you make the decision to go to business school?

A It was actually really tough. I enjoyed mutual shares immensely. I loved sitting side by side. I was literally next to Mike Price and right around the corner of the trading desk from Max Heine, and I was the only analyst. It was literally the three of us met a bunch of traders, admin people. It was such a wonderful learning experience, and I was soaking it in. On the other hand, I had a sense that Top Business School would be a good place to go. It would round me out. I may have known More and more about stocks, but I didn't know a lot about business, and so to study business to try to understand what's a good company, what makes a company great, how to think about running a company, upside the challenges, was certainly appealing, and I ultimately thought, it's not gonna be a negative, it's probably gonna have a lot of positive, and it will make me a better investor if I decide to stick to investing. I also wanted to rule out that there was something else I'd rather do, Although I kind of suspected that investing was my thing, so I did investing before, took a summer job at Salomon Brothers just to see what investment banking was. It was very popular back then, and a lot of people were going in that direction, and I didn't think I'd love it, but I figured I'd try it, and I actually had a great experience. I enjoyed the young people at Salomon Brothers, and I met some of the par…

AI assessment note: “I had a sense that Top Business School would be a good place to go.”

Q How old were you when you bought your first stock?

A I bought a share of Johnson and Johnson when I was around 10 years old with money I got from my birthday. A few days later, it split three for one, which I didn't know had been announced, but it must have been announced a little bit before that. So I own three shares of Johnson and Johnson. Why did I buy it? I knew what the company did, and you got to start somewhere. My mom found me a very kind stockbroker named Max Silverman down in Baltimore, and he was happy to execute An order where he couldn't possibly make any money, and he was my stockbroker for a number of years, but it was always at a very small scale.

AI assessment note: “I bought a share of Johnson and Johnson when I was around 10 years old”

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A Sizing has been one of the strengths of Baupost over its history. I've run into people with unusual views about sizing, so I've come across a number of funds that have a view that the goal in investing is to limit how much you can lose on any idea, so the key is to have 200 ideas in your fund, none of them more than half a percent. You don't understand that. If you can establish that an idea is good versus one that's bad, Then why can't you understand that there might be one that's great rather than just good? And why would that not be bigger? I also think a portfolio can absorb more than a 10th or two 10th of one percent of loss, so we prefer to identify over time through continued work, through price decline, that a good idea has now become a great idea, or through an event, through a company announcement that the following is going to happen, and maybe you've studied the company long enough that you understand or can appreciate right away what that news means, where somebody else might Think it's directionally not the direction to go, or at least not understand the impact of it. So, we obviously stay very far away from any line of inside information, but we want to capitalize on our insights and patience that our long-term oriented clients give us. We have made our big dollar profits over the years, usually on ideas that have gone against us at first, and we average down, an…

AI assessment note: “we prefer to identify over time through continued work... a good idea has now become a great idea”

Q How have you gone about evolving that decision-making process as Baupost has grown in number of people over the years?

A I would tell you I've done it poorly. I continue to have final say in the portfolio. So the way I wield that power is I have final say, but I defer a great deal to my team. So I give the team rope. If it's a senior partner who's produced a lot of profit for the clients over the years, and they want to do something that I'm not sure about, I tend to give them room to do that. I think that's valuable and probably career Extending for them. It makes them feel appreciated. It gives them satisfaction that they're getting to make decisions. But I also, in some sense, I'm deciding on investments, but I'm also deciding on people. Who do I trust? When they say they've done the work, what does that mean? Have they done good work? And for our best people, which we have a lot of really great people, long-tenured people, trusting them has been exactly the right thing to do for a very long period of time. The final say, a portfolio manager still needs to sit on top of the structure, and it's because we slosh money into and out of areas. So we might have loaded up on corporate credit over the last six months, but if tomorrow there's something better to do in a private investment or in real estate, we may be reducing positions we like to buy something even better. The organizational key is somehow to have people that are team-oriented enough to say, Oh, I get it. I worked hard on this idea. I'…

AI assessment note: “I continue to have final say in the portfolio... but I defer a great deal”

Q How have you thought about the legacy of Baupost? Let's say you do this another 40 years, but at some point in time you may not be doing this.

A I'm very cognizant that I can't and shouldn't be doing this forever. I think Warren and Charlie are great exemplars that you can still be doing this into your nineties, but I don't think I should be running bow post more than another 15 or so years. Maybe I'll still be involved in some capacity. People have done a good job in some cases of stepping back, still playing a role, and I'd like to think as long as I'm sharp that the investment skill set actually is a cumulative additive thing where you may be Not familiar with the latest change in technology in the world, but you have a large amount of perspective on what are good entry points and exit points and where risks might lie. So I'd like to think Baupost will succeed past my tenure. The reason I think it is, we've been a great thing for our clients. The clients have made a lot of money with very little drawdown in the bad years, and the Team at Baupost has prospered, and we've got a 250 plus person firm, and a lot of people have made their entire careers here. We're very proud to say we have people that have been here not just five or 10 years, but many people, 20, 2530 year anniversaries, which we enthusiastically celebrate. A good thing that serves interest of employees and clients ought to be around. I will need to pull back. I will need to continue to delegate like I've been doing and find more things to delegate. And I…

AI assessment note: “I don't think I should be running bow post more than another 15 or so years.”

Q How do you go about communicating with your counterparties so that they start showing you more and more of these idiosyncratic opportunities?

A I think that's part of the intel inside at Baupost, but it's not as hard as you might think. In the historic days of Baupost, 35, almost 40 years ago, we'd get a phone call, hey, I'm Joe Smith or Jill Smith, and I'm your new coverage for Merrill Lynch, and I'd like to come by and talk about what we can do for you. And time being scarce, and just me or a very small group of people, We'd say, look, you don't need to come by, but if you guys ever see on your desk a bond that you've never heard of, or a stock you've never heard of, or a shareholder in a business that wants to move it quickly, we're your call. So don't call us with IBM Insights or your new rating of Microsoft, but when you find that secondary partnership interest, or you find that illiquid stake in a private company, call us with that, because we'll have a bid for you. And so I think it's seeing those patterns. And then it's a little bit like that quote that when you come to Baupost as a young person, either what we do resonates or it doesn't. I think for the great majority of our people who tend to be quite long tenured, they come here, and it's like they too have been let in on a little secret. And they realize that looking at what everybody else is looking at is probably not that interesting. If you're going to look at what everybody else looks at, look at it in a highly differentiated way. That's fine. But you'r…

AI assessment note: “if you guys ever see on your desk a bond that you've never heard of”

Q So as you're learning early on in your career, it's also around the same time you had the Bill Sharps of the world writing about efficient markets hypothesis. And I'm really curious, as you started hearing about that, thinking about the markets and index fund investing, and then on the other side, you're seeing all these security level inefficiencies. How did you think about the investing world more broadly?

A I read a book after that, but quite a while ago called To Conquer the Air. And it's about Orville and Wilbur Wright and them building a flying machine in the early 1900. At the same time as they were trying to build an airplane, you had a guy named Langley at Smithsonian also trying to build a flying machine. And he was the respected guy. He was a academic and famous and everybody thought he would succeed. And it all made sense in theory. But the Wright brothers went down to Kitty Hawk, where the winds were strong, and where they could experiment with what the winds might do to any particular kind of flying craft, and how the wings of an airplane might be the same or different from the wings of a bird, and how you might maneuver in the air. Langley's machine eventually was launched, I believe, off of a river, and it was all set to launch out over the water and fly, Except it plopped in the water, never to be seen again. And the Wright brothers, over a couple of summers, figured it out. And I say that because it seems to me it's the same thing, that I always thought there are these academics sitting in their institutions writing out theories. And in theory, it makes sense. It might be Yogi Berra who said, in theory, every theory works, but in practice, a lot of them don't. The academic idea was logical that there are transaction costs, and there are a lot of competitors, and eve…

AI assessment note: “what's true in theory isn't true in practice in every case”

Q As the economic environment's been changing with rates rising and inflation, particularly in the U.S. over the last year and a half, two years, where is your antenna up in that pattern recognition for the types of opportunities you suspect will come over the next few years?

A This is to me one of the weirdest times since I've been in the investment business for over 40 years, that you had a bubble. It was really a credit bubble that became an everything bubble. Super low interest rates, at times, zero rates, made capital easily available and incredibly cheap, and that led to startup manias and SPACs and meme stocks and crypto, all kinds of speculative activity. I'm not convinced that we've even begun to sort out that bubble. Now, that bubble did a pretty good job of collapsing in twenty-twenty-two, but the market has rallied back so much this year, we're now in a bull market, no longer in a bear market by that at least Arbitrary definition of 20%. I think that the damage that was done over a twelve-year bond bubble, and of course, don't forget, it's been a thirty-five-year bond bull market up till twenty-twenty-two, that what were financial institutions supposed to do during that time frame? They couldn't get paid by taking credit risk. It still wasn't much. They couldn't get paid by going out in duration. The yield curve was decently flat, at least part of the time. And so we've seen some financial institutions do what like Silicon Valley Bank did and end up with significant mismatches of assets to deposits, but I'm not convinced we know where all the bodies are buried. I think here and there you read an article that says this bank has a hundred bi…

AI assessment note: “I'm not convinced that we've even begun to sort out that bubble.”

Q There is a degree to which AI, as you get closer to general intelligence, tries to replicate how humans would think. Where do you think as computers on the short end, say of trading, and then AI maybe over time replicating thinking will still go wrong relative to human behavior?

A A caveat that anything to do with technology, you've got the wrong guess, and that I need to know about it, I need to be up to speed, I need to have an opinion about where it might go, but I'm not an early adapter, I don't fool around with it the way some people do, so my opinion may not be as good as some people's, but when I think about it, first of all, my understanding of AI is that it is trained to look at enormous amounts of past data, I don't fully understand how that is done, because, for example, up until 2022, we'd had the longest bull market in history. And so depending on what period one looked at, one might think, well, the absence of a bull market, maybe we're past that. Is that right? Or is it pent up that the absence of a down market, the straight up 12 years of bull market that ended in 21. It's like if you're waiting for a bus, and the buses, as you know from the schedule, come every 15 minutes, and it's been 45 minutes. So, either four or five buses are gonna come right away, or the road is collapsed and no buses are coming. Which is it? What will the computer tell you? Which is it? Those are hard questions. I don't think humans will always know the answers. I think AI will be amazing at saying, Oh, well, when, when the Suez Canal gets closed by an attack of some sort, here's what happens to oil prices, or here's what happens to GDP around the world in the ne…

AI assessment note: “my understanding of AI is that it is trained to look at enormous amounts of past data”

Q What have you found about differential risk premium in international markets compared to the U.S.?

A We invest internationally. We have stocks in Europe. We have debt in Europe that we sometimes buy. We own real estate globally, although mostly it's US and Western Europe. Our mandate is broad and flexible, which lets us move where the opportunity is. We talked to our clients not that long ago about a few Chinese stocks we were finding. We had never owned anything in China for decades. It was in favor. Everybody was lining up to go there. I knew that they have a pretty authoritarian system of governance and didn't want to be on the wrong side of that. We stay away from most markets like that as a pretty regular rule. Yet, the stocks were starting to discount such a significant degree of China risk that we felt like for the first time ever that you're actually getting well paid. And we found a company whose stock was beaten down 90% And thought that was attractive, and so far, so good, but it's not a large percentage of our capital, but it was a very intrepid idea by one of our analysts. I don't have a view about emergent markets, about the frontier markets. We're humble enough and cautious enough to know that if you don't live in a country, if you don't have people that are active in that country, you're at a real disadvantage, and so I have no idea what the premium should be for buying Equities in Africa, equities in Asia, but when I find a stock trading at 25 cents on the dol…

AI assessment note: “I don't know that Western Europe needs particularly significant risk premium over the US.”