Seth Klarman On ‘Trumptopia’: “Investors Are Being Too Trusting”

Via RealInvestmentAdvice.com,

Baupost Group’s Seth Klarman laid out his concerns with the market in a recent client letter…

“Risk, Klarman wrote, is the most important consideration when investing, and investors are being too trusting.

When share prices are low, as they were in the fall of 2008 into early 2009, actual risk is usually quite muted while perception of risk is very high. By contrast, when securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.”

The problem with overvaluation and investor exuberance is they are clear hallmarks of historical bull market peaks. This is particularly the case when there is a central asset, or asset class, that investors are piling headlong into without regard to the consequences. As I addressed recently:

“When it comes to investing, ALL investors, individual and professionals, are subject to making “stupid” decisions. As I discussed recently:

At each major market peak throughout history, there has always been something that became “the” subject of speculative investment. Rather it was railroads, real estate, emerging markets, technology stocks or tulip bulbs, the end result was always the same as the rush to get into those markets also led to the rush to get out. Today, the rush to buy “ETF’s” has clearly taken that mantle, as I discussed last week, and as shown in the chart below.”

As noted in the NYT, Seth is a little more realistic about the effect of “Trumptopian” policies on the markets and the economy. To wit:

“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers.

President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces. While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off.”

Markets have rallied since Trump was elected in November, as Wall Street took confidence in the president’s plan to cut taxes, roll back on regulations, and boost infrastructure spending. As I have penned in this missive many times, the RISK TO INVESTORS is what happens if those expectations either DO NOT materialize OR fall well short of expectations.

The risk of disappointment is exceptionally high. 

While we currently remain long-biased in portfolios, we do so with stops and hedges in place, risk management controls active, and a focus on capital preservation.

While you may not agree with our positioning, we have managed money through these exact cycles in the past and survived.

That is why we remain a slave to our discipline and our rules.