Source: Smart Investors
“Our value investing approach is to continually ask ourselves: What can we actually be certain about?”
In the world of value investing, Seth Klarman is a benchmark figure.
He authored a book titled Margin of Safety, which was published in 1991 and never reprinted, remaining out of print for decades—copies once fetched over $1,000 on the secondhand market. The firm he leads, Baupost, founded in 1982, has recorded losses in only five years over nearly 44 years, with its worst annual decline amounting to just around 10%.
Yet he has always maintained a low profile. Recently, at the Global Alternatives Investment Conference in New York, he granted CNBC an interview—a rare half-hour opportunity during which he shared detailed insights into his recent investments and views on the market.
After listening to the entire session, the most profound impression it left was four words: clear-eyed realism.
And the source of this clarity lies precisely in the opening quote: In a market that routinely assigns valuations of 40 times earnings—or even approaches infinite multiples—he repeatedly asks not “How high can it go?” but rather, “What can we actually be certain about?” This question has underpinned his investment philosophy and guided his exceptionally patient, multi-asset investment journey over the past 44 years.
It begins by focusing on the intrinsic value of the business itself.
Klarman stated that true value investing is not mechanically buying cheap stocks, but rather determining how much a business is truly worth.
On the topic of AI, he does not deny that it could be a game-changing technology, but believes AI has introduced enormous uncertainty—yet the market is assigning ever-higher multiples to price a future that is becoming increasingly opaque.
He categorizes companies into three groups: AI winners, AI losers, and AI-irrelevant firms. He avoids trillion-dollar-valuation large-model companies and instead focuses on researching the overlooked, gradually cheapening third category and potential losers that may have been wrongly punished by the market.
Klarman is indeed a quintessential value investor—the only distinction being that his approach to generating returns is not confined solely to equities.
Baupost’s 40 investment professionals are distributed across four areas: public equities, credit, private equity, and real estate, with capital flowing bottom-up to where opportunities are most abundant. For example, they are currently placing greater emphasis on distressed debt, assisted living facilities within commercial real estate, and land being reserved for data centers.
They employ no leverage, are willing to hold cash, and treat downside risk with the same seriousness as upside potential. That 44-year track record—with losses in only five years—is precisely the result of this combination of discipline and flexibility.
By the way, Seth Klarman’s sharp commentary on U.S. policy was also quite interesting. The host himself couldn’t help remarking, “I’m genuinely a bit surprised you’d assess this war in that way.”
Klarman argued that while many policies may have good intentions, their implementation has been extremely careless. “Right now, we haven’t thought through the consequences—not just of this issue (the U.S.–Iran conflict), but of almost everything. That’s what’s truly alarming.”
He bluntly stated that markets continue to significantly underestimate numerous risks, including the U.S.–Iran conflict.
It must be said that at a time when everyone is talking about how far AI can go, hearing a value investor thoughtfully discuss “what we can actually be certain about” serves as a rare and valuable reminder.
Notably, he is anything but dogmatic—he actively stays current with ongoing developments in AI himself.
Carefully translated and compiled by Smart Investor. Enjoy it～
01. Seeking opportunities across a wide range of asset classes
Host: Could you start by giving us a brief overview of Baupost? What makes it truly distinctive? You’ve been operating for nearly 44 years, with losses in only five of those years. I think many people would love to understand how you’ve achieved that.
Seth Klarman: The original structure of Baupost largely determined how we operate on a day-to-day basis and shaped our investment culture over the past several decades.
Baupost initially resembled an extended family office. At the time, several families had sold their stakes in Boston’s Channel 5 television station, and another friend had sold a computer publishing and consulting firm.
Our initial capital of $27 million was thus assembled.
From the outset, therefore, our objective was not to build a continuously expanding investment management firm, but rather to generate solid long-term returns for these clients while minimizing downside risk as much as possible.
This has always been Baupost’s core driving principle.
Our approach to capital preservation treats downside risk as equally important as upside potential. We conduct extremely thorough fundamental research on every company; if sufficiently attractive opportunities are not available, we are willing to hold cash; and we do not employ portfolio leverage whatsoever.
Additionally, we invest in more senior securities—such as debt instruments—or execute structured investments in private markets to secure a more senior position in the capital structure of many transactions.
This provides us with structural downside protection even if outcomes fall short of expectations.
Finally, we also implement macro hedges.
Host: So you engage in cross-asset investing?
Seth Klarman: Yes, across asset classes. We are not confined to any specific asset class and seek opportunities across many different assets.
Initially, we primarily invested in equities and credit. However, later on, when we observed some temporary dislocations in the commercial real estate sector, we also began participating in it and gradually realized that commercial real estate itself is a very large market—comparable in scale to the equity market.
02. The current market indeed exhibits certain bubble-like characteristics.
Host: You just mentioned that your emphasis on downside protection is no less than your pursuit of upside gains. To be frank, that’s not a very 'sexy' topic; the media rarely discusses how to defend against downside risks.
But it is actually extremely important—especially considering your long-term track record, and I recall your worst year saw a decline of only about 10%.
Seth Klarman: Most market participants, including the media, naturally tend to craft narratives that align with the market’s prevailing direction.
When markets are rising every day, discussing downside risk is a buzzkill. Nobody wants to hear it.
But there will always come a moment when the market corrects, and many people experience pain. In such environments, if we have protected ourselves sufficiently well—and so far, we have—we can deploy capital precisely when other competitors may be stepping back and watching from the sidelines.
Opportunities that emerge in the worst market conditions often generate returns for many years thereafter, because you can deploy significantly more capital at far more attractive prices during such periods.
Host: So what does that mean in today’s context? The market is clearly stretched, yet highly unusual. People ask me, 'Is this a bubble?'
Seth Klarman: I believe it does indeed exhibit some bubble-like characteristics.
Market sentiment has become extremely optimistic around a specific technology and the notion of a so-called new era. This is a classic 'new era narrative.'
You can already see signs of this in certain places. For example, Allbirds, the footwear company, saw its stock perform well simply by adding 'AI' to its name. It’s crazy—and very reminiscent of the dot-com bubble.
On the other hand, AI may genuinely be a game-changing technology. So it’s difficult to outright dismiss it or claim that everything related to AI is purely speculative.
The real challenge lies in the immense uncertainty created by AI. I believe no one can confidently predict how this will ultimately unfold.
Will today’s winners remain winners in the future? Will this be a winner-takes-all technology, or will there be multiple winners across different layers? Where will it ultimately lead? And what price should we be paying for it right now?
Are these emerging businesses merely good—or truly great? And what kind of disruption will they cause in other industries?
The market now tends to categorize companies into three groups: AI winners, which everyone wants to own; AI losers, which everyone avoids; and AI-irrelevant companies.
The third category is also unpopular because its potential returns lack the excitement associated with AI winners.
And it is precisely these 'AI-irrelevant' companies that we are spending a lot of time studying right now. Because the market isn’t paying attention to them, their valuations have been gradually declining.
At the same time, we are also looking at some companies that the market views as AI losers, though we are not certain they truly will be.
For example, in the credit markets, many software-related debt instruments have been heavily discounted. However, we are not sure whether this discounting is justified.
Their trading multiples relative to cash flow are already very low; and if you look at them from a debt perspective, the implied multiples are even lower. So, at least from the standpoint of credit investors, this is an area worthy of serious investigation.
03. True value investing is not simply about buying low-valuation stocks
Host: That’s exactly the question I was about to ask. I’ve always viewed you as a value investor. Do you define yourself that way as well?
Seth Klarman: Yes, that’s correct.
Host: In an environment where AI has become the dominant market theme, what should a value investor do?
Seth Klarman: Many people, especially in academia, tend to equate value investing with a mechanical approach of 'buying low-valuation stocks'—that is, purchasing stocks with the lowest valuation multiples.
But we realized early on at Baupost that this is not the correct definition of value investing.
True value investing is not simply about buying low-valuation stocks; it’s about determining how much a business is truly worth.
Clearly, growing companies are more valuable than those that are stagnating. However, the issue today is that once a company enters a downturn, its rate of decline could be significantly faster than in the past. As soon as material operational problems arise, cash flow, competitive positioning, and enterprise value can deteriorate rapidly.
We typically avoid companies of this type.
Even if it appears to be trading at just 4 times cash flow, we would not consider it cheap solely because of the low multiple. In such situations, it is very difficult to accurately assess how much value will remain in the future.
Our value investing approach constantly asks: what can we actually be certain about? Especially in today’s emotionally exuberant market, many investors are focusing on outcomes many years into the future.
When you pay 40 times earnings for a company—or, in some cases, effectively an infinite multiple—you must have considerable confidence in a very distant future.
But I don’t see how we could possibly achieve that level of certainty.
We do not know whether AI will evolve into AGI, nor do we understand its potential impact on the economy, employment, or inflation.
Therefore, if a market suddenly faces significantly greater uncertainty, valuation multiples should theoretically be lower to provide an adequate margin of safety against that uncertainty.
Yet the opposite is happening—the market’s valuation multiples continue to rise.
That is why I believe that even if AI ultimately proves to be close to the most optimistic expectations, today’s market may still exhibit bubble-like characteristics.
04. Approximately 10% of the portfolio stands to benefit directly from AI.
Moderator: But according to your definition of value, are there any value opportunities in AI-related sectors? For example, Amazon or Alphabet. I know you’ve discussed these companies before.
Seth Klarman: I would say that roughly 10% of our portfolio could benefit directly—and fairly quickly—from the advancement of AI.
We hold positions in both Amazon and Google. What we like about these companies is that they are already massive cash-generating machines.
Their businesses are highly diversified and adaptable, enabling them to engage with AI in multiple ways.
Google, for instance, is clearly developing its own chips. Both companies play roles across different segments of the AI value chain. Amazon’s data center business is growing extremely rapidly—much faster than even a year ago most people anticipated.
However, holding positions in such companies doesn’t mean you have to buy them at any given time. Nearly every company experiences periodic volatility, which can create attractive entry points.
We bought Google several years ago. Normally, I wouldn’t discuss specific holdings, but at the time, its valuation multiples were genuinely below those of the broader market.
Thus, sometimes you don’t need to rely on aggressive assumptions to find compelling reasons to like such companies.
We also hold certain undeveloped land parcels that we believe could eventually be developed into data center sites.
Host: Land?
Seth Klarman: Yes, land—land that could potentially be used for data centers in the future.
This land is located near power resources. With a very low cost of capital, we have created valuable optionality around data center land.
Host: How do you determine which parcels of land might become data centers in the future?
Seth Klarman: We know that—at least at this stage, although circumstances may change—the market demand for data centers is virtually insatiable.
The key questions are: Can it actually be built? Can it secure political and regulatory approvals? And is there sufficient power supply? Power availability is the most critical factor.
We have an experienced operating partner who specializes in identifying such sites and securing land reserves upfront. We then assess whether there is sufficient demand to justify further development.
Therefore, we are not certain that we will build data centers ourselves, but we can offer this land to those who need additional computing capacity.
We also hold a private investment in data center assets located in Asia. This asset was spun off from a Chinese company in which we also maintain a public market position.
By participating in this private placement, we established our position at a significant discount relative to the public market valuation. I cannot guarantee that the public market valuation multiples are reasonable.
But I believe the position we acquired in the private market is roughly equivalent to only about 40% of the public market price. That, in itself, may represent value.
05. Don’t make the mistake of underestimating AI—that’s largely correct.
Host: What about those large language model companies poised to enter the market with trillion-dollar valuations, such as OpenAI and Anthropic? Are they attractive to you?
Seth Klarman: We have not participated.
From an investor’s perspective, I would first ask a few questions.
First, will this be a winner-takes-all market? Can you be certain that these two companies will ultimately emerge as the winners? Can you even be sure there will only be two winners?
Second, these companies appear to require continuous, substantial cash outlays to train models, update them, and maintain their technological lead. If they ever fall behind the technology curve and no longer possess the best models, I believe they will face serious challenges. Therefore, they must keep investing heavily.
This is not what Warren Buffett would describe as a 'great business.'
Moreover, these companies already command enormous valuations, yet they may still be many years away from achieving sustainable profitability.
That said, I always remind myself of something Eric Schmidt, former CEO of Google, said a few years ago: 'Don’t make the mistake of underestimating AI.' I think that statement is largely correct. AI may ultimately prove even more successful than the most optimistic observers in today’s market currently imagine.
But even so, you still need to think carefully: what is the right way to participate in AI—by investing in model companies, intelligent agents, or companies that provide supporting services to the AI ecosystem?
I believe there is no answer to this question yet.
06. Three Principles for Participating in AI Investment
Host: You just mentioned that you prefer ‘AI-agnostic’ companies. What do you mean by that?
Seth Klarman: By AI-agnostic companies, I mean those you believe will not be significantly disrupted by AI. The impact of AI on their businesses may not be that substantial.
They might be able to use AI to reduce some costs, but that isn’t the core value of AI.
Host: For example, companies in roofing or residential building materials?
Seth Klarman: Certainly, there could be companies like that.
I also think the travel industry largely falls into this category. AI might help businesses reduce some costs, but cost reduction is not AI’s most important application.
If AI can help humans discover new drugs with greater certainty and speed, that would be a truly transformative development for society—one that could enable us to overcome diseases that are still fatal today.
Therefore, the highest value of AI lies not in cost reduction, but in solving problems that humans cannot solve on their own—such as interpreting X-ray images with greater accuracy.
I believe this is the key point. Of course, we can imagine applications even more significant than this.
However, I have not devoted most of my time to AI.
From the outset, I established several principles for myself.
First, I will not position myself at the forefront of AI. I am not a technologist, nor can I realistically become someone at the cutting edge.
Second, I must understand AI. Even if I am not at the forefront, I cannot afford to be at an informational disadvantage.
Third, I must remain focused. The scenario I most want to avoid is a perfect pitch landing right in the center of the strike zone—and me swinging and missing.
That 'perfect pitch' could be a stock unrelated to AI or a distressed debt transaction.
Over the past few months, opportunities in distressed debt have suddenly increased, and we are seeing more actionable prospects. It could also be a private investment—for example, in commercial real estate.
We believe the current impasse in commercial real estate is beginning to ease. Fundamentals in many real estate markets are also improving. We see opportunities to deploy capital at prices significantly below replacement cost and achieve highly attractive returns without relying on aggressive assumptions.
This is one of our favorite areas at the moment.
07. There’s always something to do in credit markets.
Host: Real estate? Why do you think opportunities are emerging now?
Seth Klarman: Many people have been hurt in real estate. Most who already have exposure to real estate would say, 'I’ve had enough of it.'
For the past decade or even longer, many people haven’t made money in real estate.
Moreover, finding a single property you’re willing to buy at the right price requires a lot of work. And even if you find one, the amount of capital you can deploy in a single transaction is limited.
So I like looking for opportunities where large institutions aren’t interested.
I prefer sourcing individual assets one by one—perhaps $50 million, $100 million, or something in that range. As long as I’m confident, I can allocate capital and aim for disproportionate returns with limited risk.
Host: You also mentioned that distressed investment opportunities are increasing. Are you referring to software companies? What kind of opportunities specifically?
Seth Klarman: Right now, the biggest distressed opportunities are still largely event-driven, idiosyncratic situations.
For example, we observed a company in Brazil that was forced to restructure. We hold a position in it. The company has just announced its restructuring plan. Upon completion of the restructuring, a batch of new securities will enter the market. I believe these securities may initially trade poorly due to selling pressure, but that could precisely be where the opportunity lies.
We have also seen a large private equity transaction in which the debt was impaired. They launched a debt exchange offer. Following the exchange, some new securities will be issued, and we believe these could be significantly mispriced.
The company itself may have already fully disclosed all negative news and taken all necessary impairments, and its business might be approaching an inflection point. Therefore, these newly issued securities—including preferred and common shares—could prove quite interesting.
Credit investing is compelling because it often involves a transfer of ownership.
Investors buy bonds with the expectation of receiving par value at maturity and earning coupon payments. Once they realize this outcome is unlikely, they sell. They sell when ratings are downgraded. They also sell when the company files for bankruptcy.
Even distressed investors who enter the scene may not stay with the company until the end, as they might quickly move on to the next distressed opportunity.
At that point, new capital is needed to absorb these securities and be willing to wait for the company to complete its turnaround and recovery.
Thus, there is always something to do in the credit markets. And as you know, value investors are inherently patient.
08. Certain aspects of the economy are indeed heating up.
Host: Yes. But you’ve described these opportunities as “idiosyncratic, event-driven,” meaning we’re not yet talking about a broad-based credit cycle. The market has been asking: Where exactly are we in the credit cycle? Are we really going to see…
Seth Klarman: Some kind of downturn cycle?
Host: Yes.
Seth Klarman: It’s a very unusual environment. Since the global financial crisis, we haven’t actually experienced significant downward volatility or witnessed a large number of corporate bankruptcies.
But as I just mentioned, such cases are now starting to increase. We’re also seeing problems in private credit markets. So, there is indeed considerable trouble in the market.
I don’t make market forecasts. In fact, we never make market predictions. I don’t know what will happen next.
But I do believe we are overdue for a credit cycle.
You can imagine certain scenarios: for instance, we might be in some kind of inflationary boom. Many companies are pushing for localized production. In our real estate portfolio, demand is very strong for industrial land, warehouses, and even cold-chain storage facilities.
So, certain parts of the economy are clearly heating up.
Add to that the massive inflow of capital into data center construction, and you get a sense that this activity itself is inherently inflationary. Building data centers drives demand for land, equipment, electricians, and other resources—all of which are currently in very high demand.
Host: Short-term inflation, long-term deflation?
Seth Klarman: That may well be the case.
But there’s another issue here as well. Once the genie is out of the bottle, will people really be willing to accept stagnant wages? Will they accept all the consequences that come with falling costs? This is an extremely thorny political question.
Of course, AI itself is increasingly becoming a political issue.
Should we really be building so many data centers? And if we do, where should they be located? Many local residents are already deeply dissatisfied.
09. America’s 'risk-free assets' are becoming riskier by the day
Host: Do you think this is a risk currently underestimated by the market?
Seth Klarman: I do believe this risk has not yet been fully priced in.
Host: Are you referring to the possibility that politicians might step in?
Seth Klarman: I think there are many risks that have not yet been fully priced in.
Politicians might intervene. But if they do, I suspect the response would be more localized rather than a coordinated national effort.
First, there is AI risk at the systemic level. AI could spiral out of control. We may not yet have truly established adequate rules. I’m also uncertain whether this administration has fully thought through how to address this issue.
Second, at the local level, this has already become a political issue. By 2028, it is likely to become even more politicized.
Therefore, I believe this path will encounter considerable turbulence.
Of course, there’s also the U.S. debt issue and what’s currently unfolding in the Strait of Hormuz. There are many challenges.
Over recent years, markets seem to have developed a habit of not paying too much attention to these issues. What appears to matter most is whether corporate earnings materialize and what the Federal Reserve does.
But I believe these issues may become increasingly significant in the future.
I am also concerned about the United States’ own problems. U.S. debt has just reached 100% of GDP—a troubling figure. It doesn’t necessarily mean a crisis will erupt immediately, but no one ever expected it would reach this level.
Of course, the U.S. faces a very large structural deficit, adding $2 trillion or more in new debt each year.
The current debt stands at over $30 trillion; in five years, it could reach $50 trillion, and in another decade or so, it might approach $100 trillion—or a similar magnitude.
These figures are alarming.
Host: Right. But this issue has been warned about for a long time, and the market still appears to have strong demand for U.S. Treasury securities.
Seth Klarman: If you were designing a system from scratch, you wouldn’t want it to end up like this: so-called 'risk-free assets' that grow riskier by the day.
I believe that overseas observers no longer view the United States as the stable, reliable, and serious country they once did.
There are many reasons for this—such as tariff policies, the frequent reversal of announced policies, and recklessness regarding the conflict with Iran.
We haven’t achieved much—perhaps nothing at all—and the underlying problems remain unresolved, possibly beyond immediate resolution.
This also includes how we talk about allies, alliances, and even our neighbors to the north and south. The U.S. is fortunate to have neighbors like Canada and Mexico.
If every country in the world could choose its neighbors through a draft, Canada would undoubtedly be the top pick for everyone. Yet we have such a neighbor and fail to treat it appropriately or show it sufficient respect.
10. The market may be underestimating risks associated with war.
Host: It sounds like you disagree with many of the Trump administration’s policies. I must admit, I’m somewhat surprised by your assessment of this conflict.
Seth Klarman: I believe every policy should be carefully scrutinized.
What I really want to say is that any good idea should be taken seriously.
For example, is controlling government spending a good idea? Of course it is.
If someone like Mitt Romney or Charlie Baker—both widely seen as more establishment-oriented, governance-focused, and fiscally prudent Republican politicians—were to take on this task, I think many people would say, 'God bless.'
But when Elon Musk does it—even though he could have done it—the problem is that he charges in with a 'chainsaw.' He cuts personnel without providing sufficient justification: Why shut down the pandemic preparedness office? Why reduce funding for FEMA, the Federal Emergency Management Agency? This causes unease.
Now we can see that it was more of a performance.
If you are an overseas creditor of the United States, you would realize that the U.S. actually lacks the capacity to truly control its debt. This is cause for concern.
We have simply made it clearer to the entire world that we are not serious.
Host: I think this also shows that no matter who does it, this will be politically very difficult.
Seth Klarman: Undoubtedly. The American public is not ready right now to cut spending or to pay higher taxes.
Host: So, do you think the market is underestimating war-related risks?
Seth Klarman: I think so.
You can ask yourself—or experts—what would happen if the Strait of Hormuz were closed for several months. I suspect oil prices wouldn’t just rise to $90. Why couldn’t they reach $150 or even higher?
So far, people may be better prepared than we imagine. Many have built up inventories, but those stocks are being depleted rapidly.
I believe that if the situation persists for several more months, oil prices could climb to a very painful level.
Of course, governments are clearly doing—and will continue to do—everything possible to end hostilities. But if gasoline prices rise to $6 or even above $6, I think this will become a major political issue by November.
Host: Do you have any investments in the Middle East?
Seth Klarman: No.
Host: Because I’ve heard from some investors that they actually support this war. They believe that eliminating the threat posed by a potentially nuclear-armed terrorist state would help stabilize the region.
Seth Klarman: As someone who supports Israel’s existence, I also believe that Iran’s messianic leaders pose a threat to regional peace and stability.
This situation has been ongoing for quite some time—approximately 47 years.
Therefore, what I had originally hoped to see was a truly comprehensive plan.
(Conflict begins) At that time, there was no imminent threat. There were no indications that they had achieved any decisive progress. By the way, we had already dealt them a heavy blow last summer.
Thus, there is also no indication that what we have done this time was absolutely necessary.
Of course, it would be ideal if this were a foolproof operation capable of permanently preventing them from developing nuclear weapons—and if we could guarantee this outcome through some agreement, a lasting peace, or a regime change.
Regrettably, none of these have come to pass.
So, one might say the intentions may have been good. But I believe it is the responsibility of leaders to foresee not only the next step, but the step after that as well. You must anticipate the chain reactions.
And I think that right now, we haven’t thought through the consequences—not just on this issue, but on virtually everything. That is what is truly concerning.
Host: You just mentioned the changing attitudes overseas toward U.S. assets. On the other hand, nearly all major developments in AI are happening in the United States. This certainly makes the U.S. market very attractive.
Seth Klarman: That’s absolutely correct. One hundred percent.
This demonstrates that our markets and our institutions remain exceptionally strong.
Then the question is, why would we voluntarily step back from this leadership position—this hegemonic status—that has granted us the world’s reserve currency?
Why would we relinquish it without cause? Historically, no nation as successful as the United States has ever voluntarily withdrawn from its position of leadership in this manner.
11. The Federal Reserve may still prefer to cut rates internally.
Host: You just mentioned that AI infrastructure development could generate inflationary pressures, and energy prices also pose a risk. Do you think the Federal Reserve will raise rates this year?
Seth Klarman: I believe the Fed actually prefers to cut rates internally.
First, I hold great respect for Kevin Warsh. I know him personally, and he is a thoughtful individual. If someone with his background were to assume that role, I would feel reasonably reassured.
I don’t consider him particularly politicized. Of course, I could be mistaken, but in my view, Kevin would strive to do what he believes is right.
Therefore, he wouldn’t rush into action. He would carefully monitor the data and make decisions in a more deliberate and cautious manner. I also believe he might attempt to change certain internal habits at the Federal Reserve, encouraging officials to look beyond surface-level data and develop a deeper understanding of what the data truly signifies.
They are also likely to adjust their external communication approach. I think this would be appropriate.
I have never quite understood why the Federal Reserve feels compelled to signal its intended actions to the market in advance, only to later regret having been overly definitive. In contrast, maintaining greater flexibility might represent a more effective communication strategy.
So, I believe these changes are a good thing.
My guess is that they will wait and watch for a while, closely monitoring inflation data. They might raise rates once more, or even twice.
But over a slightly longer horizon, I think they still want to bring interest rates down. Moreover, if AI truly proves as impactful as it currently appears, it could eventually exert a noticeable deflationary effect.
At that point, the Federal Reserve may have considerable room to cut rates.
12. My most regrettable investment was missing out on Palantir.
Host: I’d like to do a quick Q&A. Seth, what’s your best investment idea right now?
Seth Klarman: Our single favorite opportunity right now is in commercial real estate, specifically in assisted living facilities.
This sector went through a very difficult period after the pandemic and saw numerous bankruptcies. Newly built assisted living centers struggled to increase occupancy rates. At that time, no one wanted to place their loved ones in such facilities.
Now, the industry is gradually absorbing the earlier shock, and conditions are beginning to turn around. However, I believe we are still in the early stages of this reversal.
This is our current favorite investment idea.
Host: Over the years, has there been any missed opportunity that you’ve regretted—the kind of ‘big fish that got away’?
Seth Klarman: For me, the most regrettable one was Palantir (founded in 2003 by Peter Thiel, Alex Karp, and others, Palantir is a major U.S. data analytics and AI software company, initially known for serving defense, intelligence, and government agencies, and later expanding into enterprise clients).
You know, we like receiving calls from Wall Street or operating partners.
Once, we received a call from someone who said, 'We believe there’s a company called Palantir, and about $40 million to $50 million worth of venture capital shares may be available for sale. Are you interested? Is there a price you’d consider?'
We conducted extensive research and were ready to make an offer, but the seller changed their mind.
That was roughly 15 or 20 years ago. Had we completed the investment, it could have earned us tens of billions of dollars—possibly even over $100 billion.
But there was nothing we could do to prevent it. By the time we were able to act, there was nothing left to do.
Still, I think every investor has a story like this.
Host: What does your investment process look like? You operate across so many areas—how do you generate ideas and research them?
Seth Klarman: Our team comprises 40 investment professionals distributed across four areas: public equities, credit, private investments—which also include some private credit—and real estate.
They hold regular pipeline meetings. I remain fully integrated into their information flow, so I know what they’re looking at and researching.
I generally give them a lot of space, but I also engage deeply. I frequently attend their meetings, so I have a solid grasp of the overall situation.
When allocating capital, we fundamentally adopt a bottom-up approach. In other words, we start with specific opportunities and assess where the best prospects lie: in private equity, public equities, or credit?
Capital naturally flows to wherever we see the greatest number of opportunities.
We don’t begin by making a top-down asset allocation decision, such as saying, ‘We should allocate X amount of capital to a certain sector.’ Instead, we prefer to let capital be allocated organically from the bottom up, based on the actual opportunities we observe.
Moderator: Whose views do you listen to? Whether it’s other investors, CEOs, or others—whose advice do you seek, or from whom do you gain insight into future directions?
Seth Klarman: I try to read and listen as broadly as possible.
I have many friends in this industry who, like me, have been doing this for a long time. As a result, I maintain strong relationships with individuals who manage large funds, distressed funds, and long/short equity funds.
I also greatly respect certain thought leaders in the industry, including columnists and academics.
For example, Niall Ferguson—I always want to read what he writes. I don’t necessarily agree with him all the time, but I’m interested in understanding his perspective.
To keep up with AI, I read almost everything and listen to a lot of podcasts.
I really enjoy reading Dario Amodei’s articles. They’re a bit sobering, but truly remarkable.
We should be grateful to have an executive like this. He could have simply been a cheerleader for AI, but instead, he is also a thoughtful steward, reminding us that AI holds immense potential but also carries significant risks.
I admire this kind of leadership.
Of course, I also pay attention to Jamie Dimon’s views. There aren’t many people like him.
And then there’s Warren Buffett, Todd Combs, and Ted Weschler—they’re friends and also exceptionally insightful investors who take a much longer-term perspective.
So, I don’t often discuss individual stocks with them; instead, we talk more about the market or deeper, philosophical questions—about the moment we’re living through.
Host: How much longer do you plan to keep going? Another 44 years?
Seth Klarman: I hope I live another 44 years.
Host: What is your vision for Baupost?
Seth Klarman: I’m in my 60s now, so I figure I probably have about another 10 years left.
I don’t believe someone should stay in a position forever. So whenever I see an older person doing something they shouldn’t, I remind myself internally: I need to know when it’s time to step aside.
I’m delegating more authority to the team, allocating more capital to certain members of the team, and also changing our decision-making approach in some respects.
I am still personally focused on developing the team.
When I feel I’m no longer the best person to lead Baupost, I will step down.
But I feel I can continue for another 10 or 12 years before it’s truly time to hand over the reins.
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Editor /rice