Street Capitalist: Event Driven Value Investments

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Street Capitalist: Event Driven Value Investments

Seth Klarman and Inflation Hedging

I mentioned Seth Klarman and inflation hedging previously in my post about his talk at the CIMA conference. Here is another quote, this time from a recent article on MarketWatch:

Seth Klarman, a top-performing value investor and head of The Baupost Group LLC, told clients in an Oct. 10 letter that the economic downturn could be “vicious and protracted.”
“The financial market collapse and bailout makes us sick,” he wrote. “There is likely more carnage to come.”

The U.S. dollar will likely weaken and its reign as the world’s reserve currency could end, Klarman predicted. Longer-term, U.S. interest rates may rise as foreigners have to be enticed more to invest in dollar-denominated assets, he added.

The recent Treasury Department bailout has yet to be paid for and should add to inflationary pressures over time, especially when the economy begins to recover, he said.

I still haven’t figured out what his inflation hedge might be, but it’s something worth thinking about. Here’s a line from his book Margin of Safety, which hints a bit at inflation hedges:

…value investing can work very well in an inflationary environment. If for fifty cents you buy a dollar of value in the form of an asset, such as natural resource properties or real estate, which increases in value with inflation, a fifty-cent investment today can result in the realization of value appreciably greater than one dollar.

What might he be looking at? Timberland? Oil and gas properties? Or maybe land itself, domestically or abroad.

  • John
    I would have a look at Linn Energy (LINE). Specifically their hedging policy (cap / floor), and the price these options are at versus the current oil price. Having said that, LINE is likely to small an inflation hedge compared to the size of Klarman's assets. Thus i wonder if he has constructed an inflation hedge via the yield curve and / or constructed it via optionality on an asset class that rises with inflation, albeit seems to be mispriced. e.g. grains are a proxy for energy / inflation.
  • All the above I would assume. If you can find timber, oil, gas properties and or real estate for .50 cents on the dollar, and you've done ample research, who wouldn't make the purchase?
  • PlanMaestro
    TIPS should be excellent at current prices
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