Seth Klarman: The Investing Opportunity of a Generation (First Interview in 12 YEARS)

Do you think that opportunity that you had in 1979 still exists in 2023?

Seth Clarman is a legendary investor who just broke his 12-year silence to reveal the secrets to outperforming the market and the investment opportunity he would dedicate his life to if he was just starting out. His track record of investing returns is truly spectacular, having averaged a 20% annual return for the last 30 years. In fact, the best investor of all time, Warren Buffett, has said that Clarman is one of just a handful of investors on the planet that he would trust to invest his own money. That is quite the compliment from the Oracle of Omaha.

Unfortunately for us, Clarman virtually never gives interviews and likes to keep a low profile. In fact, he hasn't given a media interview in a whopping 12 years. That is until now. Luckily for us, Seth Clarman recently did a very rare interview where he talked about what he is seeing in the market today, the future of the economy, and, most importantly, what opportunities there are today to make money in the stock market.

Let's hear what Clarman had to say, but first, make sure to hit that subscribe button because it's my goal to make you a better investor by studying the world's greatest investors.

Okay, let's jump into the video. If you could put yourself back now, you were talking about investing and how it's shifted over time, but if you were, and you were also talking about the private markets, how there's a lot more opportunity there. But if you were a kid coming out of college, and we're both the alma mater Cornell, but you graduated in 1979, but if you were graduating today and you had to actually play, if you will, the public markets, do you think that opportunity that you had in 1979 still exists in 2023?

You know, Andrew, was it's such a great question. I think that markets can become more efficient, and there's a question in my mind about once a market becomes more efficient, whether it actually does have the likelihood of becoming less efficient afterward. So for sure, there's more money in public markets. Things have become somewhat more efficient, but I also see a short-term orientation that tells me that it's possible some pricing has actually become less efficient.

I think when you look at Meta, and the stock's been all over the place in a reasonably short period of time—falling to under 100, then rising back up to almost 300 literally months apart for a large, well-established company that I think everybody can analyze. So I think that there are opportunities now. If a kid came to me and said where do you think I should potentially make my career, I would encourage them to look for the most inefficient pockets in the world.

I also think it's important that they get mentored; most people aren't ready to just jump right into this business right out of school. So I do think there are opportunities, but people should ask themselves what are my interests? What kind of edge might I have? If you're from a different country, maybe you have great contacts in that country—maybe you know a lot about the business culture in that country.

My advice would be to go where you're naturally inclined and go where you think there may be interesting opportunities. Obviously, a market that's setting all-time highs may not be the best place to focus a career.

According to Clarman, one of the biggest advantages that individual investors have over Wall Street is what is referred to as time arbitrage. Wall Street is overly focused on short-term results, and this can create opportunities for investors who are willing to be more long-term focused. This dynamic creates a so-called market inefficiency, and this is the investment opportunity Clarman recommends you focus on.

Clarman uses Meta, formerly known as Facebook, as an example. As a background, Meta owns the popular social media sites Facebook, Instagram, and WhatsApp. Meta had been a favorite stock among Wall Street investors for years, and rightfully so. Look at this price chart for Meta stock. Investors could have bought shares in Meta for less than $20 a share in the fall of 2012. Those same shares had a peak of over $375 in September 2021. For investors who held on, this would have been a nearly 20-fold increase in the share price.

Meta was a Wall Street darling. The company has a brilliant business model. Billions of users across the world upload content to Facebook to share with their family, friends, and acquaintances. Similar to other social media companies, Meta incorporates ads into the content, making money from brands that want to get in front of potential customers.

However, there is one enormous difference from Meta and other media companies. Other media companies have to spend a ton of money to create the content that attracts the viewers. Old school newspapers have to have a large staff of writers, journalists, and editors to create their content. That small army of employees doesn't come cheap. Companies like Disney and Netflix spend billions and billions of dollars creating high-quality content to attract an audience that can then be monetized through subscriptions and advertising.

Meta is different. Users will willingly post on Facebook and Instagram without having to be paid. You don't have to be an Ivy League graduate like Clarman to see why this is a very profitable business model. Meta generated nearly $40 billion in cash in the year 2021. That's not revenue; that's not even pre-tax profit. That is nearly $40 billion in cold hard cash that can be paid out to shareholders.

With this background, it's easy to see why Wall Street loved Meta stock. However, things can change quickly in the stock market. Wall Street went from love to hate with Meta stock for two main reasons. The first was that its founder and CEO, Mark Zuckerberg, was investing aggressively in virtual reality. The so-called metaverse became the next big thing, even inspiring the company to change its name from Facebook to Meta.

All the money being spent by the company was decreasing current earnings for potential profit in the future. Being more focused on short-term results, Wall Street hated this. While all of this was happening, a new competitor entered the equation. TikTok seemed to come out of nowhere in just a matter of months, threatening Meta's top spot in the social media industry.

These two issues sent Meta shares plunging. Shares fell from their peak of $375 all the way to as low as $90 in November of 2022, a decline of nearly 80%. Meta became incredibly unpopular on Wall Street. The average professional investor wanted nothing to do with the stock.

Professional investors are evaluated and, most importantly, paid on their stock picks over relatively short periods of time. When Meta stock started to fall, it was hurting the performance of the funds that owned it. As a result, these professional investors had no choice but to sell to stop the pain. This put even further downward pressure on the stock price as these large investors dumped the stock in droves.

This is where the opportunity for the individual investor comes in. Most people invest for years and decades, not for the next week or two. This allows the individual investor, AKA you at home watching this video, to have an advantage over Wall Street. You can ignore the short-term noise and instead focus on the long-term fundamentals of the stock. Those that bought Meta stock when it was at its most hated, and subsequently its cheapest, have been rewarded handsomely. The stock is up more than three times from its lows less than a year ago.

It's clear that there is a massive opportunity to make money investing in stocks that have currently fallen out of favor with Wall Street—the so-called inefficient markets that Seth Clarman refers to. The problem lies in identifying those opportunities as investors are constantly bombarded with seemingly infinite amounts of information.

Clarman had something interesting to say on this topic. "I wanted to understand how you think about the inflection point with a technology company. There, of course, was a point where Amazon might have seemed like a speculation. Today, in retrospect, you wouldn't think that. You might even look at Tesla that way. There are some people in the public market right now who think that Bitcoin and various cryptocurrencies are complete and utter speculation. There are others who say 10 years from now we're going to look back and say that wasn't a bad investment. How do you think about that distinction?"

You know, Andrew, one of the things that's really important is that there's an enormous amount of fire hose of information coming at all of us all the time. As an investor, I've learned to try to be focused on things that actually are going to move the needle for me and my portfolio. So I try to focus on bottom-up individual situations—stocks, bonds, real estate transactions—and I don't spend a lot of time thinking about things where I think the answer is pretty imponderable.

So I do spend time thinking about technology, and part of that, at least, is to avoid being on the wrong side—to avoid being in a company that gets disrupted. I think something like crypto, which I've tried hard to understand, the arguments and figure out why people are so excited about it, I can't find value there. So I'm not making a judgment that it might not go up; I have no idea. But we focus our time where we think we might spend it productively.

Seth Clarman referenced a concept known as “important and knowable.” Understanding this concept can fundamentally change the way you think about investing, helping you cut through the noise and identify what truly matters.

Important and knowable is a principle coined by Warren Buffett, one of the most successful investors of our time. Buffett talks about how successful investing revolves around identifying and analyzing factors that pass a simple two-question test: Is a piece of information A) important and B) knowable?

Important refers to the key factors that significantly impact a company's success and its long-term growth prospects. This list includes things such as the financial health of the company, the future prospects of the industry it operates in, the quality of the company's management, what is going to happen with interest rates, and what the economy will do in the future. These are just five examples of things that would be important to know before you were to make an investment. I'm sure you could come up with many more.

Ultimately, each of the items on this list will help determine just how successful the investment ends up being. Going down the list, the financial health of the company will determine the likelihood that the company will go bankrupt and if it will have the cash needed to invest in future growth opportunities.

The future prospects of the industry that the company operates in will greatly impact the future cash the company is able to generate. You could have been the best horseshoe manufacturer in the year 1900, and your business was still going to be headed for extinction.

In terms of the quality of a company's management, the decisions that the CEO and their management teams make can greatly enhance or greatly destroy shareholder value. If you consider yourself a long-term investor, this is extremely important.

Down the list, future interest rates impact the value of your investment. Lower interest rates result in higher asset values, and higher interest rates result in lower asset values, all else being equal. And then finally, the health of the economy is important to nearly every business. A strong economy is like a rising tide that lifts all boats. It's easier for a company to generate more cash when there are consumers and businesses with money they are looking to spend.

It's clear and obvious that everything on this list is important. There is no debating that. However, as investors, how do we decide what to focus on and what to ignore? This is where the second question we must ask ourselves comes in: Is this information knowable?

Knowable means that these factors can be analyzed and a conclusion can be made with a reasonable level of confidence. I want to emphasize the term reasonable confidence. Of course, nothing can or should be predicted with absolute 100% certainty; however, some things are much more predictable than others.

Going back to our example list, which of these five things should we consider knowable? I would say that the financial health of a company is definitely knowable. You can relatively easily analyze a company's balance sheet. Just looking at how much debt a company has relative to its cash and its earnings can tell you a lot about its financial health. All of this information is publicly available for any stock.

Whether the future prospects of the industry are knowable depends on the specific industry in question. For example, the future of cryptocurrencies is highly uncertain; however, in the case of Meta from earlier, it's fair to assume that the digital advertising industry is going to continue to grow.

The size of the digital advertising market is $271 billion in 2023 and is projected to keep growing at a healthy rate. The future of the digital advertising industry is much more knowable for investors than that of the cryptocurrency industry. Management quality is also relatively knowable. Buffett has talked about how you can evaluate the quality of a management team by evaluating what they have accomplished relative to their competition and how they have allocated capital over time.

The final two items on our list are different. What is going to happen to interest rates and the future of the economy fail the second part of the test. These two things are definitely not knowable. It is extremely difficult to make accurate economic predictions—so difficult that virtually nobody has been able to do so consistently throughout a career.

This is what Clarman says: it is much better to focus on things that, in his words, "actually move the needle" in his portfolio. This important and knowable test is something that you're going to want to keep in mind.

So there you have it. Thank you so much for watching! Make sure to subscribe to the channel because a ton of work goes into the video. If you made it this far, hopefully, you find the information useful. Best of luck, and talk to you again soon.