Letter Excerpt: Value Investing in a Turbulent Environment
From: Baupost 1997 Letter to Investors
Among other thing, Seth Karman says –
If you anticipate going into a sudden downdraft in the market, there are following ways to profit from it –
- Sell short: very risky (as late ’90s bull-run showed us)
- Hold market hedges: cannot hold enough when a downturn actually comes, because, like insurance, it is costly.
- Hold cash: provides protection in storm and ammunition to take advantage of any opportunities, but puts a drag on the performance
- Hold compelling investments that provide good return over time but can fluctuate: this is the best option amongst the others, as this way, we are not simply waiting for the market downturn to materialize.
Value investing discipline becomes especially important during bear markets because value investing, virtually alone among strategies, gives you exposure to the upside with limited downside risk. Furthermore, the discipline helps you find your bearings when other landmarks are no longer visible (momentum investors cannot find momentum, growth investors worry about a slowdown, and technical analysts don’t like their charts).