Action by governments and central bankers has convinced investors that risk “has simply vanished”, says value investor Seth Klarman, founder of the Baupost hedge fund, in his latest letter to investors, quoted in the Financial Times.
Klarman has long been a critic of the Federal Reserve’s loose monetary policies, which he believes have badly undermined “the market’s usual role in price discovery... With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin”.
Klarman points to electric-car maker Tesla as one of the most egregious examples. The group’s share price has risen “seemingly beyond all reason”. He blames low interest rates, which drive up the value of the estimated future cash flows used by analysts to calculate the present value (see box) of a company. “The more distant the eventual pay-off, the more the present value rises. When it comes to the value of cash flows, the vast and limitless future, yet to unfold, has gained considerable ground on the more firmly anchored present.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
That said, while Klarman may feel that the investment environment is hostile, his fund has still been putting money to work. In the third quarter of 2020, Baupost invested $400m in a “special purpose acquisition vehicle” (a cash shell, effectively) launched by fellow hedge-fund manager Bill Ackman, with the goal of investing in “mature unicorns” – private companies valued at between $10bn and $15bn.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Why undersea cables are under threat – and how to protect themUndersea cables power the internet and are vital to modern economies. They are now vulnerable
-
Should you bet on US stocks?You don’t have to be bearish on US stocks to worry that they are now such a large share of global indices
-
Warren Buffet invests in Domino’s – should you buy?What makes Domino's a compelling investment for Warren Buffet's Berkshire Hathaway, and should you buy the UK-listed takeaway pizza chain?
-
Is India still a good investment?India's long-term story is compelling, but after a spectacular bull run, warning signs are starting to show. Is investing worth the risk?
-
4Imprint makes a strong impression – should you buy?4Imprint, a specialist in marketing promotional products, is the leader in a fragmented field
-
Are vintage Ladybird books valuable?Collectables Keep an eye out for vintage Ladybird books at the car boot sale or on online marketplaces like eBay. You could find gold dust between its hard covers
-
Invest in Glencore: a cheap play on global growthGlencore looks historically cheap, yet the group’s prospects remain encouraging
-
Alchemy: gold for the gulliblePeople have fallen for alchemy for centuries, including Isaac Newton and Johannes Kepler. They should have known better
