He added that these factors combined with the typical market inefficiencies result in rapidly moving opportunity creation that requires flexibility. According to Klarman, Baupost’s strategy is especially suited to investing during times of disruption, uncertainty and unpredictability.
He added that Baupost’s primary success factors include its “long-term flexible investment mandate, experience investing amidst great uncertainty, intellectual honestly in a rapidly evolving world, appreciation of optionality and a record of assessing and mitigating downside risk.”
Whenever they have identified an opportunity, the Baupost team considers several questions. They think about why the opportunity exists, identify the market inefficiency, and consider whether they have lowered the bar, making investments appear more attractive than they are. Before they invest, the Baupost team also thinks about why their competitors haven’t jumped in on the apparent mispricing.
Klarman says that one of their primary drivers of capital deployment in 2021 was “finding opportunity well off the beaten path.” They don’t buy high-flying stocks in hopes that they will continue to soar. Instead, they focus entirely on valuation and business fundamentals with a goal of growing capital over three to five years instead of over a week or a quarter.
One area in which Baupost uncovered opportunity last year was in commercial real estate, which Klarman said experienced pandemic-related shortfalls in capital. Due to the pandemic, occupancy levels were lower than usual, leasing activity was limited, and construction was delayed.
