A stock is removed from an index. Index funds must sell it all within a day, regardless of price
Index funds sell because of rules, not because value has fallen. Selling like this can push the price below value for a while
Famous Traders · Value / Special Situations
Seth Klarman
Seth Klarman / The Author of a Book With Only About 5,000 Copies, Who Holds Cash While Waiting for Bargains
He wrote just one investing book, in 1991. It sold poorly and went out of print, but today investors hunt for it like a collector’s item. At Baupost he chooses to hold cash when he can’t find bargains, lost far less than the market in 2008, and has returned money to investors because there weren’t enough opportunities. On this page you can try valuing a business as a range, test holding cash while waiting for the right moment, and see who gets paid first when a company fails.
SETH KLARMANMargin of SafetyRisk-averse value investingMCMXCI
LOT 1991 · FIRST PRINTING$25$650–3,300Cover price → used price reported by Quartz
≈5,000Copies printed · out of print
Illustration: a cover we designed, not the real cover. No openly licensed photo was found
Born1957
Joined Baupost1982
Margin of Safety1991
First printed≈5,000
Baupost · 1982$27MStarting money from 4 families. Klarman was 25, on a salary of $35,000
2008 · as reported−7 to −13%while the S&P 500 with dividends fell about 37%, and in 2009 the funds came back up about 27%
December 2013$4BMoney returned to investors because there weren’t enough cheap enough opportunities
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ProfileQuick facts
NameSeth Klarman
Born21 May 1957 in New York City, USA
EducationBachelor’s degree in economics from Cornell in 1979 (magna cum laude) and an MBA from Harvard Business School in 1982 as a Baker Scholar
PositionCEO and portfolio manager of The Baupost Group in Boston
The journeyInterned and worked with Max Heine and Michael Price at Mutual Shares · joined Baupost at its start in 1982, with $27 million from 4 families
SpecialitiesUndervalued stocks, debt of bankrupt companies, claims, real estate and complex assets others don’t want to hold
BooksMargin of Safety (1991), and editor of the 6th edition of Security Analysis (2008)
Outside the marketA major donor (Klarman Hall at Cornell and at Harvard Business School) and co-owner of Klaravich Stables, which won the Preakness Stakes in 2017 and 2022
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From Mutual Shares to BaupostFrom Max Heine’s intern to managing tens of billions
Klarman didn’t learn value investing mainly from textbooks. He says he learned by working beside Max Heine and Michael Price at Mutual Shares, a fund that bought cheap stocks, debt of troubled companies and special situations
When he joined Baupost at 25, he managed money for a group of wealthy families and gradually turned it into a large investment firm. Tap each stage to follow the journey
CATALOGUE · 1957–2026Klarman’s file
1957 · Born on 21 May 1957 in New York City. His father, Herbert Klarman, was a public health economist at Johns Hopkins
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CATALOGUE CARD · No. 1991Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
- Author
- Seth A. Klarman
- Publisher
- HarperCollins · 1991
- Printed
- About 5,000 copies
- Cover price
- $25
- Status
- Out of print
- Used price
- $650–3,300 as reported by Quartz
- Value as a rangeValue can’t be estimated precisely, so leave room
- Investors versus speculatorsBuying something with value, versus buying in hope someone else will pay more
- Sources of opportunitySpinoffs, bankrupt debt, liquidations
- Managing a portfolioLiquidity, cash, and selling when the price nears value
Book topics summarised and paraphrased by us, not the real table of contents
A principle he repeats oftenMost investors look at returns first, when they should first ask how much they could lose
Paraphrased from Margin of Safety, not a direct quote
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Value is a rangeLab: value is a range, and the price must be below the lower edge
In Margin of Safety Klarman writes that business value can’t be estimated precisely. He uses several methods together, such as the present value of cash flows, the value of assets if the business were liquidated, and the prices the market gives similar businesses, then buys when the price is far enough below the conservatively estimated value. Choose a hypothetical company, adjust the discount rate and move the price
Which value to compare with the price
Margin of safety—
Worst case (lower edge of assets)—
As expected (middle of the range)—
Expected gain versus possible loss—
Simple model: value from cash flows = free cash flow per share × (1 + growth rate) ÷ (discount rate − growth rate), using each company’s low and high growth rates. The overall range is the lowest to highest of the cash-flow and market-comparison methods. Asset value is used as the floor of the worst case. All companies and figures are hypothetical, not Klarman’s formula
What it means for traders
The fair price of gold or a currency isn’t a single number either. If your analysis gives you a zone, place your entry near the edge that favours you, and ask how far away your stop loss is if the analysis is wrong. A trader’s margin of safety is the distance between the entry and the point where you admit you’re wrong
COST · MARGIN OF SAFETY
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Cash is a positionLab: holding cash for bargains, what do you gain or lose?
Baupost has held about 30% cash on average, and as much as about 40–50% in 2006–07, according to Institutional Investor. Set your own rules in a simulated 30-year market: how far below value the price must be before you buy fully, and how much stock you hold when prices are expensive, then compare with being fully invested all the time
Market set 1
Return per year: your rule—
Fully invested all the time—
Biggest drop: your rule / fully invested—
Average cash—
Model: value grows 6% a year plus a little volatility, price swings around value with market mood, with 2 random heavy falls. Stocks pay a 2% dividend a year, cash earns 3% a year, rebalanced monthly, excluding taxes and fees. In real markets nobody knows the true value the way the model does, so the results flatter value-based rules
Baupost’s average cash≈30%As reported by II in 2010
Hot market of 2006–0740–50%As reported by the media
Loss in 2008−7 to −13%S&P 500 about −37%
Money returned Dec 2013$4BThe firm’s second time
What it means for traders
Traders who must always have an order open often enter when they have no edge. Having no position is also a decision, and leaves margin free when a good setup comes, but you have to accept that sometimes you’ll miss trends that run a long way
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Who gets paid first?Lab: who gets paid first when a company fails?
Baupost has profited many times from the debt and claims of bankrupt companies. The heart of this work is the order of repayment: secured creditors are paid first, followed by unsecured creditors, then subordinated debt, with shareholders last. Adjust the business value after restructuring and see what the purchase price of each layer gives you
LayerDebtPurchase priceRecoveredReturn per year
Business value at which unsecured bonds break even—
Unsecured bonds recover—
Shareholders get—
Best-returning layer—
Hypothetical company model: secured debt 300, unsecured bonds 500, subordinated debt 200 (price per 100 of face value). Shareholders get what’s left after the 1,000 of debt, paid in strict order of priority. In reality there’s often negotiation that gives lower layers something, legal costs, and payment in new shares instead of cash
Lehman · 2008→2018<10¢ → ≈50¢Hedge Fund Alpha reports that Lehman bonds once traded below 10 cents, recoveries rose to nearly 50 cents by 2018, and Baupost once held this debt as about 20% of its portfolio
PG&E · 2019→2020≈35¢Bought claims with a face value of about $6.8 billion, some at about 35 cents, and received more than $3 billion when PG&E emerged from bankruptcy
The 2008 crisis≈$4BHe said in a 2026 interview that he raised about $4 billion during the crisis and at one point invested about $100 million a day (figures from his memory)
What it means for traders
The same asset gives very different results depending on the price you pay, not on whether the news is good or bad. The question to ask before entering is how bad an ending the current price assumes, and if it ends worse, how much you’d lose
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Why is it cheap?Game: cheap because the seller is forced, or cheap because it’s really bad?
Klarman writes that opportunities often arise when sellers sell for reasons unrelated to value, such as being forced by rules or needing cash, while a bargain that’s cheap because the business is really getting worse may be a trap. In each situation, choose which it is
Score 0 / 6
A large company spins off a small business as a new company. Original shareholders dump it because it’s too small to care about
Spinoffs are one of the sources of opportunity Klarman discusses in Margin of Safety, because many sellers aren’t selling on price
Sales have fallen 3 years in a row, competitors are cutting prices, the stock is down 60% and analysts cut estimates every quarter
The price has fallen along with a real fall in value. A bargain like this can get cheaper still. Re-estimate the value first rather than just looking at how far the price has fallen
A fund faces heavy investor withdrawals and must sell all its bonds before year end
A forced seller needs cash and doesn’t care how far below value the price is. Whoever has cash waiting has the edge
The stock looks very cheap at a P/E of just 4, but this year’s profit came from a one-off land sale and the core business is losing money
A one-off profit makes the numbers look cheap. Take it out and the core business may not be cheap at all. Check where the value comes from
A company files for bankruptcy, and many funds must dump its bonds because their rules ban holding defaulted securities
Klarman writes about institutions that must sell defaulted securities by rule. This selling doesn’t come from valuation, which is the source of opportunities in bankrupt debt
Tap an answer on each card
We wrote these situations for learning, based on the sources of opportunity Klarman discusses in his book, such as spinoffs and the securities of bankrupt companies. Even when the seller is forced, you still need to value it before buying
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Fact checkFact check: truth and stories passed along
Klarman rarely gives interviews, so his story has been retold until some parts are exaggerated. We sort each one by the weight of the evidence
Margin of Safety was printed in only about 5,000 copies and now sells used for thousands of dollars
Quartz reports a first printing of about 5,000 copies at a cover price of $25. In 2007 a copy sold on eBay for about $2,000, and reported prices have ranged from about $650 to $3,300, varying with time and condition
Klarman founded Baupost with his own money
Baupost started with $27 million from 4 families. The co-founders named on Wikipedia are William Poorvu, Howard Stevenson, Jordan Baruch and Isaac Auerbach. Klarman joined at 25 on a salary of $35,000 and says he initially owned no stake in the firm
Baupost has always returned about 20% a year
Institutional Investor reported in 2010 that the oldest partnership fund had made about 19% a year since 1983. That is one fund’s figure up to that time, not a lifetime figure for every fund
In 2008 Baupost lost far less than the market
The reported loss was about 7% to about 13% depending on the fund, while the S&P 500 with dividends fell about 37%. The next year the funds rose about 27%
Baupost returned money to investors because it couldn’t find enough bargains
Institutional Investor reported in December 2013 that Baupost would return about $4 billion, citing a lack of investment opportunities, and that it was the second time the firm had done so
Baupost is a hedge fund that borrows to boost its portfolio and shorts heavily
In a 2008 interview he said he used no leverage on the portfolio at all and that short positions were less than 1% of assets. He calls Baupost mainly a long investor
Baupost made a fortune buying Lehman debt
Hedge Fund Alpha reports that Baupost once held Lehman debt as about 20% of its portfolio, bought at very low prices, with recoveries rising to nearly 50 cents by 2018. But the average purchase price and actual profit weren’t disclosed
Baupost made nearly $1 billion from PG&E
Claims Journal, citing Bloomberg, says the profit on insurance claims may have been close to $1 billion, but Baupost also lost money on the PG&E shares it held, partly offsetting it
Klarman refuses to reprint the book to keep old copies expensive
This is a story passed around among investors. We found no evidence from reliable sources that this is the real reason. What can be confirmed is that the book is out of print and rare
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LessonsLessons for Forex and gold traders
Your checklist
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Value is a range, not a single number
Klarman writes that business value can’t be estimated precisely, so you must buy below the conservatively estimated lower edge. Traders can apply the same principle: profit targets and support should be zones, not single prices
No good setup? Hold cash
Baupost has held as much as about 40–50% cash and returned money to investors when it couldn’t find bargains. For traders, not opening an order on a day with no plan is also a position. You can wait for big news to pass first
Ask who’s selling and why
A price that falls because sellers are forced is different from a price that falls because things are really getting worse. Before catching a falling knife, look at the news or data behind it
Think about losses before profits
He stresses that most investors look at returns before risk, which is backwards. Traders should know how much they’ll lose if wrong before clicking, and control order size so a single trade can’t destroy the account
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Quiz5-question quiz
Question 1 / 5
In what year was Klarman’s Margin of Safety first printed, and in roughly how many copies?
About 5,000 copies were printed at a cover price of $25, and it is out of print
Who taught Klarman value investing directly early on?
He interned and worked with both of them at Mutual Shares before his MBA
In 2013, what did Baupost do that most funds don’t?
The reason given was that it couldn’t find cheap enough investment opportunities
When a company goes bankrupt, who gets paid first?
In order of priority, secured creditors are paid first and shareholders last
What is a margin of safety?
The further below value you buy, the more valuation errors and bad luck you can absorb
0/5
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Patience is a position.No setup, no trade
What you can apply from Klarman is waiting for an edge, seeing prices as zones, and knowing how much you’ll lose before clicking. Here are tools on 1TRADER that can help
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Further readingFurther reading
- Margin of SafetySeth Klarman · 1991His only book, on risk-averse value investing, covering valuing as a range, sources of opportunity such as spinoffs and bankrupt debt, and portfolio management. Out of print and rare
- Security Analysis (6th ed.)Benjamin Graham & David Dodd · edited by Seth Klarman · 2008The 1934 classic in the edition Klarman edited, with introductions from several newer-generation investors. Much easier to buy than his own book
Sources for this article
- Wikipedia: Seth Klarman
- Institutional Investor: Baupost to return $4 billion to investors (2013)
- Institutional Investor: Klarman won’t be worried by Baupost’s poor performance (2010)
- Market Folly: Profile of Seth Klarman and Baupost (2010)
- Alpha magazine interview with Seth Klarman (2008, archived)
- Hedge Fund Alpha: 1991 interview with Seth Klarman
- The Big Picture: Masters in Business transcript, Seth Klarman (2026)
- Quartz: How Margin of Safety gained a cult following
- Claims Journal: Baupost collects $3 billion on PG&E’s wildfire claims (2020)
- Hedge Fund Alpha: Seth Klarman books profits on PG&E claims
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FAQFrequently asked questions
Who is Seth Klarman?
An American investor born in 1957 who has run The Baupost Group in Boston since 1982 and wrote Margin of Safety in 1991. He is known for risk-averse value investing and for holding cash when he can’t find bargains
Why is the book Margin of Safety so expensive?
About 5,000 copies were printed in 1991 and it is out of print. As Klarman became more famous, demand outstripped the copies available. Used prices reported by the media range from hundreds to thousands of dollars
What is the Baupost Group?
A Boston investment firm that started in 1982 with $27 million from 4 families. It invests in stocks, debt of troubled companies, claims and real estate. Klarman said in 2026 that it manages about $22 billion
Why does Klarman hold so much cash?
He sees cash as the option to buy when things are cheap, not wasted money. When no assets are priced far enough below value, he holds cash rather than forcing investments, even if it means underperforming others in bull markets
How can Forex and gold traders use Klarman’s ideas?
Don’t force trades when there’s no edge, see price targets as zones, ask why the price is moving before going with or against it, and set your stop loss and order size before thinking about profit
Educational content, not investment advice. Figures are publicly reported. The labs use models and hypothetical companies. · risk disclosure · Forex glossary