Seth Klarman Special Situations Investing Case Study

Seth Klarman, famous value investor and CEO of Baupost Group, was recently interviewed on the “Capital Allocators” podcast.

It was a terrific interview, and I recommend listening to the full conversation.

Today, I want to highlight a case study that Klarman walked through.

I LOVE case studies.

My favorite part of You Can Be a Stock Market Genius (my favorite book) is all the case studies.

The case study that Klarman describes was actually the first stock that he analyzed for legendary investor, Michael Price, at Mutual Shares.

Here’s Klarman:

Shortly after I joined Mutual Shares, Michael Price threw a prospectus on my desk and said, “Here – figure this out.”

The prospectus was for a company called Telecore, was an electronics distributor.

It was losing its contract with a Japanese company whose products it was distributing.

And Telecore was going to get bought out for the value of its net working capital – $8.

…Telecore also owned a subsidiary called Electrorent which rented and leased electronic equipment. So you were going to get $8 in cash and would receive a share of Electrorent.

And Electrorent at that valuation that you could create it for was trading at under 1x earnings.”

That was math I could do in my head. And math that made the nature of that inefficiency so glaring and so obvious.

It was an example of how complexity can be an investor’s friend.

I highly recommend listening to the full episode. I found the first half most interesting because Klarman discusses: