Power Players

Meet hedge fund billionaire Seth Klarman, the 'most influential investor you've probably never heard of'

Seth Klarman
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The global investment community took notice on Tuesday when billionaire hedge fund manager Seth Klarman issued a stern warning that increasing debt and global tensions could potentially bring on the next worldwide financial crisis.

As CNBC reported, the warning in Klarman's annual letter to investors (which CNBC "Squawk Box" co-anchor Andrew Ross Sorkin wrote about in The New York Times) caused a stir at the annual World Economic Forum in Davos, Switzerland.

Stephen Schwarzman, CEO of Blackstone, told CNBC that Klarman is correct that global tensions are creating increased market uncertainty, while Bridgewater Associates hedge fund manager Ray Dalio also agreed, telling CNBC that "the implications of the political conflict, for markets, are very profound."

So who exactly is Klarman, a relatively unknown figure to the general public but considered one of the world's smartest financiers? As The New York Times once put it: "He is the most successful and influential investor you have probably never heard of."

The 61-year-old Klarman, who co-founded Boston-based hedge fund the Baupost Group, where he manages roughly $32 billion in total assets, is known for his "sober and meticulous analysis," according to the Times. He has been dubbed "the next Warren Buffett" due to similarities in the two men's investing styles and strong track records. He is even sometimes called "the Oracle of Boston " in a nod to Buffett's famous nickname.

Much like Buffett, Klarman (who is worth of $1.5 billion according to Forbes) is a value investor, which means his investment philosophy revolves around putting money behind stocks that he believes to be undervalued by the rest of the market. In 2015, Klarman wrote a list of the top lessons he learned from following Warren Buffett's career, and he placed the advice to "buy bargains" at the top of that list.

Warren Buffett speaks to CNBC's Andrew Ross Sorkin
CNBC

Both Klarman and Buffett are also both famously risk-averse, as they are both wary of borrowing money for investments (to avoid taking on debt should an investment go south).

Also like Buffett — who bought his first stock at 11 — Klarman has been honing his investment techniques since a very early age. Klarman bought stock for the first time ever when he was just 10, he told his alma mater, Harvard Business School, in a 2010 interview.

"I bought one share of Johnson & Johnson with birthday money and it split three-for-one the next day," Klarman says in the interview. He picked the pharmaceuticals and consumer goods giant because he used a lot of Band-Aids as a kid. (Based on Tuesday's closing prices, one share of Johnson & Johnson stock currently costs $128.80.)

Klarman was so excited about investing as a child that he even gave a presentation to the students in his fifth-grade class about buying stocks, and he had his own personal stockbroker to provide him with daily stock prices.

"I owned stocks all the way through my childhood. My mom found me a stockbroker — Max Silverman, a kindly gentleman who didn't mind a 10- [to] 12-year-old calling him for quotes," Klarman told Harvard Business School.

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"I was business-oriented as a kid," Klarman adds in the interview.

Klarman went on to study economics at Cornell University before obtaining his MBA from Harvard Business School, where he was a classmate of future JPMorgan Chase chairman Jamie Dimon, in 1982.

Upon graduating from business school in '82, Klarman joined his Harvard professor, William Poorvu, and three other investors to co-found Baupost Group.

The hedge fund started out with initial capital of $27 million (much of it provided by Poorvu), which Klarman helped to manage despite his relative inexperience as a recent graduate. But Klarman's strong and consistent track record with investments made a lot of money for the group's clients and himself, over the next few decades.

Klarman has been drawing favorable comparisons to Buffett since at least 1989. That year, Fortune magazine included Klarman in a profile of a handful of young money managers (Klarman was 32 at the time) who could follow in Buffett's footsteps as one of the world's greatest investors. That article touted the young Klarman's investment record after his portfolios improved by 20 percent, on average, in 1987.

In 1991, Klarman wrote "Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor," which now out of print, sells for exorbitant sums online and is considered a must-read on Wall Street.

Klarman is now Baupost's president and CEO, and the group has been able to deliver tens of billions of dollars in profits to its clients, "which include the endowments of Harvard and Yale and some of the wealthiest families in the world," according to the Times.

Now Klarman is raising alarm among the global investment community, thanks to his annual letter to investors.

"It can't be business as usual amid constant protests, riots, shutdowns and escalating social tensions," Klarman wrote in the letter, reports CNBC, which also warned that rising levels of debt taken on by major countries (including the US) could be planting "the seeds of the next major financial crisis."

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This story has been updated.

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