Comments on Distressed Debt Investing: Wisdom from Seth Klarman - Part 2

Really, Hat’s off. Well done, as we know that “h...

2010-06-04T07:20:51.012-04:00

Really, Hat’s off. Well done, as we know that “hard work always pays off”, after a long struggle with sincere effort it’s done. This action proof to be a win, win situation. This is a true art
work, which will be a success story.
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The Finance Firm

2009-08-13T09:41:39.239-04:00

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For those who are unfamiliar, the Kelly criterion is a strategy relating to how much of your portfolio to allocate to any particular investment. The Wikipedia article has links to the original paper, which was - interestingly - focused on improving communications for Bell Labs.

The story is well told in the book Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.

While I have tremendous respect for Klarman and co...

2009-08-05T01:48:08.529-04:00

While I have tremendous respect for Klarman and concur with you that his letters are a must read for any serious student of the markets, I think the Enron example you cite is not the best example of his wisdom. A 15% position in a single name is a tremendous risk. While the Kelly Rule has its place, I don't think any investor can ever get enough of an edge in a situation like Enron to make an outsized bets. Judges make mistakes and inconsistent decisions too often; not frequently, but too often for oversize bets, which makes big bets on litigation outcomes risky. The returns cited are hardly extraordinary for distressed. If the one position was the entire 15% of non performing and contributed 3.3% to NAV, then it generated just a 22% return; middling by distressed standards and not appropriate for what would have begun as a greater than 10% position.
I don't mean to take anything away from Seth Klarman, his letters or his returns, but simply make the point that this particular investment isn't the examplar of why he is (rightly) held in such high regard.
Thanks again for taking the time to post and discuss Klarman's letters; its a good service to the investment community.