Seth Klarman is one of the most successful investors of all time. In a recent speech, he indicated that he is more worried now than at any time in his career.Below are several quotes from his speech.
"The possibility that the government will continue to print money to solve our economic problems has left me more worried than at any time in my career. There are not enough dollars in the world to do that, unless we greatly debase them."“A Hostess Twinkie is something that has made many childhoods slightly happier with totally artificial ingredients. That metaphor explains the prevailing environment in the U.S. over the last year, when virtually every market condition was maintained by the government, which kept interest rates at zero, bought up mortgage-backed securities, and installed far reaching lending programs. We don’t know the full extent to which we were manipulated. The government wanted people to buy equities, to invest so that the market would go higher, to build the wealth effect so that people would feel better, and to restore a degree of optimism so that the economy might recover.”
"I am worried about what would happen to the economy and the market if those artificial ingredients were removed and we realize it was in effect a Twinkie."
"That high degree of government involvement continues, with the gargantuan European bailout program, which is not likely to work and merely kicks the can down the road, serving as the latest example. It is one more manipulation tempting people to own things. It’s almost like the government was in the business of giving people bad advice. 'We’re going to hold rates at zero, so please buy stocks or junk bonds that will yield at least five or six percent so you might make something.’ In effect, it is forcing unsophisticated investors to speculate wildly on things that are fully too overvalued.”
Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.