8 Useful Investment Tips from a Less-Known Investing Guru

Hedge fund manager Seth Klarman may not be a well-known name.

His results, though, have been mightily impressive. As the founder and president of Baupost Group, a hedge fund company with assets of US$28.5 billion (as of March 2015), he has delivered compound annual returns of close to 20% since 1992.

Given Klarman’s accomplishments, there would be useful investing lessons to learn from him.

Here are eight investing tips from him which have caught my eye.

Investment Tip No. 1 and 2 – click here

Investment Tip No. 3 and 4 – click here

Investment Tip No. 5 and 6 – click here

Investment Tip No. 7:

“We clear a high bar before making an investment, and we resist the many pressures that other investors surely feel to lower that bar. The prospective return must always be generous relative to the risk incurred. For riskier investments, the upside potential must be many multiples of any potential loss.”

When it comes to investing, Klarman favors situations where the reward-to-risk ratio is heavily asymmetrical in his favour. For every company that we look at, there are risks to consider. For Klarman, it’s the potential return that comes with the risk taken that matters.

More importantly, Klarman is also uncompromising in his requirements. Picking the right companies for our portfolios may be the single most important thing we do in investing. For Klarman, it’s about finding the investments (be it stocks, or distressed debt, or other types of financial instruments) which offer outsized returns to the risk that he takes.

Investment Tip No. 8:

“There is also a bit of a slippery slope in that if a little leverage is good, why isn’t more leverage better? When do you stop?”

In the quote above, Klarman makes his aversion to the use of leverage clear.

History is littered with cautionary tales when it comes to leverage-related blowups. When we cannot predict where the stock market is headed over the short term, leveraging up can become downright dangerous for the investor as a sudden downturn can wipe him or her out.

Speaking of leverage, we should also keep a close eye on companies which use debt to finance their expansion.

A good example is BreadTalk Group Limited (SGX: 5DA). The bakery and restaurant owner has grown its network of stores globally from around 400 at end-2010 to 932 today. Over the same time, its total debt has ballooned from $19.4 million (as at end-2010) to $228.8 million (as at 30 June 2015). None of this is meant to say that BreadTalk is a bad investment; it’s merely to point out that the company’s growing debt is one risk that investors may want to keep a watchful eye on.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.