Bottoms Up
“Paradoxically a bottom-up strategy is in many ways simpler to implement than a top-down one. While a top-down investor must make several accurate predictions in a row, a bottom-up investor is not in the forecasting business at all.” — Seth Klarman, Margin of Safety (pg. 107)
Seth Klarman’s bread and butter is value investing. His success at The Baupost Group has come in a similar manner to the way in which Warren Buffett and Berkshire Hathaway achieved extraordinary returns over the years — looking at the underlying fundamentals of equities, debt instruments, and other investment assets. From his perspective, too many investors get caught up in macro trends, stories, hypotheses, etc. that drive them to poor decisions and outcomes. The bottom-up strategy he champions is difficult, and it requires patience, independent conviction in businesses, and the ability to put your head down and ignore the noise.
While value investing =/= venture investing, this is something I struggle with. I’m thinking of new startup ideas and looking at markets from high-level angles constantly. However, the top-down approach — narratives, themes, predictions — is easy and convenient. The best venture investors I’ve seen follow Klarman’s philosophy, stay opportunistic, and dig deep when they see the potential to work with talented entrepreneurs in large markets.
Investments that fit nicely with higher-level theses and narratives help short-run objectives, like fundraising or some talent attraction. As I embark on an investing path, I’m curious to see how much the stories and themes associated with a business change in the long run in relation to key drivers of value — market size, management + cultural DNA, etc.
As a final note, I’d also like to add a short note on Seth Klarman — he’s cool! Even though he participates in an entirely separate realm, the venture/tech community can learn a lot from his success. I see a lot of tweets about Buffett or Marks, but rarely much on Klarman. I suspect this is in part to his very low public profile, so I’ll share some links here for people to peruse:
