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Seth Klarman's 2000 Letter to Investors Rings Eerily True Today

- By Stepan Lavrouk

The more things change, the more they stay the same, and while history may not exactly repeat, it does certainly rhyme. Almost 20 years ago, Seth Klarman (Trades, Portfolio) published a letter to investors of his Baupost Group, in which he performed a cutting post-mortem of the dot-com crash. The Baupost Group ended that 12-month period up 22.4%.


The end of the road?

Consider this section, addressing the issue of cash-incinerating internet companies (emphasis mine). Sound familiar?


"Clearly, the Internet bubble has burst. Nearly all publicly traded Internet stocks have come up snake-eyes, and there is considerable doubt about whether there is or ever was a 'new economy.' No longer can you add 'dot com' to a word, sell shares to the public, and join the Forbes 400. No longer can entrepreneurs count on investors to fund enormous and protracted operating losses. Although the carnage thus far is extensive, the economic fallout from the end of this speculative mania has yet to be fully felt."



While the take on the "new economy" is definitely a cold one in retrospect, the part about entrepreneurs using investor cash to fund mounting losses is extremely relevant today. We have recently seen the Lyft (LYFT) initial public offering severely disappoint investors, leading Uber (UBER) to significantly lower its own offering range (and still deliver a lackluster performance). Institutional holders are dumping Tesla (TSLA). Softbank is reportedly facing difficulties in raising Vision Fund 2.0. What we are seeing is an increased reluctance by capital markets to fund these tech unicorns, similar to the end of the dot-com bubble.

Market crashes: opaque on arrival, inevitable in retrospect

The ongoing demise of the dot-coms did little to dissuade some growth investors from chasing high returns, however:


"Like a couch potato clicking the remote control, real-world growth investors are continually switching their capital from areas of disappointment to areas of perceived opportunity, oddly unaware that all of the channels are showing reruns. Each alluring new area is the 'before' photo, each broken growth stock 'the after,' but no amount of adversity seems to dissuade growth stock investors from the hunt."



Like all stock market crashes, it was difficult for many at the time to understand what was happening while they were in it. Looking back, it seems obvious that the exuberance of the late '90s was doomed to fail. But at the time, it was not so. Perhaps we will look back on today and ask ourselves how so many investors missed the warning signs.


"The unraveling of the virtuous circle of growth is not pretty, with earnings shortfalls, plunging share prices, employees with underwater options jumping ship, overzealous shareholders receiving margin calls, accounting chicanery exposed, lawsuits filed, and, to come full circle, the final insult of deletion from the relevant major market index."



Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.