A few weeks ago, I posted a link to Sal Daher’s wide-ranging interview with Howard Stevenson in 2017 (episode 29 of Daher’s Angel Invest Boston podcast). Howard Stevenson is a professor emeritus at the Harvard Business School and a co-founder of the Baupost Group. Below are just a few of my takeaways from that conversation, which is full of great insights and therefore worth listening to in its entirety. Please note that my notes are condensed and paraphrased, so any mistakes are my own.

You can listen to the full epsiode here. Daher has also provided a complete transcript for his audience.

• On early-stage investments: There is no formula. He has always been experimental, because he doesn’t believe he understands or can predict the future. When you look at the facts, very few people can. In the early-stage, he prefers to invest in companies which are post-revenue because it points to the fact that there is somebody that’s willing to have a cash-ectomy performed on their wallet. In the growth-stage, he prefers investments where the scientific or technical risk is out but the market risk is still there. He likes to be broadly diversified. The best investment he ever made was in a company (Asurion) that had a really stupid business plan but where the people were fantastic. They were in an industry that he thought was very interesting, he just thought that what they were doing in that industry made no sense. Over a couple of years, however, they morphed, and that investment eventually returned 400 to 1.
• On the criteria for backing entrepreneurs: First, is the person honest? Because, if they’re not, they’ll screw you in some way. Second, are they nice? By that he means, are they looking out for somebody other than themselves? For example, he has previously invested in companies where the entrepreneur takes care of themselves really well, but the early-stage investors not so much. Third, are they curious? Because if you believe that the future is impossible to predict, then anybody who thinks they know the future absolutely, is not looking around the corner. Finally, are they smart? Because entrepreneurship is a very complicated field to navigate.
• On process versus outcomes: In investing, you’ve got to differentiate between “Was it a good bet?” and “Did it work?” because, on a high variance bet, it’s not going to work out all the time. One of the things he is always trying to do is to say, “What are we betting on? What are the three or four conditions we’re betting on?” And, then recognize and accept that sometimes it’s still not going to work.
• On hiring Seth Klarman: People often focus on hiring somebody like X (the benchmark they have in mind), but you are actually trying to hire someone like X was 30 years ago and then help them grow/evolve into the role. That was true of Klarman. He was an extremely bright, unusual young man who liked stocks and liked betting. He fit all the criteria outlined above (honest, nice, curious and smart). The Baupost founders also liked that he was willing to do original research. But he transitioned into the role of president over six years, because people don’t want to give a 26 year-old all of their money. One other thing Klarman was brilliant at was moving from sector to sector as the opportunity set evolved. So, he bought real estate when real estate was dead cheap. He bought busted bonds. And so on. Finally, Baupost also had the right set of investors – it was a small group of people and they all had a long-term outlook. They had a much healthier attitude towards the market than a lot of people have today, where fund managers live and die by their last set of results.
• On building wealth: Assets are more important than income. If you have a high income, you usually have high expenditures. He has always tried to focus on the asset side, because you can’t spend it. He gives the example of how some of his colleagues at the business school would take on consulting gigs (usually a euphemism for teaching courses at GE) and make a lot of money, which they would then typically spend on expensive cars and the like. By contrast, he would go to relatively far-flung places like Lima, Ohio and so on, where he was only paid $300 a day, but also got 1% of the company.
• On having a long-term perspective: Most of the world is only interested in the first two or three years of return. Warren Buffett is the classic example where, if you look at his results, it’s largely because he bought long duration cash flows. He’s buying the three to fifteen year cash flow. It’s much harder to outguess the professionals that have better information, quicker execution, all of that in the first three years.
• On achieving real diversification: One has to ask the question, “What are the underlying drivers?” Figure that out and, if they look the same, that’s not diversification. He gives the simple example of the SPDR ETFs that were initially based on the S&P 500. People think they are diversified just because they hold 500 stocks. But what percentage is represented by the high technology stocks? 25%? That is quite a lot of dependence on one group of stocks with similar drivers. And if you go back to 2001, high technology probably represented well over 50% of the S&P. So anybody who thought they were diversified was smoking stuff that smelled funny. 
• On investing in the current environment: He quotes Bernard Baruch who once said “sometimes the best investment is going to the beach.” Right now, you probably want to have some cash (Baupost has, at certain points in time, had 30-45% of their assets in cash). They also do more structured deals these days (e.g. via preferred equity investments) where the focus is more on protecting capital than shooting the moon.