Seth Klarman (Trades, Portfolio) is one of the best value investors alive today. Since he first founded his hedge fund Baupost in 1990, he's written hundreds of pages of communication to investors, all of which are packed full of nuggets of investment advice.

Of particular interest are Klarman's comments on the state of the market in the late '90s, when the dot-com bubble was just beginning. When reading through his letters, it is amazing how similar the environment was compared to today. Below are some extracts:

"The U.S. stock market has been propelled by investors falling all over themselves to buy large capitalization growth stocks like Microsoft (NASDAQ:MSFT), Coca-Cola (NYSE:KO) and even General Electric (NYSE:GE). At least they are, more or less, good companies. Occasionally, periods of unbelievable excess occur where near-worthless enterprises are propelled into the stratosphere. Such a period is now upon us. It is bad enough that the shares of small-growth companies announcing stock splits surge skyward as if something value enhancing has actually taken place. Now, suddenly, the siren song of the internet has become even more irresistible for hordes of growth investors." – June 25, 1998

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Peter Lynch Chart of MSFT "Not so for dreams. With more and more of the market value of U.S. equities represented by lofty (in some cases infinite) multiples of current results, a change in sentiment could wipe out a large percentage of investor net worth. Sentiment, existing only in the minds of investors, is subject to change quickly and without notice. Perhaps today's dreams will become realities for some of the current internet and technology favorites and perhaps not. For many, the dream will be replaced by a nightmare. Then, the escalating bill for betting on dreams rather than on realities will have to be paid up."

"Real value, of bricks and mortar, finished goods inventories, accounts receivable, operating factories and businesses, and even brand names, is hard, although far from impossible, to destroy. If you don't overpay for it, your downside is protected. If you purchase it at a discount, you have a real margin of safety." – June 24, 1999

"Occasionally we are asked whether it would make sense to modify our investment strategy to perform better in today's financial climate. Our answer, as you might guess, is: No! It would be easy for us to capitulate to the runaway bull market in growth and technology stocks. And foolhardy. And irresponsible. And unconscionable. It is always easiest to run with the herd; at times, it can take a deep reservoir of courage and conviction to stand apart from it. Yet distancing yourself from the crowd is an essential component of long-term investment success." – Dec. 17, 1999

"A second factor contributing to today's lofty market valuation is the cult of growth and momentum investment strategies, a bizarre emphasis on the trend of a company's results rather than on the absolute level of its performance. To this way of thinking, no price is too high to pay for a company that is rapidly growing and there is no price worth paying for a company that is not. I heard about a recent business school discussion where an entire class of students expressed a preference to own Microsoft (60 times earnings, 20 times revenues) rather than General Motors (under 10 times earnings). One student indicated that he would not choose General Motors (NYSE:GM) at one-half or even one-fourth of its current price. The professor asked if there were any price at which the student might prefer General Motors. The student started to reply in the negative, hesitated, and then allowed how he might take it were it offered for free. This so perfectly captures today's investment mentality." – Dec. 17, 1999

"With so many investors choosing not to think about their investing (indexing), failing to analyze the fundamentals of their holdings (momentum investors) and having an extremely short-term time horizon (almost everyone else), this is a wonderful time to be a long-term value investor. It is important to keep in mind that stocks are perpetuities with no maturity date. While we frequently invest in stocks with a catalyst for value realization in order to create a portfolio of limited duration, we nevertheless buy only when we are prepared to hold for the long term. Very few investors would choose to hold their current portfolios if they thought the stock market might be closed for trading for the next five years; since we are investing and not speculating, we would be comfortable with our portfolio under such conditions." – Dec. 17, 1999

Disclosure: The author owns no stock mentioned.

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