At a recent CNBC interview during the New York Global Alternative Investment Conference, Seth Klarman spent a rare half hour sharing his latest investment views and thoughts on the market in remarkable detail.
Who Seth Klarman Is?
Seth Klarman is the founder and CEO of The Baupost Group, one of the world's most respected value investing firms. Often described as the "next Warren Buffett," he is best known for his disciplined, risk-focused approach and his classic book, Margin of Safety, which emphasizes the importance of downside protection and buying with a margin of safety.
Key Takeaways from the Interview
Value investing is not buying cheap stocks. It is determining what a business is truly worth and only investing when there is a sufficient margin of safety.
Protecting downside is as important as pursuing upside. Baupost avoids leverage, holds cash when opportunities are scarce, invests higher up the capital structure, and uses hedges when appropriate.
Invest across asset classes. Opportunities can emerge in public equities, credit, private investments, and real estate.
The current market shows bubble-like characteristics. AI could be transformative, but investors are paying increasingly higher multiples amid rising uncertainty.
Focus on what is knowable. If investors pay 40× earnings—or even "infinite multiples"—they must have extremely high confidence about the distant future. Klarman argues that confidence is often unjustified.
Be patient and flexible. Some of the best returns come during periods of distress, when others are forced sellers.
Market risks may be underestimated. He worries about geopolitical tensions, U.S. fiscal deficits, AI regulation, and energy shocks.
"The so-called risk-free asset becomes more risky every day."
How Seth Klarman Invests in AI
Despite being a traditional value investor, Klarman is not anti-AI. Instead, he approaches AI through a value-investing lens.
1. Avoid the obvious AI darlings
He avoids investing directly in the trillion-dollar LLM companies such as:
OpenAI
Anthropic
because:
He cannot determine who the ultimate winners will be.
The businesses consume enormous amounts of capital.
They require constant reinvestment to stay competitive.
Profitability may still be years away.
"This isn't Buffett's definition of a great business."
2. Classify companies into three groups
Klarman divides the market into:
AI Winners → everyone wants them.
AI Losers → everyone avoids them.
AI Unrelated Companies → largely ignored.
He spends much of his research effort on the latter two categories. "The companies no one is paying attention to are often becoming cheaper."
3. Own high-quality cash-flow businesses benefiting from AI
Approximately 10% of Baupost's portfolio directly benefits from AI.
Examples include:
Amazon
Alphabet
Why?
Massive existing cash flows.
Multiple business segments.
Ability to adapt.
Participation across various AI layers.
Examples:
Google develops its own AI chips.
Amazon benefits from accelerating data center demand through AWS.
"You don't have to make heroic assumptions to own great businesses."
4. Invest in AI infrastructure rather than AI models
One of his more interesting approaches is investing in:
Data center land
He owns undeveloped land that may eventually become:
Data center sites
especially those with access to electricity.
His thesis:
AI demand appears enormous.
The bottleneck is often power availability.
Cheap land creates valuable optionality.
"Power is the most important condition."
5. Buy AI exposure through discounted private assets
He also invested in:
Asian data center assets
purchased through private transactions.
The attraction:
Significant discounts to public-market valuations.
Similar exposure to AI infrastructure growth.
He noted that one investment was acquired at roughly: 40% of comparable public valuations.
6. Study AI constantly, but don't chase it
Klarman set three personal rules regarding AI:
Rule #1
Don't try to stand at the cutting edge. "I'm not a technologist."
Rule #2
Understand AI well enough not to be disadvantaged.
He reads extensively and follows AI developments closely.
Rule #3
Stay focused on your circle of competence.
He doesn't want to miss obvious opportunities elsewhere simply because everyone is talking about AI.
"The next fat pitch might be an AI stock... or it might be a distressed debt investment."
Don't chase the AI gold rush. Own businesses with cash flows, buy the overlooked parts of the ecosystem, invest in the infrastructure enabling AI, and never stop asking: What can I actually know with confidence?