Does Buffett See the Markets Through Rose-Colored Glasses?

While Warren Buffett gave his annual comfort speech to stock investors at the Berkshire Hathaway shareholders meeting, another famed value investor was preparing a very contrary statement. Seth Klarman's Baupost Fund, which has 19% compounded annual returns since 1982, is set to return money to investors for just the second time in its history. How could this be, right on the heels of Buffett's rally for equities? Let's take a look at Klarman's latest shareholder letter to see if investors should be cautious in entering a market inflated by the Federal Reserve and priced to entice.

Klarman is a self-proclaimed Buffett follower, using the superinvestor's methodologies as the platform for his own tremendous investing success. In practice, though, the two investors have not had the most similar picks. While Buffett has stuck to names (and products) we know and love, Klarman dabbles in anything from high-tech companies to pharmaceuticals.

Whether he has stayed true to the Buffett ways or not, you can't argue with Baupost's returns over the long run. Hedge funds of this size have a wonderful problem -- too much money. At more than $25 billion in assets under management, Baupost has an extraordinary task of maintaining its excellent returns. As Buffett has said, he could compound returns at 50% annually if he had a small amount of capital to play with. Regardless of these hypotheticals, Berkshire Hathaway can still push book value up more than 20% year over year, as we just saw in its earnings release.

So why is Baupost ready to send money home? He sees few bargains in the market and fears the government's influence on equities.

In what may become a meta-contrarian point of view (if Buffett is indeed a contrarian), Klarman believes that investors are wrong to think that, since fixed income markets are so expensive, equities are the only option. True, fixed income is expensive, but there is a third option: neither asset class. In his letter to investors, Klarman warns, "Investing, when it looks the easiest, is at its hardest."

Do investors consider investing easy? I'm not too sure, but it's tough to know who is good and who is bad when we all have a tailwind.

Klarman goes on to write that "a market relentlessly rising in the face of challenging fundamentals -- recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S. -- is the riskiest market of all." The investor references a report from Gluskin Sheff that 30% of the market's current value is due to Fed action, and predicts that once Bernanke shuts off the faucet, there will be a fallout.

Is contrary-to-the-contrarian Klarman taking a wiser, more conservative approach to the markets than perma-bull Buffett? Time will tell best of all. In the meantime, Baupost does not mind missing out on short-term gains and perhaps a tarnish on its image while the market at large rallies like a high school cheer squad.

A penny for your thoughts?
As always, long-term success in the markets will be a direct result of smart stock picking. The presence of some troubling macro elements doesn't mean that certain stocks won't flourish in the coming months and years. This is the Buffett approach: Choose good companies and try to relax.

Where do you lie on the megainvestor philosophical opinion scale? Remain confident that a good stock pick today will endure a macroeconomic shift, or wait until the other shoe falls off, and then back up the truck? Sound off in the comments below.

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