Research Topic of the Day: Contrarian-ness in Investing

Seth Klarman's Big Bet on Distressed Bonds

During the 2008 financial crisis, Seth Klarman didn’t follow the herd into cash. Instead, he bought bonds that were trading for pennies on the dollar. These bonds were risky, but Klarman felt the market had overreacted and bet big.

Klarman anchored on judging the value of the investment via analyzing intrinsic value. He calculated the worst-case scenarios and found that the potential upside far outweighed the downside. When the market stabilized, his portfolio surged in value.

Contrarians don’t avoid risk, they price it. Success lies in finding mispriced, loopsided, assymetric bets where the odds are in your favor.

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