Investing

I wrote about Baupost's (Seth Klarman's) Hedging Strategy based on his view in 1995-1997. In a recent speach he updated his thoughts on insurance (hedging).

"Do you overpay for insurance — or do you go uninsured?

Klarman: In terms of our firm, I tried so hard to learn
the lessons of 1998 in particular, which were: Don’t be
unprepared for something out of the blue that’s really bad.
To some extent, we were prepared this time. However,
you can never be prepared enough. We had a lot of macro
protection in terms of credit default protection on bonds
where we were just betting that credit spreads would widen.
That’s been incredibly helpful. But we’ve gotten really tired
of buying market puts, or anything like that, because they
inevitably are expensive and expire worthless.
So as an investor, you have terrible trade-offs. Do
you overpay for insurance — or do you go uninsured?
That’s just one of those dilemmas for which there are really
no perfect answers."
Outstanding Investor Digest March 17,2009