A letter by Brian Spector of Baupost, encouraged and endorsed by the firm’s iconic value-investing president Seth Klarman, gives a rare inside look at this secretive investment firm. As Business Insider reports, Klarman asked Spector, whom Klarman describes as “an outstanding investor, collaborator, and mentor,” to write a letter directly to the company’s investors as Spector announced his retirement after a 17-year tenure.

Spector described two types of investing: “needle in a haystack investing” and “tide comes in, tide goes out investing.”  According to Spector: “Most of the time we are in periods of haystack investing,” meaning “we sift through lots of investment ideas to find a few decent opportunities. We sell more securities than we buy and our cash reserves begin to build.” Occasionally, such as at the end of the dot com bubble, the markets “become significantly dislocated” and the “tide” changes.  This is when Baupost seizes opportunity: “We see distressed sellers, illiquid securities, huge redemptions, and an excess of paranoia and fear. We quickly find a number of interesting opportunities, deploying our significant cash balances as we trade precious liquidity for mispriced securities. We may lose money in the short term, as we add to our portfolio while prices are dropping. But when markets turn, we expect multiple years of strong profitability.”

The approach appears successful.  With net gains of $23.4 billion since its 1982 inception, the Baupost is ranked among the world’s top-performing funds.

Spector points to several factors that underlie success:

• He describes a “culture of patience,” noting “when we don’t find interesting ideas, we do nothing and hold cash.” He continues: “On the flip side, when an idea has been analyzed and is fully baked, we drop whatever else we are doing, discuss the investment, and make a decision. Our portfolio decision process must be incredibly efficient, as we recognize that good ideas are scarce and may prove fleeting.”

• Spector observed that most within the firm “believe we have generated [out-performing] returns BECAUSE of th[e] cash” it holds. Without it, “it would be impossible to deploy capital when we enter a tide market.”

• Spector credits the firm’s culture of teamwork (as opposed to internal competition) and mutual confidence among its members. “This is an area that I believe makes Baupost exception,” he says. Unlike firms where investors act as “free agents” who are rewarded on the basis of an individual “book” of investments, Spector says Baupost investors “work together to maximize the returns for our clients . . . they comfortably make hand-offs [by giving investments to others in the firm based on expertise], root for one another, and try to help in any way possible. This means reviewing investments, exchanging impactful information and opinions, as well as mentoring one another.”

• Finally, he explains: “We try to maintain a calm working environment. . . . At Baupost, if you were in our trading room, you would not know if the market was up 5% or down 5%. This is by design. It is much easier to make reasoned decisions without someone screaming at you or second-guessing your judgment.”

All of these points seem to support Spector’s discussion of the firm’s success as a product of “tide investing.” He notes: “Investing in tide markets takes chutzpah. To do so effectively, you need to fly in the face of public opinion, you have to fight normal human emotions, and you have to be prepared to double down on your bets when your conviction is most in question. . . . But most importantly, you have to be at a place that empowers you to succeed – a place that is uniquely situated to take advantage of these market conditions.”