Baupost 2012 Shareholder Letter

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BAUPOST LIMITED PARTNERSHIPS

2012 YEAR END LETTER

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Copyright © 2013 The Baupost Group, L.L.C. This letter and the information herein is confidential and is provided to you only

in your capacity as a Limited Partner and not for further dissemination. Baupost and The Baupost Group are registered service

marks of The Baupost Group, L.L.C.



“In the end, more than freedom, they wanted security. They wanted a comfortable life, and theylost it all--security, comfort and freedom. When the Athenians finally wanted not to give to

society but for society to give to them, when the freedom they wished for most was freedom from

responsibility, then Athens ceased to be free and was never free again.” --Edward Gibbon (1737-1794), British historian and MP

“A democracy cannot exist as a permanent form of government. It can only exist until the voters

discover that they can vote themselves largesse from the public treasury. From that moment on,

the majority always votes for the candidates promising the most benefits from the public treasurywith the result that a democracy always collapses over loose fiscal policy, always followed by a

dictatorship. The average age of the world's greatest civilizations has been 200 years.”

--Attributed to Alexander Fraser Tytler (1747-1813)

“I am more worried than I have ever been about the clouds gathering today…. I hope they pass

without breaking, but I fear the defining feature of coming decades will be a Great Disorder of

the sort which has defined past epochs and scarred whole generations.”

--Dylan Grice, Global Strategist, Société Générale, October 2, 2012



The Baupost Group, L.L.C. 10 St. James Avenue, Suite 1700 • Boston, Massachusetts 02116 • Phone: 617-210-8300 • Fax: 617-451-7333

January 18, 2013

Dear Limited Partner,

We are pleased to report a gain for the year ended December 31. Various appendices andtables detailing a categorized breakdown of our investment returns, largest individual gains andlosses, portfolio allocation, and ten largest positions at December 31 will be available in separatequarterly reports on our website in early February.

Year in Review

All things considered, 2012 was a profitable but frustrating period for Baupost®. Formuch of the year, it felt as if we were all dressed up with no place to go. We had plenty of cashto deploy, the strongest and deepest investment team we’ve ever had searching assiduously for

opportunity, a well-considered plan as to where we might look, and an operations team ready to process and report on any investments we might make. But, for various reasons, potential sellersof securities and assets largely held back while buy-side competitors became increasinglyaggressive. Bargains generated by the panic selling and forced liquidations of late 2008 andearly 2009 were long gone, replaced by mostly higher prices amidst a grind-it-out environmentof subdued economic conditions and festering problems. On the whole, though, given the lessthan robust opportunity set, we are quite pleased to have found sufficient new investments tokeep most of our capital productively deployed. Much of our success last year was the result ofyears of hard work analyzing complex and messy situations and building and strengtheningrelationships that underpinned our sourcing efforts. While our return for the year was notscintillating, we regard it as acceptable considering the limited risk incurred to achieve it,including the consistent maintenance of cash balances that hovered around 30% of capital allyear before ending somewhat higher.

While our investment approach is always bottom up, the prevailing market and economicenvironments inevitably influence the flow of opportunity. One likely scenario for 2013 is areprise of 2012: extremely low interest rates increasingly pressuring yield-starved investors tothrow caution to the wind while curtailing the opportunity set for bargain seekers. Indeed,during the first week of January 2013, the S&P 500 hit a five-year high while junk bond yieldsfell below 6% for the first time in history. Another plausible scenario would involve real progress on deficit reduction and entitlement spending, thereby encouraging legitimate optimismabout the future. But the odds of such a development seem discouragingly low at this time.Given the rancorous debate and partisanship that characterized the last-minute “fiscal cliff” deal,the real downside scenario--which concerns us greatly--involves the end of the “free lunch” oflarge deficits, zero interest rates, and relentless quantitative easing. This story line would takethe form of a currency, sovereign, or economic crisis inciting panic throughout the financialmarkets.

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Our portfolio holdings are quite compelling as we enter 2013, and we believe we willachieve solid long-term returns with limited downside risk under any of the aforementionedscenarios. Indeed, because we never know what is going to happen, we always attempt to buildan eclectic, diversified portfolio that should protect capital even in times of great adversity whilealso generating decent investment performance under virtually any market or economic

environment. Meanwhile, we will remain disciplined, continue to choose capital preservationover speculation, and stay focused on achieving good absolute, not relative, returns.

The success of an investment firm is necessarily dependent on the actions of others. Thecollective behavior of the entire community of investors determines market prices, and pricefluctuations, in turn, drive investment opportunity. In other words, determined effort, deepanalysis, strong processes, and good judgment are necessary but not sufficient for investmentsuccess. When buyers are numerous and sellers scarce, opportunity is bound to be limited. Butwhen sellers are plentiful and highly motivated while potential buyers are reticent, greatinvestment opportunities tend to surface.

The actions of two powerful figures, Ben Bernanke and Mario Draghi, impacted us andother investors profoundly last year. Throughout 2012, the Fed chairman and his counterpart atthe European Central Bank (ECB) were maestros whose monetary symphonies beguiled mostinvestors. Their seductive melodies, consisting of the same flat notes of lenient policy actionsand endlessly offbeat repetitions, had the effect of intensifying competition for investments byluring many into paying up for risky assets while dampening any urgency sellers may have had.Bernanke’s plan for quantitative easing (QE3), announced in September 2012, involved theFed’s purchase of $40 billion of agency mortgage-backed securities (MBS) a month. Then, onlythree months later, he effectively doubled down with a plan to augment the MBS activity withmonthly buybacks of $45 billion of long-term U.S. Treasury securities. Bernanke’s ongoingfinancial experiment (now in its fifth year and counting) is a real world test of his Ph.D. thesis onthe proper response to a looming depression. In reaction to his efforts, investors belted out aresounding chorus of “risk on” for much of the year.

While economic conditions in the U.S. have moderated from crisis levels, Eurozoneeconomies continue to struggle. Greece remains mired in economic depression; its GDP today is19% below its level of four years earlier. Reported Spanish unemployment hit 25% recently, thehighest since 1976. Mario Draghi’s mid-year announcement to undertake Outright MonetaryTransactions (OMTs), in which the ECB buys back shorter-term maturities--between one andthree years--of peripheral European countries’ sovereign debt, calmed markets while provokingrisk taking. Spain, Italy, and other countries have temporarily benefited from issuing debt atinterest rates well below what the market would have otherwise demanded, while European banks purchase debt of their own sovereigns through collateralized borrowings in a new form ofcarry trade. Meanwhile, according to the International Monetary Fund (IMF), the underlyingsovereign debt-to-GDP ratios of Portugal, Ireland, and Spain all continue to grow. According tothe IMF, Germany and France--Europe’s core--now have debt to GDP ratios of 83% and 90%,respectively, a level considered dangerous for any country’s long-term fiscal soundness. Thesovereign debt crisis and Eurozone fiscal imbalances remain grievous threats to the global_____________________________________________________________________________________________________




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economy, with Draghi effectively declaring a three-year truce between debtors and creditors atgreat expense to the healthier European economies. His actions are keeping market forcestemporarily at bay, but when they re-emerge another day of reckoning will be at hand.

Thanks to Bernanke’s and Draghi’s interventionist policies--and the markets’ belief that

they will continue indefinitely--interest rates have plummeted. In the U.S., the ten-year Treasury bond yield bottomed at 1.43%, while the thirty-year yield hit an astonishingly low 2.46%.Triple-A-rated Microsoft recently issued five-year paper at less than one percent, while the five-year Treasury bond yielded as little as 0.56%. Similarly in Europe, rates in most countries fellsignificantly while bond prices surged. Vanishing interest rates have combined with the pressures wrought by short-term, relative investment performance measurement to driveinvestors into riskier investments (i.e., “risk on”). Desperate for yield, investors poured moneyinto high-yield bond funds; 2012 inflows more than doubled the previous yearly high set fouryears ago. As a result, junk-bond investors have posted huge gains as yields plummeted to all-time record lows in late 2012 and again in early 2013. Similarly, yields on commercialmortgage-backed securities hit their lowest level since the inception of the Barclays Capital U.S.

CMBS Investment Grade Index in 1997, while leveraged loan issuance hit a five-year high. As perceived risk dropped and bond yields plummeted, most global equity markets surged in 2012in an equally frenetic reach for return. Both the Russell Midcap Index and the Russell 2000Index of small-cap stocks hit an all-time high just yesterday. When today’s aggressive policiesfinally end and market forces reassert themselves, those who grabbed desperately for return and bore excessive risk to do so will encounter substantial market value declines.

If economics were a hard science like chemistry, you’d mix a little of this with a bit ofthat and the concoction would lead to strong economic growth, full employment, rising home prices, buoyant financial markets, and low inflation every time. But economics is a soft science,and real life simply doesn’t work so predictably. Though economists might wish otherwise,economics is, at its core, behavioral. Modern economies are too complex to be reliably modeled;their connections and correlations are loose and imprecise, the second- and third-order effectslargely immeasurable, the fickle vagaries of individual and aggregate human behavior utterlyunknowable. Put an economist in a powerful government job and provide levers that can be pulled to start the printing presses, set reserve requirements, fiddle with the Fed funds rate,expand the Fed’s balance sheet, and deliver indecipherable communiqués, and that economistwill feel compelled to pull those levers. He or she, like a monkey with a typewriter, might evengive us Shakespeare (or Adam Smith) on occasion. But mostly that economist will spoutgibberish, a mélange of untested and potentially counterproductive measures that unleash allmanner of unintended consequences. Were the meddling to actually remedy the targeteddeficiency, it might well be at the cost of dangerous feedback loops and unexpected ripplesgrowing beneath the surface into the incipient waves of tomorrow’s much larger problems.

In the short run, it seems unwise for investors to wager heavily that Bernanke and Draghiwon’t do exactly as they say, at least until some sort of crisis, possibly driven by the return ofmarket forces, overwhelms their determination. No one should bet the farm that interest rateswill suddenly be allowed to surge. Nor should anyone bet on rates staying low forever._____________________________________________________________________________________________________




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Bernanke and Draghi seem intent on buying back bonds indefinitely, whether or not their actionsdeliver an economic recovery and in spite of any unpleasant side effects. It is clear after fouryears and counting that their efforts have not delivered as predicted. Only a zealot wouldcontinue on with a plan that is not working and, in defiance of reason, massively expand it. Butfor Bernanke and Draghi, coming up short only seems to steel their resolve. In the words of The

Wall Street Journal’s Richard Barley, “quantitative easing, a shocking development when firstimplemented, has now become mainstream.”1 The greatest danger? How swiftly market participants have come to accept such actions as normal. What could possibly go wrong? Well, just about everything: markets distorted, future returns diminished, moral hazard snuffed out,new bubbles inflating, caution abandoned, inflation unleashed. When investors come to believethat downside tail risk has been extinguished, it emboldens them to pay higher prices, therebyaccepting more risk with less return. In this case, such excesses are not a mere side effect. Ascrazy as it seems, especially given who the masterminds are, reckless investor behavior is, infact, the planned objective. But unlike most plans, there is no fallback position and no feasibleexit. Why is no one asking hard questions about these policies? If they are the proper responsesto economic conditions, why haven’t they worked as predicted? Why, four years in, are things

so bad that efforts must be redoubled? What might provoke an acknowledgement that these policies aren’t working, aren’t going to work, and may even be counterproductive? What would precipitate a candid conversation about how difficult it will be to reverse the policies, especiallygiven their magnitude and long duration and the distortions they have triggered?

Turning our attention homeward, our nation’s ever-mounting burden of on- and off- balance-sheet liabilities is a ticking time bomb. The U.S. now owes $16.4 trillion to creditors, upfrom $10.6 trillion only four years ago, an increase of over $50,000 per household over thosefour years. Assuming a continuation of current tax and spending policies, public debt, only 38%of GDP in 1965, is projected by the Congressional Budget Office to hit an ominous 90% of GDPwithin ten years and by JPMorgan to hit an absurd 247% of GDP within thirty years. Thegovernment is on the hook for about another $55 trillion, in addition to public and intra-governmental debt, to meet other federal commitments and unfunded entitlement programs suchas Social Security and Medicare. The cost of such entitlement programs, well under one-third ofthe federal government’s total outlays in 1960, amounted to two-thirds of federal spending by2010. “On its current path,” commentator Fareed Zakaria recently warned in Foreign Affairs,“the U.S. federal government is tur ning into, in the journalist Ezra Klein’s memorable image, aninsurance company with an army.”2

In 2011, the federal government took in approximately $2.3 trillion of revenue and spentroughly $3.6 trillion, running up a deficit of over 8% of GDP. Even the most aggressiveremedies balanced between revenue increases and spending cuts, such as those proposed by theSimpson-Bowles deficit-reduction plan, are unlikely to halve the deficit over the next decade andthe national debt would continue to mount. These deficits mean that we are spending borrowedmoney to fund current “priorities,” while leaving future generations on the hook for the debt we

1 Richard Barley, “Central Banks’ Incredible Lightness of Easing,” The Wall Street Journal, August 27, 20122 Fareed Zakaria, “Can America Be Fixed?” Foreign Affairs, January/February 2013._____________________________________________________________________________________________________




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incur. Indeed, the U.S. government curr ently spends four dollars on citizens over age 65 forevery dollar it spends on those under 18.3 Fewer and fewer Americans pay federal income taxes(though most, of course, still pay FICA withholding, local sales, and real estate taxes), whileincreasing numbers receive payments from the government. Tackling the federal deficit wouldweaken an already soft economy, while failing to act would push us closer to unsustainable debt

levels. To meet the annual cost of all its unfunded obligations, the U.S. government would, bysome estimates, need to take in an additional $7 trillion a year. Yet all federal taxable income--individual plus corporate, in its peak year of 2006--totaled only about $6.7 trillion, meaning thatthese entitlements are completely unaffordable and can never be paid.

The fiscal cliff deal to raise tax rates for the wealthy may matter symbolically, but therecently voted increases only scratch the surface of the deficit problem. Meanwhile, the absenceof any agreement on spending cuts augurs ominously for the future. The sooner we acknowledgethe full reality of our predicament and amend benefits and eligibility for these programs, the better the chance of limiting the uncertainty and potential social upheaval when the promised benefits fail to appear.

Worse still, today’s debt-service costs are artificially low because interest rates have been pushed down by QE, masking the mounting danger. One prominent economist bizarrely argues(twice weekly) that today’s deficits pose no danger because interest rates remain historically low,as if QE were not artificially driving down rates and as if markets are not both fickle and oftenwrong. Government debt maturities, which, in a rational world, should have been extendedduring a time of low rates, have, in fact, been shortened. Total interest expense on the federaldebt is roughly unchanged from 2007 levels, even though the debt is about 80% greater. Theshorter debt duration also means that the U.S. government must tap the capital markets to thetune of about $4 trillion annually, including amounts needed to fund the deficit and refinancedebt maturities. It is dangerous to need constant access to the capital markets for such staggeringamounts of financing. An unknowable tipping point looms over the horizon. When we reach it,outsiders and U.S. citizens alike will become suspicious of our creditworthiness, causing interestrates to rise and the dollar to plummet. Holders of greenbacks will rush to spend their moneywhile it still has some value, causing the prices of goods and stores of value (like gold) to surge. No one knows precisely how much debt is too much, or at what moment the tipping point will bereached. It’s like driving a car with a faulty navigation system along a steep mountain road atnight while wearing a blindfold. Sooner or later, you’re going to plummet over the edge. By thetime we reach that point, it will likely be too late. Astonishingly, we seem to lack the politicalwill to act in advance, dooming us to the vicissitudes of volatile markets and the unpredictablehand of fate.

As we enter 2013, our nation is on a dangerously flawed trajectory of unprecedentedmoney printing, unchecked government spending, massive federal deficits, governmentsubsidies, artificially low interest rates, and speculative behavior. According to the PewResearch Center for the People and the Press, close to 50% of Americans aged 18 to 29 view

3 Fareed Zakaria, “Can America Be Fixed?” Foreign Affairs, January/February 2013.

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capitalism negatively. We aren’t teaching young people about the virtues of the free-marketsystem, though they do seem aware of its inevitable shortcomings. Meanwhile, even though weare all in this together, the government continues to ask nothing difficult from the majority of itscitizens. We talk of everyone paying his or her fair share, but no one discusses the obligation weas citizens have in a democracy to do our fair share. Instead, we are encouraged to follow the

feckless path of living beyond our means, making life more comfortable in the near term whilethe nation’s crumbling infrastructure, faltering education system, and declining internationalcompetitiveness put us further and further behind--all the while piling up a crushing debt burdenfor future generations.

As investors have become accustomed to sputtering economies and massive governmentintervention, episodic “risk-on” and “risk-off” behaviors drive the capital markets. Unexpected bad news means risk off. A stopgap solution to the crisis du jour is offered--i.e., a bailout, arescue, a Band-Aid deal, QE(n)--and risk on resumes. We have been on a roller-coaster ride forthe last four years and counting, with no meaningful recovery, no feasible solutions, andineffectual leadership. Investors conditioned to the short-term trading mentality are increasingly

ill prepared for policy changes. What will happen when the Fed declares, as it someday must,that the era of low interest rates is at an end? What if governments holding trillions of dollars ofsovereign debt and other securities stop buying and begin to sell? Or if another serious crisis--economic, political, international--materializes and governments have insufficient ammunition tointervene? The content, though not the timing, of the next chapter in market history is quite predictable. Few will say they saw it coming, though, in fact, everyone could have seen it if theyhad only chosen to look.

Optimists (and there are some) think we will continue to navigate carefully betweendeflation and runaway inflation, and that the U.S. will muddle through the ongoing global de-leveraging. That would be a fine outcome, particularly since other scenarios are much worse.But can you really say that an economy is healthy when it achieves an increment of short-termgrowth at the cost of a worsening long-term debt picture? In fact, weren’t myriad past attemptsto steer the economy through its inevitable troughs responsible for some of the dampenedvolatility and consequent overleverage that led to the 2008 collapse and current stagnation? Oureconomy is walking on a narrow tightrope over a vast crevasse, and if we lose our precarious balance--if the economic winds unexpectedly gust one way or another, or if a geopolitical stormarrives--who knows how far we could fall?

The good news, such as it is, points to brighter prospects for the U.S. than those for eitherEurope or Japan. The U.S. stock market valuation is increasingly expensive but not extreme.The U.S. has moved closer to achieving energy independence, and low-cost natural gas has madea manufacturing renaissance a possibility. We are a nation of entrepreneurs and innovators. Ournational debt is entirely denominated in our own currency, so we cannot actually default. Andthe solution to our irresponsible deficit spending lies in our own hands. Unlike peripheralEurozone countries, we are still the masters of our fate.

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One of the investment challenges arising from the current environment is that while theU.S. stock market may appear to be quite volatile, posting as much as one- and even two-percentswings on some days, overall market volatility has been low to average over recent months andyears. In mid-January, the VIX Volatility Index hit a five-year low. This dampened volatility,accompanied by higher securities prices, is a challenge for Baupost. Big market swings can

benefit us. Extremely high prices, for example, are useful for taking profits. Were the marketsto rise dramatically from today’s levels, we would undoubtedly take advantage by selling intostrength. Conversely, if the markets were to drop significantly, we would redeploy cash on handto thoughtfully scoop up the bargains uncovered by the receding tide. Unfortunately, the FederalReserve’s relentless interventions and manipulations (the “Bernanke put”) have truncated marketdeclines, leaving relatively little worth acquiring--at least for now.

Nassim Taleb, author of the new book, Antifragile, praises volatility and criticizes thosewho would artificially damp it at great unseen cost. He is concerned about the rigidities inherentin our system. Taleb writes: “Stifling natural fluctuations masks real problems, causing theexplosions to be both delayed and more intense when they do take place. As with the flammable

material accumulating on the forest floor in the absence of forest fires, problems hide in theabsence of stressors, and the resulting cumulative harm can take on tragic proportions. And yetour economic policy makers have often aimed for maximum stability, even for eradicating the business cycle…. [In contrast,] Mervyn King, Governor of the Bank of England, has advocatedthe idea that central bank s should intervene only when an economy is truly sick and shouldotherwise defer action.”4

Accepting that we cannot predict the future--i.e., that there will always be unexpected andhighly consequential events--is the first step in becoming less fragile and more adaptable.People should be highly skeptical of anyone’s, including their own, ability to predict the future,and instead pursue strategies that can survive whatever may occur. Taleb advises us to be “anti-fragile”--i.e., to embrace those elements that benefit from volatility, variability, stress, anddisorder. This is exactly what we strive to do at Baupost, and Taleb has coined a name for it.The world will always deliver surprises coming from left field, things that have never happened before or, at least, that no one can remember having happened. As Nobel Laureate DanielKahneman notes, people tend to underestimate the odds of extreme events that haven’t occurredrecently. It’s a tendency known as availability bias. This tendency is crucial to effectively position ourselves to survive and even thrive regardless of an uncertain future. How do we dothat? By eschewing portfolio leverage, keeping ample cash balances ready for rapid deployment, pursuing a mostly generalist and flexible approach while avoiding narrow silos, seeking bargain- priced investments where possible adverse developments are already priced in, holdingnumerous investments with uncorrelated catalysts to drive outcomes irrespective of marketlevels, maintaining prudent diversification, demanding high intellectual honesty whileconsistently striving to improve, and having clients whose long-term orientation matches ourown.

4 Nassim Nicholas Taleb, “Learning to Love Volatility,” The Wall Street Journal, November 16, 2012._____________________________________________________________________________________________________




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Over the years, we have warned--typically prematurely but often quite accurately--ofexcesses that were brewing in the markets or the economy. The Internet stock mania, housing-market madness, and excesses in newfangled financial products derived through financialengineering readily come to mind. Sometimes years went by before our concerns were borneout; sometimes bubbles inflated further before they burst. Today’s absurdly low government

bond yields for countries considered “safe” is another such bubble. If inflation were rising, or ifthe U.S. fiscal position were weighing on investors’ minds, normally you might see these problems expressed in higher yields and falling bond prices. But because of QE, the usualmarket signals are masked, and, consequently, are leading to growing imbalances. Today’sfederal budget deficit is another unsustainable condition; sooner or later, we will either reduce itwillingly or we will be forced to do it by the capital markets or our creditors.

It can be tedious to write about excesses that don’t go away. It is surely even moredraining to read about them. Human nature being what it is, especially in today’s world ofoverload and limited attention spans, it is natural to want to move on, to pay attention tosomething else, even to jump on the bandwagon as others profit from short-term speculation.

But just because a reversal of something unsustainable hasn’t happened yet doesn’t mean itwon’t. Risks avoided aren’t risks nullified; often, they fester and grow even more dangerous.

Today, the greatest nation in the history of the world is on a direct path to becoming oneof its poorest credits. The Fed is buying nearly three-fourths of the Treasury’s annual debtissuance in an unprecedented attempt to keep interest rates low. (The Federal Reserve actually posted a “profit” of nearly $89 billion in 2012 from interest income on its bond holdings,suggesting the possibility not only of an economic “free lunch” but a national lifetime pass to anall-you-can-eat buffet.)

Leverage is always a double-edged sword, and in 2007 excessive leverage at all levels ofthe economy had eroded our country’s margin of safety. Stimulative effects of additionalleverage were having less and less impact on the economy, while debts grew larger and larger.When things went wrong in 2008, we had nothing to fall back on. There was no room for error,little cushion to give us time to refocus and rebuild. By artificially propping up our economy inthe intervening years, keeping interest rates low, spending vast sums on programs to generateephemeral demand, and rescuing failing enterprises, we have effectively been engaged in anattempt to return to 2007 and the very conditions that proved unsustainable and led directly to the2008 collapse. Today, with massive deficits and higher government debt, we have even lessmargin for error than we did four years ago. What might we do instead of today’s unsuccessful,misguided, and dangerous programs? Jim Grant, in a CNBC interview several months ago, hadone suggestion: perhaps we should try capitalism.

In some ways, conditions today are even worse than before the 2008 meltdown. InAugust, the U.S. labor-force participation rate fell to 63.5%, a 31-year low. Real medianhousehold income in 2011 fell for the fourth straight year to 1995 levels. Government credibilityhas also deteriorated. Claims of accomplishments that cannot be measured--jobs created and jobs saved--or re-drawing a new target around an arrow that has already been shot (e.g.,_____________________________________________________________________________________________________




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expensive stimulus programs once proclaimed as certain to restore economic growth are nowdeclared a success for merely helping to have avoided economic collapse). Such behavior erodesfaith in a government that can neither effectively tackle our problems nor resist the temptation toover claim its accomplishments even as it falls short of delivering on its promises.

Attempting to return to the fragile 2007 circumstances seems an odd and likely ill-fatedidea, but our policy makers have not come up with anything better. Austerity, for example, isdeemed politically unacceptable. While we are unlikely to willingly choose the path of austerity(and start living within our means again), it is increasingly plausible that austerity might chooseus. Individuals determined to live beyond their incomes will soon run out of money, leavingausterity as their only option. So, too, eventually with a down-at-its-heels country. Whenmarkets cease to fund a nation’s borrowings, it is forced to cut back. But by then, it could well be too late. The financial dominoes might already be falling, causing the crisis to quicklyworsen. For example, a country whose creditworthiness comes under question faces skeptical buyers of its bonds, which, in turn, has the effect of driving interest rates higher, thereby raisingthe burden of debt service and rendering the country less creditworthy still. It’s a vicious circle

in which a country’s currency will likely fall versus other major currencies, raising the cost ofimports and adding to inflation. As we have noted, the best and perhaps only time to react is before such a tipping point is reached and a sovereign death spiral takes hold.

Absent an immediate crisis--and sometimes in the face of one--governments will oftenstruggle to meet great challenges. Michael Boskin, former chairman of George H. W. Bush’sCouncil of Economic Advisors, recently described five tendencies of governments that shouldsound familiar. They include (1) Waiting until forced to act, often too late and with great harm;(2) Systematically ignoring long-run costs to provide short-term benefits; (3) Tryingunsuccessfully to circumvent the laws of economics; (4) Ignoring the laws of arithmetic,selectively counting some effects while excluding others; and (5) Enacting programs or spendingmoney in a crisis or boom where especially large unintended consequences become apparentonly when the economy returns to normal. This is a truly damning indictment of governmentarrogance, ineptitude, and overreach in the economy and beyond.

The short-term palliatives we are currently pursuing go against everything a long-term-oriented society should aspire to achieve. Today’s policies encourage spending over saving,reward the profligate over the prudent, and support the failing at the expense of the successful.The antidote now being dispensed puts us squarely in uncharted territory in which the risks areoutside the range of historical experience. There is no obvious exit and no path to normalcy.

Growing entitlements are popular with voters and with those whom they elect, forobvious reasons: because the bill never seems to come due. But come due it will. According tothe law of economics named after the late economist and author Herbert Stein, if somethingcannot go on forever, it will stop. The result, which we are beginning to see already, is anacrimonious debate that divides rather than unites. Instead of efforts to expand the national piethrough large investments in scientific and medical research and repair or replacement of ourcrumbling infrastructure, for example, we waste our breath bickering over the fairness of how we_____________________________________________________________________________________________________




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will share a flat-to-shrinking one. Our spending is completely out of control, and, as of now, itseems as if the situation will have to become calamitous before we act. Let’s hope that it won’tthen be too late.

Reflections on Baupost at Thirty

Baupost® was formed thirty years ago with the goal of first protecting and then safelyenhancing client capital. That remains our primary objective to this day.

Over the last three decades, Baupost has successfully navigated all sorts of markets, fromstampeding bull to roaring bear to full-fledged financial crisis and everything in between. Wehave seen U.S. Treasury obligations issued with double-digit yields and zero yields. We haveseen debt defaults and bankruptcies by giant corporations, major commercial and investment banks, huge government-sponsored enterprises, and sovereigns. You know the names: Texaco,Macy’s, WorldCom, Lehman Brothers, Washington Mutual, Fannie Mae, Freddie Mac, andGreece, to list a few. We have seen the land under Japan’s Imperial Palace valued about the

same as all the land in California.

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We have seen triple-A-rated U.S. government debtdowngraded. We have seen Wall Street innovation gone awry, with the creation and subsequentimplosion of flawed securities such as PIK bonds, tranched CMBS, and CDOs and CDOs-squared. Like financial zombies, they keep coming back. We have seen bonds default beforethey paid their first coupon, and we have bought bonds on a Tuesday at deeply distressed pricesthat matured at par two days later. We have seen manias (and, yes, you can pretty much tellwhen you’re in a financial bubble) and we have seen panics. We have seen the carnage fromPonzi schemes including Madoff’s, and frauds such as Enron. But we wouldn’t say we’ve seenit all. In the financial markets, there is rarely anything new under the sun, but you can never sayyou’ve seen it all, and what you thought you would never see can clobber you.

We opened our investment partnerships for business in early 1983, a fledgling firm withan investment philosophy adopted straight from Graham and Dodd. We’ve refined that approacha bit over the years, pursuing some new asset classes (commercial real estate) and covering somenew geographies (we’ve become more global), but we have stuck to the bedrock principles ofvalue investing and are far better off for it. We seek absolute returns, not relative ones, and resist being benchmarked against market indices for that reason. We have always had a traditional,seat-of-the-pants view of risk, and we steer clear of the foolhardy academic definition of risk asvolatility, recognizing, instead, that volatility is a welcome creator of opportunity. We’vemaintained a commonsensical, albeit increasingly unconventional, approach to investing in thatwe strive to maintain a long-term perspective in a world of short-term actors, and we patientlyhold cash in the absence of compelling opportunity, refusing to pull the trigger until the target isclear and compelling. Oddly, few others seem willing or able to follow suit. We put our moneywhere our mouths are, always aligning interests as much as possible by investing the vastmajority of our personal net worths in our partnerships directly alongside client capital.

5 Douglas Stone and William T. Ziemba, “Land and Stock Prices in Japan,” The Journal of Economic Perspectives,Summer, 1993. _____________________________________________________________________________________________________




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We pursue opportunity largely off the beaten path, sifting through the debris of financialwreckage, out-of-favor securities and asset classes in which there is limited competition. Wespecialize in the highly complex while mostly avoiding plain vanilla, which is typically morefully priced. We happily incur illiquidity but only when we get paid well for it, which is usually

when others rapidly seek liquidity and rush to sell.

We make no heroic assumptions in our analysis, hoping, instead, that by compoundingmultiple conservative assumptions, we will create such a substantial margin of safety that a lotcan go wrong without impairing our capital much or even at all. We never invest just to investand don’t bet blindly on mean reversion or on historical relationships holding up. Our settingsare permanently turned to “risk off.”

For thirty years, we’ve been more focused on risk than on return, which perhapscounterintuitively has actually served us well in achieving strong returns with very limitedlikelihood of permanent capital impairment. We’ve suffered market-value declines in only two

years out of thirty. We always work hard, really hard, to find compelling opportunity. But weare cognizant of the risk in trying overly hard to make money, because in investing one candefinitely try too hard, which usually involves overpaying, excessive risk tolerance, and anincreasingly compressed time horizon that often leads to lower rather than higher returns.Pressuring yourself or your team for results is, more often than not, counterproductive. Rather,we strive to avoid loss, which actually works as intended. In 2012, as in every year prior, weincurred only very limited risk, assiduously searched for opportunity and found some, andachieved many successes with relatively few mistakes, while earning decent risk-adjustedreturns.

Some twenty-one years ago, Margin of Safety was published, which spelled out whyfinancial markets weren’t, and never would be, efficiently priced and what we intended to doabout it. I endeavored to make the book timeless--more about how to think about investing thanabout what one should buy or sell at any given moment. Some of the categories of opportunity Iwrote about hardly exist today (e.g., thrift conversions), while others that have emerged in recentyears couldn’t have been specifically contemplated two decades earlier (e.g., distressedstructured products). But while the categories and the specific opportunities may have changed,the fundamental lessons remain.

Baupost is a modern firm with an old-fashioned mind-set. People in every era like tothink of themselves as modern--more advanced, and therefore better than what came before.They crave modern appliances, modern architecture, and twenty-first century technology. Butmodern in finance has lately meant financial engineering, high-speed trading, esotericderivatives, off-balance-sheet financing, and quantitative easing. As Jim Grant has observed, inscience progress is cumulative; in finance it is cyclical. Modern finance is enough to make youlong for the old-fashioned version--bearer bonds you keep in a vault with coupons you removewith scissors and redeem for cash, on-balance-sheet financing, governments that balance their budgets, and a world on a gold standard in which “money” cannot be printed by whim or fiat as_____________________________________________________________________________________________________




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it is relentlessly created today. Baupost’s technology is certainly modern, as is our 24/7connectedness, our ability to constantly monitor developments and update our analyses, and ourleadership in industry-wide best practices. But our mentality is traditional: capital preservationfirst and foremost.

In Margin of Safety (which undoubtedly would have sold far more copies had I used thealternative title, Fifty Shades of Value), there was no chapter on investing in markets in whichnearly everything is manipulated or managed by governments in the name of delivering prosperity--or at least avoiding its antithesis. Interest rates were not driven to zero in the hopesof driving stock prices higher. Governments did not issue massive amounts of debt with onearm, then repurchase it with another and claim a large profit from such activity. Unemploymentand inflation data were not massaged with such abstruse adjustments and other distortingtechniques such that you actually had a chance of figuring out where things stood. Investingtoday may well be harder than it has been at any time in our three decades of existence, not because markets are falling but because they are rising; not because governments have failed toact but because they chronically overreact; not because we lack acumen or analytical tools, but

because the range of possible outcomes remains enormously wide; and not because there are noopportunities, but because the underpinnings of our economy and financial system are so precarious that the unabating risks of collapse dwarf all other factors.

We started our firm with $27 million under management and a single investment analyst,yours truly. We have grown over time, mostly by compounding client capital, earning net profitsfor clients of over $17.6 billion from inception to date. Today, our investment team of 43analysts and six traders act, as always, with determination to protect and wisely invest the capitalentrusted to us ahead of everything else. Similarly, the operations team works tirelessly and inclose coordination with the investment team to structure, process, accurately account for, andreport on the investments we make. We have consistently raised our game over the yearsthrough the thoughtful hiring, training, managing, developing, and advancing of our exceptional people. Hands-on experience has taught me that the job of a leader is to get the most from everyteam member, and that the finest result comes when the whole of an excellent organizationregularly exceeds the sum of its individual parts.

We started with a few subleased rooms on Brattle Street in Cambridge and moved toBoston in 2001, when we outgrew what Harvard Square had to offer. We now occupy three fullfloors at 10 St. James Avenue, and, a year ago, we established an office in London. Weexpanded to Europe not because of any broadening of our ambitions for growth, but rather infurtherance of our core mission: the unwavering pursuit of attractive investment opportunity. Ican happily report to you, after recently returning from London to celebrate the office’s firstanniversary, that we are off to a very promising start there.

We at Baupost march to our own drumbeat, unafraid to stand apart from the crowd,willing to wait patiently, and accepting setbacks with equanimity. We put great emphasis on aconsistent investment process that demands enormous creativity, energetic sourcing, outside-the- box thinking, intellectual honesty, and vibrant debate. We consistently try to perfect our craft._____________________________________________________________________________________________________




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When we are surprised by disappointing developments, we set aside emotion and focus solely onthe facts as they are presented; our singular focus must then be the price at which we can buy orsell compared to our fresh assessment of value. Only after the dust settles do we examine oursuccesses--and especially our failures--for lessons that could provide insight in the future.

We clear a high bar before making an investment, and we resist the many pressures thatother investors surely feel to lower that bar. The prospective return must always be generousrelative to the risk incurred. For riskier investments, the upside potential must be many multiplesof any potential loss. We believe there is room for a few of these potential five and ten baggersin a diversified, low-risk portfolio. A bargain price is necessary but not sufficient for making aninvestment, because sometimes securities that seem superficially inexpensive really aren’t.“Value traps” are cheap for a reason--perhaps an inept and entrenched management, a poorhistory of capital allocation, or assets whose value is in inexorable decline. A catalyst for therealization of underlying value is something we seek, but we will also make investments withouta catalyst when the price is sufficiently compelling. It is easy to find middling opportunities butrare to find exceptional ones. We conduct an expansive search for opportunity across industries,

asset classes, and geographies, and when we find compelling bargains we drill deep to verify thevalidity of our assumptions. Only then do we buy. As for what we own, we continually assessand reassess to incorporate new fundamental information about an investment in the context ofmarket price fluctuations. When bargains are lacking, we are comfortable holding cash. Thisapproach has been rewarding--as one would hope with a philosophy that is painstaking,extremely disciplined, and highly opportunistic.

We strive to remain below the radar, though it has become increasingly difficult. We prefer to invest with near-anonymity because good ideas are scarce and not to be advertised,while selling is best done in the absence of energetic competition from others. In contrast to thesometimes well-deserved poor reputations of Wall Street firms and investment businesses, weare proud of our firm’s values and actions that put clients first. We are determined to do an even better job of avoiding highly controversial investments. Nevertheless, a licentious media andsometimes fact-free blogosphere nearly guarantee ongoing coverage of Baupost regardless of our best efforts to stay out of the headlines.

One could characterize the history of Baupost as a book that is still being written. In itare a series of chapters, listed chronologically: start-up; defining who we are; growing slowlyand mostly organically through the compounding of capital; exploiting opportunities in newmarkets and asset classes; occasionally raising capital to pursue an increased opportunity set and building a deeper team in tandem; balancing the client base between high-net-worth families andinstitutional clients; implementing stronger management practices to match our growth; furthersuccessful compounding of capital prompting the decision to limit assets under management tomatch the prevalent or anticipated opportunity set; and an increased emphasis on teamdevelopment, including progression and eventual succession planning. Each chapter to date hasincluded my constant presence, the loyal support of our founding clients and those amazingcolleagues who have joined Baupost’s founders on our Advisory Board, and the emergence (andsometimes departure) of important contributors to the team. Each chapter in our history has_____________________________________________________________________________________________________




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involved new heights of achievement driven by successful team members who have risen tooccupy leadership roles.

Every employee we hire begins to write his or her own paragraph in this book, and someend up authoring much more than that. The length is largely up to them. We provide the paper

and ink and the broader theme, but the excellence and enthusiasm with which they write can turntheir paragraphs into pages or even chapters of their own.

In the investment business, every firm that survives long enough has the same sort ofchapters. In last year’s letter, I told you that although we pride ourselves on our many long-tenured employees and limited turnover throughout the company, a firm like ours is bound tohave some turnover, some chapters that come to an end, especially after three decades in business. The unsuccessful leave or are counseled out fairly quickly; their words are brief.Highly talented people write more as they assume increasing responsibilities and record oneaccomplishment after another. Their compensation reflects that success and gives them options. Not everyone wants to work into their sixties or seventies; some people wish to pursue

philanthropy, politics, or entrepreneurship. And some turnover is a good thing. Turnover closerto the top opens up opportunities for important contributors who seek greater responsibility andnew challenges. Turnover lower down in the organization makes room for new talent to join thefirm. By contrast, an absence of turnover might lead to us getting stale; talented people who perceive a lack of opportunity might become frustrated.

We are intensely focused on ensuring that the current chapter in Baupost’s history is alengthy one of sustained risk aversion and the successful pursuit of long-term opportunity,regardless of how world economies or markets perform. This chapter will be characterized byadherence to our core values, consistency of approach, steady refinement of process, andongoing progression and eventual succession planning. Through these efforts, we hope the bookof Baupost will become a lengthy tome, with new chapters still being written far into the future.

Our Annual Restatement of Corporate Principles and Values

As previously noted, Baupost’s primary aim since its inception has been to provideresponsible stewardship of client capital, safely growing the value of the assets entrusted to us.Through our opportunistic, value-oriented, open-mandate approach, we seek investment returnsthat are attractive on a risk-adjusted basis over the long term. Our typical time horizon for theinvestments we make is several years. We are determined to earn returns that are more thancommensurate with the risks we incur. We continuously worry about what can go wrong witheach investment and the portfolio as a whole; avoiding and managing risk is a 24/7/365obsession for us. We will never put our faith in computer risk models; instead, we apply sound judgment and common sense to our assessment of risk. We will never place debt on ourinvestments that involves full recourse to our partnerships. When we are unable to findcompelling investment opportunities, we choose to hold cash, which, at times, has reached over50% of NAV. Since 2001, our weighted average cash balances across the Baupost investment partnerships have been nearly 33%._____________________________________________________________________________________________________




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We will always try to put the interests of our clients first and will never gouge on fees orwildly proliferate new investment products. We will never permit performance pressures tocompromise our approach. We will strive to remain within our areas of core competence. Weare not focused on growing our firm; indeed, we are determined to size it either up or down--

though not materially above today’s level of assets--to match the prevailing or anticipatedopportunity set. To ensure congruity of interests, we invest the vast majority of our own capitaldirectly alongside client capital.

We work as a team at Baupost. Every employee matters, and our success is dependent oneach and every person at the firm pulling together to create the best possible outcome for ourclients. The whole is truly greater than its parts. We structure compensation in a way thatrewards employees across every part of Baupost when the firm does well. Sixty-one of ouremployees are stockholders in the firm, and we expect this number to grow consistently overtime. We seek to attract the best talent. Fit matters as much as skill, integrity as much asintelligence. We devote considerable time and resources to protect and enhance our culture and

develop our people.

At Baupost, we pursue excellence in everything we do. Our attitude is “One Baupost,”where all employees on both the investment and operations sides of the firm are valuablecontributors to our success. We employ a team-oriented, collaborative approach that stressesmutual respect for people in all areas and at all levels of the firm. We strive to be industryleaders and follow best practices in everything we do. Baupost’s most senior executives areresponsible for mentoring and training those who work under them. The objective is to readythese employees for leadership positions in the firm. One of our most important goals is to makesure that Baupost can continue to thrive far beyond the current generation of leadership so as toserve the needs of clients for years to come while continuing to provide an extraordinaryworkplace for employees able and eager to grow. To achieve this goal, we are focused on progression and succession planning across our increasingly deep and experienced investmentand operations teams. We are confident these efforts will succeed because the key element--awise, talented, collaborative, highly motivated, and risk-averse team--is already in place.

Business ethics are front and center in our day-to-day behavior. We strive to cross noethical or legal lines in our actions, nor do we allow ourselves to even come close. Two principles govern our behavior: the first is The Wall Street Journal test, in which we imagine acontemplated action appearing on the front page of the next day’s Journal. If we would not be pleased to read about it there, we don’t do it. The second is the football field test, whereby if you play too near the sidelines, you might stray out of bounds--or someone might think you did. Wetry to play towards the center of the field. Importantly, we regularly remind employees, thenewest as well as the longest-tenured, of our corporate history and values.

We do not contribute to systemic risk in the marketplace. Indeed, by relentlesslyshunning recourse leverage and embracing the countercyclical behavior characteristic of valueinvestors, we hope to contribute to systemic sanity._____________________________________________________________________________________________________




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We reject some investments because they take advantage of others or are anathema to ourvalues or to the interests of the United States. They have no place in our portfolio.

We know how fortunate we are to work in a business that offers the potential of high

remuneration for our skills, and we believe that those who do well in a society have a strongmoral obligation to help others less fortunate. Our values lead us to embrace corporate andindividual philanthropy by strongly supporting local community endeavors and by participatingin Baupost’s substantial matching gift program for which all employees are eligible.

Aware of the inherent fragility of investment organizations, we are determined never tofall victim to the arrogance, hubris, indifference, or complacency that sometimes bring firmsdown. We will tirelessly strive to improve while maintaining our commitment to intellectualhonesty in the service of building the best investment firm we possibly can for the long-term benefit of clients and employees. We intend to be around for a very long time.

The Baupost Team

Our investment team worked hard to navigate 2012’s challenging markets. Theydemonstrated exceptional patience, discipline, determination, and focus in finding some trulycompelling bargains amidst a sparse opportunity set. We also made a few mistakes and neverhesitated to reverse course when our views changed. Our investment team’s talent and passionfor investing continues to shine through. Baupost’s Public and Private Investment Group partners, managing directors, and principals continue to do exceptional work leading ourinvestment effort as we pursue highly complex opportunities across diverse asset classes andmarkets. It is a privilege to work closely with professionals who tirelessly manage risk, identifyopportunities, and maintain discipline under relentlessly challenging conditions. I am pleased toannounce that three team members were promoted to managing director at year-end. In addition,eight individuals were promoted to principal.

Each member of our Public Investment Group is prepared to work wherever opportunitiesarise, be they debt, equity, structured products, or anything else. Jim Mooney, a Partner and amember of our Management Committee, has, as previously announced, assumed Herb Wagner’sresponsibilities as head of our Public Investment Group. Jim is an exceptional investor and has been responsible for a number of our most important distressed-debt and other investments overthe past twelve years. He is also a proven thought leader and manager of importantcollaborations and initiatives within the firm. Along with Jim, Partners Brian Spector and JoshGreenhill remain key contributors to this effort as do Managing Directors Greg Ciongoli, MikeDeMichele, and John DeVoy.

Partners Tom Blumenthal and George Rizk co-head our Private Investment Group, andtheir team maintains a global focus on all types of real estate as well as small-to-medium-sized bank debt credits and opportunistic private equity investments. Sam Plimpton, Partner Emeritus,returned at the beginning of October from a four-month sabbatical with significant enthusiasm as_____________________________________________________________________________________________________




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he begins his new role in sourcing, analyst training, and team mentoring, while continuing toapply his acumen and experience to our real estate investment activities. Joining this group inthe leadership ranks are managing directors for the private team: Bob Berlin (privateinvestments), Mark Tsocanos (real estate), and Brian Zilla (head of asset management).

Josh Greenhill has assumed leadership of our London office, and like Jim Mooney beforehim, will retain his role as a partner in the Public Investment Group in Boston while travelingregularly to London. Huge effort has gone into the conception and execution of this initiativefrom both the Public and Private Investment Groups, with the involvement of many throughoutour organization. Jim shepherded the establishment and development of the London office thesame way we make investments at Baupost: he focused equally on the opportunity and the risks.His attention has, without doubt, helped to eliminate or mitigate many of those risks whileincreasing the likelihood of success. Josh is following in Jim’s footsteps, working hard atensuring that this office is a hub of activity, opportunity, and effective coordination between thevarious groups within Baupost. We have strived to ensure cultural synergies and consistencies between Baupost London and Baupost Boston, and I am convinced that we are succeeding.

Between the investment teams, we added five new investment professionals in 2012--three in the Private Investment Group, one in the Public Investment Group, and one in theLondon office--as we enhanced our already deep, talented, and hardworking team. One analystdeparted earlier in the year. Three new analysts will join us later in 2013. Every team membermade important contributions to our investment efforts this past year. We believe our ability torecruit exceptional people will remain a significant competitive advantage for the firm.

Partner Scott Nathan, our vigilant Chief Risk Officer, works closely with me and ourPortfolio Risk Committee to design and execute portfolio- and currency-hedging strategies. Healso coordinates with me on portfolio management operations, including trade allocation andmonitoring of portfolio cash balances and commitments. He oversees our Chief ComplianceOfficer and General Counsel, Scott Stone, and his staff. Scott Nathan also heads our investment-side recruiting effort, working in close coordination with our Human Resources team.

Directly supporting and facilitating our investment effort is a talented team of professionals that we refer to collectively as the Investment Execution teams. Our Trading groupof six has been led by Carolyn Beckedorff, Executive Director, for many years. This teamefficiently executes our trading decisions, which have become more global and increasinglycomplex over time. The traders’ personal commitment, flexibility, teamwork, and dedicationcontinue to be exemplary.

Adam Halpern, our new Director of Operations, Private Investment Group, capablyoversees the operations function for that group and its integration with other departments acrossthe firm. Donna Ryan, Executive Director–Tax Consulting, and Collin Beecroft, ExecutiveDirector–Investment Counsel, work with their teams and our analysts and asset managers toensure that we have efficient and effective structures in place for our investment transactions.Our public and private investment administrative support teams play a crucial role in facilitating_____________________________________________________________________________________________________




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the flow of information entering, circulating, and moving beyond the investment area to otherBaupost departments.

Our exceptional Operations team has been expertly developed and led since 1991 byPartner Paul Gannon, the Chief Operating Officer of Baupost. Barbara O’Connor, Chief

Financial Officer, and Elaine Mann, Chief Administrative Officer, are also partners withincreasingly important voices across the firm and at the partner table. Our Operations teamcontinues its stellar work in client service, trade settlement, accounting and valuation, detailedand accurate performance and tax reporting, ongoing upgrades and maintenance of ourmanagement information systems, management of the firm’s human resources, keeping theoffice running smoothly and efficiently, and careful contingency planning. Our increasinglycomplex portfolio and business are seamlessly managed by a talented and committed group ofleaders and their teams who embody our ongoing pursuit of excellence, including TradeSettlements (David Morris), Information Technologies (in transition), Tax Compliance andReporting (Frank Seyboth), Accounting and Valuation (Jason Price), Financial Reporting(Johanna Ward), Investor Services (Beth Mills), Human Resources and Administrative Services

(Lucy Tshuka), and Corporate Communications (Diana DeSocio). Additionally, our Facilitiesand Office Administration team, along with the executive assistants to the Partners, takesexceptional care in ensuring that we have the optimal environment to do our best work.

We are fortunate to have such a capable and committed management team tackling theday-to-day operational challenges of our growing and ever complex business. The dedicationand professionalism of these individuals and that of their increasingly skilled and experiencedteams permit me to fruitfully focus most of my time on investment matters, leadership of thefirm, and oversight and management of the partners.

As you know, Herb Wagner decided in September to leave Baupost at year-end to starthis own family investment office. Herb was an important contributor to the firm for thirteen-and-a-half years. We will miss him and wish him well. Bob Herin, Chief Information Officer,also left Baupost at year-end to rejoin his family in New York. We are grateful for Bob’s effortsduring his three-year tenure and also wish him continued success.

With Our Gratitude

We continue to appreciate the ongoing input of Baupost’s Advisory Board: FoundersBill Poorvu and Howard Stevenson; Jay Light, Dean Emeritus of Harvard Business School; andDavid Swensen, Yale’s Endowment Manager. They were joined earlier this year by two newmembers, Jane Mendillo, President and Chief Executive Officer of Harvard ManagementCompany, and Bill Helman, Partner at Greylock Partners. The Board is a wealth of investmentand organizational experience, and the insights of its members regarding investment and business matters continue to benefit Baupost and its clients.

We also appreciate the ongoing long-term relationships that Baupost enjoys with Ropes& Gray LLP, our corporate counsel, and Ernst & Young LLP, our auditors and tax professionals,_____________________________________________________________________________________________________




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and with Byron Woollen and CFAR, organizational consultants who have worked with me and anumber of our Partners and senior leaders over the past several years.

One of the great privileges for us at Baupost is to steward the assets of a limited numberof fine families and esteemed institutions. You, our valued limited partners, are truly long-term

oriented. Were you not, it would be nearly impossible for us to maintain the appropriateinvestment horizon, especially in today’s difficult environment. Your trust and steadfastnessstrengthen our resolve and enhance our ability to make the very best decisions. For this, youhave our sincere gratitude.

We hope you have a healthy and prosperous New Year. Please let us know if you haveany questions or comments.

Very truly yours,

Seth A. KlarmanPresident

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marks of The Baupost Group, L.L.C.6754gfh352w34aq

Baupost 2012 Shareholder Letter

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Transcript of Baupost 2012 Shareholder Letter