1. The bull market in the U.S.
2. The opportunity mindset in Europe.

Remember that his approach and views are freakishly spot on.

Two obvious ones include avoiding the Internet bubble in 1999 and the 2008 crisis.

Klarman isn’t just a smooth talker though. He walks the walk.

During the “lost decade”, Baupost obliterated the averages, returning 14.8% and 15.9% for the 5 and 10-year periods ending December 31^st versus -2.2% and -1.4%, respectively, for the S&P. – Outstanding Investor Digest

While everyone was freaking out during the 2008 crisis, this is what Klarman did.

During the crisis in 2008, Baupost lost “between 7% and the low teens.” Still though, he certainly outperformed the market indices and much of his investment management brethren in a time of panic. – MarketFolly

When Klarman talks, you should listen.

So based on the latest annual letter, here are 3 key takeaways you should know and the implications involved.

Key Takeaway #1

Brilliant.

This is related to what Bruce Greenwald means when talking about earnings power value.

If a business is unable to generate more cash than what it needs to operate (or reproduction cost), then it’s just earning enough cash to sustain itself.

This is a tricky comparison.

According to simple metrics, such as return ON capital, the company may be making a killing. But this difference is going to make many investors pour money into overvalued assets and taking on unnecessary risks.

Key Takeaway #2

Warren Buffett said that “probably the best single measure of where valuations stand at any given moment” is  the Wilshire Total Market Capitalization divided by the US GDP.

As of March 12th, the total market cap highlights a significant overvaluation at  about 117.2% of the last reported GDP.

This implies a 1.6% return a year going forward.

Total Market Cap to US GDP

Another frequently used tool is the Shiller P/E.

Right now, the Shiller PE reflects a value that is 54.5% higher than the historical mean, also implying a return of 1% for next year.

The Shiller PE

So what is the right multiple to play on juiced corporate earnings?

The question that Seth Klarman poses is one to reflect upon. As investors look at all the profits taken in recent years, their mouths could be watering. Is the expensive price justified to enter now at the market?

Key Takeaway #3

Look at the yield spreads between high yield bonds and the Treasury spot curve at the moment.

We’re really close to historical low digits, and the spread is 7.25%.

Without question, QE has initiated a search for yield that impacted nearly every market available to investors.