Seth Klarman is not an investor you would read about much in business media. He is one of the more reclusive kinds out there. He rarely speaks in public or grants interviews.

Klarman is known for his very deep value investing style and willingness to pursue value where others get very nervous. Some people, in fact call him Warren Buffett of his generation.

Late last year, he returned US$ 4 billion cash to his clients (from a fund size of around US$ 30 billion). In fact, Klarman has had about 30% of his fund’s assets in cash over the past two years as he has long been concerned about the state of the financial markets and typically looks for deeply-discounted situations.

In a recent letter to his clients, Klarman has warned that the QE (quantitative easing) stimulus bubble has become unsustainable and will burst at some point in time.

He has noted that “most” investors are downplaying risk and this “never turns out well,” noting that most people are not prepared for anything bad to happen. He wrote in his letter (emphasis is mine)…

No one can know what the future holds, but any year in which the S&P 500 jumps 32% and the NASDAQ Composite 40% while corporate earnings barely increase should be cause for concern, not further exuberance.

It might not look like it now, but markets don’t exist simply to enrich people.

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With the possible exception of Warren Buffett, no investor today commands more respect than Baupost Group’s Seth Klarman.

Since founding his investment partnership in 1983, Klarman has not only produced unrivaled returns (in excess of 20% per year), but he has also from time to time offered wise and timeless commentary on markets and the craft of investing.

He is the author of Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which became a value investing classic ever since it was first published in 1991.

Here is an excerpt from Klarman’s letter to his shareholders in February 2009, which contains some timeless ideas on investing – including the power that smart investors can derive from uncertainty.

In this letter, titled “The Value of Not Being Sure”, Klarman describes the biggest challenge in investing today, how he’s responding to the market’s turmoil and why he considers fear of the unknown such a great motivator.

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