Marty Whitman was a no-nonsense investor influenced by Graham & Dodd. With value principles as his base, he delivered a track record that beat the market by 2.3% over two decades.
In November 1990, he started Third Avenue Management and its flagship the Third Avenue Value Fund. He ran the fund until he stepped down in March 2012 at age of 87. He produced an 11.1% annual return for his shareholders (versus the S&P 500’s 8.8%). But that performance doesn’t really do him justice.
The 2008 financial crisis was a turning point for Whitman’s fund. Prior to 2008 — 1991 to 2007 — the fund earned a 15.7% annual return versus 11.4% for the S&P. Then 2008 hit. The fund lost 45.6% (the S&P 500 lost 37%). Redemptions followed. He underperformed by about 5% per year over the next three years.
A few years after he stepped down in 2012, he explained the poor performance:
As I got older and richer, I got lazier. I really knew better in 2007 and didn’t act on it. I should have sold all my housing-related stocks.… It doesn’t reflect on the investment techniques. You’ve got to be diligent and careful, and in 2008, I wasn’t.
Complacency did him in and his shareholders suffered for it. It might be the greatest lesson from his career. Letting up just a little bit increases the chance of costly mistakes.
Whitman ran a long-term concentrated portfolio focused on companies with a potential catalyst. He looked in the U.S., outside the U.S., at stocks, distressed debt, bankruptcy situations…nothing was off limits. So long as it qualified as safe and cheap. He expanded on that philosophy in books, letters, and interviews, over the years.
On “Safe and Cheap” Investing
We are much, much more price-conscious than we are outlook-conscious. Our mantra is safe and cheap, in that order. Cheap is not a sufficient condition for us to buy a security. We have to have some margin of safety, and that margin comes in the characteristics of the business, not the price of the stock.
For us to own a common stock, the business has to have great financial strength, unless we screw up, which we do from time to time. If a business is not strongly capitalized, we are never going to be anything other than a creditor.
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We very much like companies that plow back cash. We don’t like being held hostage to the capricious capital markets… We usually only buy companies that either don’t need access to the capital markets, or if they do, they absolutely control the timing of when they are going to access the capital markets. That’s a huge advantage.
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Generally, the companies we own are unleveraged, they don’t have any debt, so there isn’t a debt-service requirement.
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We analyze securities very much like corporate control people… Most of our exits come from companies being taken over, one way or another. Control people tend not to pay as much as they think the business is worth to them.
On How Companies Create Wealth
As a value investor, what you are interested in is whether the company is creating wealth. There are four ways to create wealth; it is not just cash flow.
They are, one, having cash flow from operations available to security holders. A company can use that cash to expand its asset base, reduce liabilities, or distribute the money to shareholders, either by paying dividends or buying back stock. Two, and probably much more important, is having earnings, which we define as creating wealth while consuming cash. Remember, though, that earnings for most companies do not have a long-term value unless the company also has access to capital markets because if it doesn’t, sooner or later, it will run out of cash. The third — and very, very important — value creation method is resource conversion… Mergers and acquisitions, changes in control, massive recapitalization, spinoffs, etc. The fourth wealth-creating method…is having extremely attractive access to capital markets.
On Forecasting Markets
Most people who predict the future are going to be wrong most of the time.
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We certainly don’t pay attention to the market. I’ve been in business for a long time… And the amount of times in my lifetime where the general market was more important than what we were doing — buying and holding — I can count on the fingers of one hand: 1929, 1933, 1974. We don’t get involved in all the analytic baggage of trying to figure out where a stock is going to sell. Just try to figure out what it’s worth. And I dare say all the really great investors do it the same way.
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I want to be right about the business. I don’t worry about the overall market. I worry about the business and the market will take care of itself.
On Concentration
Diversification is a surrogate — and a damn poor surrogate — for knowledge, elements of control, and price-consciousness. If you are really a value investor and do deep research, how many investments can you be involved in at the same time?… The real value investors are lucky if they can do 10 investments at a time.
On Investing for the Long-Term
I pretend that any investment requires that I put up at least $10 million of my own money and that I am going to have to live with that investment permanently or semi-permanently. Adopt this attitude and see how fast your focus switches from having opinions about market levels to concentrating on business fundamentals.
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Investors who strive to achieve good, near-term performance for their portfolios tend to focus much more on what they believe reported earnings will be for the next two or three quarters than on a business’s realistic, long-term growth prospects. This short-term concentration can easily blind people to long-term growth opportunities that could turn out to be anything from satisfactory to spectacular.
On Learning from Losses
I got wiped out for $2 million in Union Fed in California. And I learned a lesson. Never play tennis with the CEO… Frankly, I was very impressed. This was not a well-capitalized bank and I just thought it had a super management. I just thought the guy was terrific and the investor group, which I think was led by a major bank, was terrific.
On Speculation
In general, money managers are speculators, not investors, if their modus operandi has two characteristics. They buy what is popular when it is popular or just before they think it will become popular. And they don’t know much, or care much, about the underlying fundamentals of a business, including audited financial statements.
On Short Selling
Shorting is difficult. If you short, you are not only making an investment decision, you are making a market decision.
Sources:
Richer, Wiser, Happier
Shooting Elephants
The Master and Apprentice
Loaded for Bull or Bear
How Not to Get Burned
Enduring Values, Enduring Value
Buy Chip Equipment Suppliers
Back in Style
Last Call
- Dealing With Mistakes – Neckar’s Notes
- Too Smart – M. Housel
- Analysts Playing the Lottery (Stocks) – Klement on Investing
- My ‘Too Hard’ Pile Is Pretty Big – C. Benz
- Volatility Clusters – Breaking the Market
- What’s the Future for Bond and Stock Returns? – J. Rekenthaler
- A Case of Mistaken Identity – Rational Reflections
- Randomness Rules – The Better Letter
- Snapshot USA – R. Lowenstein
- Revealed: The True Extent of America’s Food Monopolies – The Guardian
