Barron’s had an excellent interview of Marty Whitman this weekend discussing the downturn, investing in Asia, his views on the American markets, and value investing. You can view the entire interview here.
For a little background on Marty Whitman, he’s the 86 year old founder and chairman of Third Avenue Management. The firm manages five mutual funds, managed accounts, and three alternative investment vehicles. Third Avenue Value, which Whitman still co-manages, has a 15 year annualized return of 9.82%. I make it a point of reading Third Avenue’s quarterly letters when they come out and have found a number of unique and profitable ideas from them. Let me give you just one example:
Third Avenue’s Q4 2009 letter, found here, talked about their investment in Sycamore Networks (SCMR). Look at page 2 in the letter. It was both a special situation and a net-net in one. Whitman bought in at an average price of $2.87. The company paid a $1 special dividend and then did a 1 for 10 reverse split. The stock now sits at $30.49 for a very low-risk 41% gain in less than a year.
Moving on to the interview, Whitman sounds pretty bullish on American stocks. Here’s what he said in response to one of the questions:
“We have a three-pronged approach to our investments in common stocks. One, we want the company to have a super strong financial position. Two, we buy at big discounts to readily ascertainable net asset value. And, three, we like to restrict investments to companies that we think, over the next three to seven years, will grow their net asset value at least 10%, compounded annually. An awful lot of American companies now meet that standard.”
He also has a lot of exposure to Asia, and Hong King specifically. The companies he mentions there are primarily real-estate related.
There is one response I have to take issue to, though. He’s asked what his thoughts are on the mutual fund industry. I think he suffers from a bit of projection in his answer. While I don’t disagree that there are some good mutual funds out there, and that the original idea behind mutual funds was a positive one, I also think that the majority of mutual funds are not investor-friendly. For example, less than half of all mutual fund portfolio managers even have an investment in their own funds. I’m sure Marty Whitman and his other portfolio managers do, and I think he would find it appalling that managers from other funds don’t. Still, he defends the industry in his response here:
“For the first time, the investor got a reasonably fair shake, a very fair shake. The investor loses money in mutual funds, of course; managements can be stupid. But the investor doesn't lose money because he was cheated or because the fund fails to diversify or because the fund doesn't pay dividends or because the expense ratio is off the charts. I think the industry has a lot to offer—and probably as much as it ever had to offer.”
I would argue that the tax costs of high turnover, holding more than 140 stocks in a portfolio (on average), and hidden fees are ripping off investors. Portfolio manager non-participation as an investor also, I believe, rips off the investor. My firm uses a different model, called a spoke fund, which we believe is better for investors. My firm isn’t the only one to use the spoke fund model, and I’d encourage you to check out this website explaining the model more fully. I think Marty Whitman would approve.
I have to close with one of his comments that made me chuckle out loud. When asked about ideas that started in the academic world, such as modern portfolio theory, Whitman's response is classic, “That stuff is absolute garbage.”
To read the whole interview, click Enduring Values, Enduring Value
Disclosure: No positions