"While I, as an OPMI, am a true believer in the Third Avenue approach it would be incomplete if I did not enumerate what I think are the shortcomings of the approach:
1. Third Avenue could deal with a lot of dead head managements who don’t care about their OPMI constituencies, in great part because they own little or no common stock in their companies; and also their companies have no need or desire to access capital markets. Obviously, the securities of such issuers should be avoided...
2. In concentrating on companies with strong financial positions, Third Avenue is dealing in 2012 with managements willing to sacrifice return on equity (ROE) and return on investment (ROI) for the safety and opportunism inherent in a strong financial position.
3. Third Avenue is involved largely with really deep down discounts from our estimates of NAV. The OPMI markets seem efficient enough to reason that in most cases deep discounts reflect a lack of near to intermediate term catalysts.
4. Third Avenue does not borrow money. Third Avenue pretty much ignores market risk and goes to great lengths to try to avoid investment risk. If one is to borrow money, it is advisable to try to guard against market risk.
5. Most asset-rich securities in the Third Avenue portfolios are general market securities. Near-term
price performance seems likely to be dominated by top-down considerations, e.g., the Eurozone."
What I learned from Whitman and how this fits in with my investment philosophy:
(1) Never pay a premium for good management, but always avoid bad management. Whitman suggested a clue to avoid bad management: select companies with management owning substantial amounts of stock so that management's interests are aligned with outside passive minority investors (OPMI). (Note: I love this OPMI term as it describes the plight and limitations of retail investors perfectly.)
(2) Weak financial position is the downside of any stock investment and high ROE & ROIC the upside.
Watch the downside, and the upside will take care of itself!
(3) Under-valuation in itself is the best form of a catalyst. Between a deep value stock with no catalysts in mind and a moderately undervalued stock with immediate catalysts on the horizon, I always choose the former. Count me out when it comes to market timing.
(4) Leverage that resides within the company and the individual stock investor should be avoided.
(5) An old Economist joke "Economists have predicted 9 out of the last 5 recessions" and a 1999 book "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market" written by two economists have convinced that economics have no place value investing. I have the utmost respect for economists and the work they do. But value investing is best executed in a bottom-up fashion.