This is one of many in a series of articles where I will extract relevant portions of classic Guru shareholder letters and share with readers my views.
Here is an overview of the April 1993 shareholder letter of the Third Avenue Fund Inc. by Martin Whitman.
(1) "...Graham & Dodd is not about understanding businesses. Rather, it is about excellent caveats to follow if you can't or don't understand particular firms..."
(2) "...no one, as of August 1993, knows how companies will sort out between winners and losers; certainly not Wall Street computer and communications analysts who seem to focus on forecasting how the market will react to their forecasts of reported accounting earnings for the next quarter, and how the market will react to estimated accounting earnings for 1994..."
(3) "...What are the TAVF criteria for selecting equities which appear to be attractive plays as long-term participants in the digital revolution?...the Fund seeks businesses with staying power; probably the best indicator of staying power is a high quality balance sheet. All of the digital companies in which TAVF has invested have large cash positions and a lack of encumbrances, whether on-balance sheet or off-balance sheet..TAVF likes its companies to have carved out one or more special niches..."
(1) Martin Whitman attempts to illustrate the difference in investment approaches between Third Avenue and Graham and Dodd. Graham and Dodd, in its purest form, sticks to a set of well-defined rules on cheapness and safety and demands a margin for safety to compensate for uncertainty.
(2) I will usually stay away from stocks in industries where I need to predict winners and losers in a big way.
(3) Off-balance sheet encumbrances include operating leases, provision of guarantee for debt of sister companies by parent company, unsettled lawsuits, binding commitments such as a take-or-pay contract, debt of unconsolidated joint ventures and associates, etc.
Interested readers can read my article "Why Net Cash Is the Most Misleading Indicator of Balance Sheet Strength."
You can read Third Avenue Shareholder Letters (1998-now) here.
Shareholder letters from 1990 to 1998 have to be requested from Third Avenue.
I got a bound hard copy of excerpts from letters to Third Avenue Fund Shareholders (1990-2005) from them.