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Notes on October 1993 Martin Whitman Third Avenue Shareholder Letter (Classic Guru Shareholder Letters Review)

November 08, 2012 | About:
It is common for investors to read the latest shareholder letters from investment gurus to understand their latest positions and opinions. However, it is often that the real wit and wisdom of the investment gurus are found in old classic shareholder letters. 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 the October 1993 shareholder letter of the Third Avenue Fund by Martin Whitman.

Extracts:

(1) "...TAVF research has a very large corporate finance component and, unlike others, is not grounded in research performed for outside passive minority investors. In corporate finance one looks at resources and examines the ways in which superior returns might be achieved from those resources and by obtaining new finance or refinance and/or by changing the way in which those resources are employed or managed. In contrast, outside passive minority investors assume implicitly that most resources will continue to be employed by the same managements in the same ways in which they historially were..."

(2) "...Frequently, activists will pre-empt those values for themselves by causing changes in credit agreements, or by the forced acquisitions of common stocks in leverged buyouts and going private transactions...Suppose the private business value of Company X, attributable to its common stock is $10; X Common initially trades at $5; bear market, or poor quarterly earnings, causes X common to sell at $2; activist proposes cash merger at $3; passive is screwed..."

(3) "Implicit in the Third Avenue Value Fund approach is the belief (proven again and again over time) that many, if not most, financial forecasts will prove to be wrong becuase the forecats were too optimistic. Thus, the Fund tries to buy 'what is' cheap, rather than relying on forward looking information..."

Comments:

(1) Cross-discipline learning is crucial to being a better value investor. You need to think like investment bankers, credit analysts and different value-seeking investor roles to unearth value.

(2) This is a common pitfall for deep value investors like me, when you get a low buy-out price below your purchase price. My partial remedy is to buy at sufficiently low prices and have the courage and resources to average down.

(3) Investing in low uncertainty scenarios and set-ups is key to value investing. When you see yourself in a situation where you need to imagine multiple combinations of scenarios, you are in the wrong stock.

Further Reading:

Readers interested in applying Martin Whitman's value investing philosophy though a quantitative screen can read my other article "The Martin Whitman Stock Screen (AIRT, PRLS, SUP) - 06 Nov 2012."

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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