Free 7-day Trial
All Articles and Columns »

Marty Whitman Shareholder Letter: Lessons Learned and Where to Invest Now

August 27, 2009

Marty Whitman, the legendary value investor who founded Third Aveneue Management, lost 45% with his fund in 2008, after building good long term track record. He learned new lessons at the age of 85! In this shareholder letter, he shared what he has learned and what areas he is looking at for new investments.

These are some excerpts from the shareholder letter:

The Fund purchased 2.4 million shares of Forest City Common at $6.60 per share in that company’s common stock offering. The offering raised $330 million from the issuance of 52.3 million shares, including the full exercise of the over-allotment by the underwriters. The proceeds, which were intended to repay outstanding borrowings under Forest City’s revolving credit facility, further strengthened the company’s balance sheet, which is primarily funded with non-recourse borrowings.

The Fund exited its full position in the GMAC 2010 Seniors and a small portion of its GMAC 2011 Seniors position, following sharp price increases after the company succeeded in raising U.S. Treasury TARP capital.

In the management of the TAVF portfolio, we treat Catastrophic Markets as non-recurring events. Such markets existed from 1929 to 1932, 1937, 1974, briefly in 1987 and 2007 to 2008. Fund Management can’t predict when Catastrophic Markets will recur; and we doubt that anyone else can either. Fund Management cannot make sound investment decisions if it assumes that draconian general market declines are just around the corner. Rather, investment decisions at Third Avenue are made based on reasonable worst case scenarios, with emphasis on the word reasonable.

Lessons investors should have learned from the 2007 - 2008 debacle:

1) Don’t invest in the common stocks of companies which need relatively continual access to capital markets, especially credit markets. The short sellers, i.e., bear raiders, have become too powerful. Even the strongest, best quality issuers can be brought down, or almost brought down, if they continually have to refinance. Goldman Sachs Group and General Electric were two such examples in the first half of calendar 2009.

2) Don’t borrow money to finance portfolio holdings of common stocks and low-rated mezzanine securities. Prices in markets populated by Outside Passive Minority Investors (“OPMI’s”) are just too capricious to permit this activity to be undertaken safely and conservatively.

3) Shareholders having rights to daily redemptions interfere with sound portfolio management. TAVF’s common shares outstanding decreased from approximately 180,000,000 shares, at November 1, 2007, to about 129,000,000 shares, at April 30, 2009. This caused Fund Management to be forced sellers at exactly the precise time when Third Avenue should have been acquiring securities at ultra depressed prices.

ATTRACTIVE AREAS FOR INVESTMENT IN 2009:

1) Hong Kong blue chips engaged in real estate and private equity investments, principally in Hong Kong and mainland China.

2) Performing loans which we estimate to have better than 80% probabilities of remaining performing loans, which are available at yields to maturity of 20% or better.

3) Energy equities. The near-term outlook is terrible. The long-term outlook for oil and natural gas seems quite favorable. The common stocks of Cimarex Energy, Encana Corp. and Nabors Industries seem to be priced attractively. 4) Capital infusions into undercapitalized companies.

THE THIRD AVENUE FORMULA FOR COMMON STOCK INVESTING:

1) The company in which TAVF would invest has to be extremely well financed.

2) The common stock has to be available at a meaningful discount from readily ascertainable NAV, usually over 25%.

3) We consider the Company to have favorable prospects for growth of better than 10% compounded per annum over the next five to seven years, without diluting the currently outstanding common stock.

Read the complete shareholder letter


Rating: 2.2/5 (14 votes)

Comments

sabonis
Sabonis premium member - 4 years ago
"3) Shareholders having rights to daily redemptions interfere with sound portfolio management. TAVF’s common shares outstanding decreased from approximately 180,000,000 shares, at November 1, 2007, to about 129,000,000 shares, at April 30, 2009. This caused Fund Management to be forced sellers at exactly the precise time when Third Avenue should have been acquiring securities at ultra depressed prices."

Boo-hoo. Dont be a fund manager if you dont want redemptions.
DaveinHackensack
DaveinHackensack - 4 years ago
Sabonis hits the same point I was going to make. That's the nature of open-end mutual funds.

More to the point, if your fund's investments drop by ~50% in a year, that's not "sound portfolio management". Here's a thought, Marty: try not to lose half of your shareholders' nest eggs in one year and you won't see such big redemptions.
batbeer2
Batbeer2 premium member - 4 years ago
>> At July 31, 2009, the unaudited net asset value attributed to the 129,498,779 shares outstanding of the Third Avenue Value Fund (“TAVF”, “Third Avenue”, or the “Fund”) was $42.14 per share. This compares with an unaudited net asset value of $34.87 per share at April 30, 2009; and an unaudited net asset value of $49.28 per share at July 31, 2008, as adjusted for a subsequent distribution to shareholders. At August 21, 2009, the unaudited net asset value was $42.42 per share.......

I wonder if poeple who went into cash between october and march did better than anyone else. Yes, open-end funds run the risk of redemptions in volatile times. Yes, the redemptions cause problems for the long-term oriented portfolio manager. Stating the latter is not the same as complaining.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Avoid this problem by buying closed-end funds where the managers do not have to deal with redemptions (at bottoms) and inflows (at mania tops).

BTF, BIF, RVT, FUND, RMT, and GAM are fine closed-end funds that are still at decent discounts.
jhodges72
Jhodges72 - 4 years ago
I find the majority of the comments left to be annoying and childish. To even question this man's logic is a ridiculous notion. The majority of you obviously are not value investors nor are you people of character.
AlbertaSunwapta
AlbertaSunwapta - 4 years ago
Actually, I too was surprised at the redemption comment. It's a reoccurring theme in the markets and the very reason value investors often obtain above average returns. (However, FPA Capital has taken similar wipes at unit holders that disliked its large allocation to cash and reallocated to equities just prior to the price collapse.)

I imagine sudden contribution manias also cause fund managers similar consternation or frustration - but again, it is the nature of the markets.

I also imagine some companies whose stock undergoes abandonment by fund managers - even Third Avenue managers - suffer similar feelings of opportunity lost.
sarpotd
Sarpotd - 4 years ago
Well Third avenue value fund sold of all its radian shares that it had ridden down in price over all of last year and this year just a few weeks before it exploded back from $3 to $9 a share.

Their supposed reason was that it would need additional capital infusion. Radian posted a neat gain and declared 25c dividend a few weeks later. I am not so sure if these guys really understand the balance sheets as well as they say they do.

Taking such a drastically opposite step based on research just a few weeks before contrary data doesnt give me very high confidence.
DaveinHackensack
DaveinHackensack - 4 years ago
"I imagine sudden contribution manias also cause fund managers similar consternation or frustration - but again, it is the nature of the markets."

Considering that their management fees go up as their assets under management increase, I doubt there's much consternation or frustration on the upside. Sometimes, small cap funds will close to new investors when their managers don't feel they can handle more capital, but I don't know if Whitman has ever closed his flagship fund to new investors.

Whitman is well aware of the nature of open-ended mutual funds: investors can pull money out anytime they want. That suggests two possible ways to protect against shareholder withdrawals during severe market downturns: 1) hedge; 2) run a closed-end fund, or a hedge fund with a lock-up period, so you don't have to worry about withdrawals.
WARRIORNASDAQ
WARRIORNASDAQ - 4 years ago
i like his scmr sycamore networks pick,, he talks about distressed securities i am buying IMPC as well California $4.3 Billion Bank, Imperial Capital Bank at $.30 cents as CFO of Imperial says they're raising cash,

San Diego Union Tribune-

Tim Doyle, the bank's chief financial officer, said in an e-mail that the bank continues to work to raise capital.

“We are analyzing our various strategic options . . . and actively pursuing potential private equity investment,” he said. “As has been widely publicized, access to capital markets is extremely limited in the current economic environment. However, we are cautiously optimistic that interest in the banking sector is improving.”

Doyle added that the bank is shrinking to improve its capital ratios, reducing its loan portfolio by 5 percent since year-end.

I'm buying SCMR with nearly $1 billion cash, as well it once traded over $100 and with the new Verizon 4g contract revenues should start to kick in over the next several qtrs and scmr should post profits and return to profitability. scmr can win 4g contracts and have a bigger market cap then cisco if they execute and win more contracts like verizon eom

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Hide