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