In his newly released shareholder letter, Martin Whitman wrote:"Earnings for TAVF purposes are something quite different from what earnings are deemed to be in conventional, plain vanilla, market analysis. Rather, both the Fund and the conventional analysts tend to be rational; they just approach the problem from different places. The fact is that in conventional security analysis, predicting market prices over the very near term is crucially important. In contrast, TAVF ignores near-term market prices for individual securities. Third Avenue tries to buy long-term value safely and cheaply; and allows market prices of individual securities in the portfolio to take care of themselves. The Fund strives to avoid investment risk on a long-term basis, i.e., something going wrong with the business or the securities issued by that business."
"Unlike TAVF, many market participants are, in fact, affected vitally by day-to-day price fluctuations in markets for individual securities. For these people, it is important to predict near-term target prices. For them, therefore, there actually does exist a “Primacy of the Income Account” and a need for GAAP to tell them the truth. After all, it seems quite valid to conclude that market prices for most securities will be influenced more by earnings as reported under GAAP than by any other single factor. These market sensitive participants include margin buyers; people and institutions relatively uninformed about the securities and companies in which they are interested; participants holding junior securities – subordinates, preferreds, common stocks and options – in companies that are not well financed; and participants who have to strive to outperform benchmarks consistently (such as many research department analysts who want to keep their jobs and get promoted). There are also market participants involved with both near-term predictions and fundamental analysis — to wit, short sellers and risk arbitrageurs (risk arbitrage is defined as investing in situations where there are reasonably determinate workouts in reasonably determinate periods of time)."
Read the complete letter
"Unlike TAVF, many market participants are, in fact, affected vitally by day-to-day price fluctuations in markets for individual securities. For these people, it is important to predict near-term target prices. For them, therefore, there actually does exist a “Primacy of the Income Account” and a need for GAAP to tell them the truth. After all, it seems quite valid to conclude that market prices for most securities will be influenced more by earnings as reported under GAAP than by any other single factor. These market sensitive participants include margin buyers; people and institutions relatively uninformed about the securities and companies in which they are interested; participants holding junior securities – subordinates, preferreds, common stocks and options – in companies that are not well financed; and participants who have to strive to outperform benchmarks consistently (such as many research department analysts who want to keep their jobs and get promoted). There are also market participants involved with both near-term predictions and fundamental analysis — to wit, short sellers and risk arbitrageurs (risk arbitrage is defined as investing in situations where there are reasonably determinate workouts in reasonably determinate periods of time)."
Read the complete letter
