Here you can read an interview with Martin Whitman. It pretty much resumes it’s investment philosophy based on what he calls the financial integrity approach. I had resumed it in the past post Sine qua non for an investment commitment. Basically it explains what he looks for when he invests:
1. The company ought to have a strong financial position, something that is measured not so much by the presence of assets as by the absence of significant encumbrances, whether a part of a balance sheet, disclosed in financial statement footnotes, or an element that is not disclosed at all in any part of financial statements.
2. The company ought to be run by reasonably honest management and control groups, especially in terms of how cognizant the insiders are of the interests of creditors and other security holders.
3. There ought to be available to the investor a reasonable amount of relevant information, although in every instance this will be something that is far short of “full disclosure”—the impossible dream for any investigator, whether activist, creditor, insider or outside investor.
4. The price at which the equity security can be bought ought to be below the investor’s reasonable estimate of net asset value.
It is all explained in depth in his great book “The Aggressive Conservative Investor”. The book was recommended by Seth Klarman.
The above mentioned interview was done in the second semester on 2002. One of his favorite stocks at the time had an outstanding performance. Note what he said about it:
TWST: If you had to pick two or three stocks to buy today, what would they likely be?
Mr. Whitman: Quanta Services (PWR) and AVX (AVX) in high tech, we’re very big in passive components. Instinet (INET) ‘ that’s what we’re buying.
TWST: Tell us about Quanta Services.
Mr. Whitman: They’re just getting a capital infusion. They’re the leading company in providing networking and management services to the electric utility industry, and we’re paying about $2.50. The adjusted book is around $10, and in normal times it earns about $1.50 a share. It’s the one I think can be a 10 bagger for us, now that they have their financial house in order. Basically over time I think there will be great growth in demand for electric power and gas. Quanta Services’ normal earning power (not this year of course) is between $1 and $1.50. You can buy all the stock you want at $2.50.
As you may confirm the stock indeed multiplied itself by a big factor.
Interesting interview points highlight, in the context of his investing framework: the irrelevance of dividends; the very low turnover of his portfolio; his answer to when to sell; his focus on the quality (not only quantity) of the balance sheet; his focus on management quality by assessing asset conversion activities (mergers and acquisitions, changes in control, massive recapitalizations, spinoffs, etc); and his focus on considering “one time” write downs as very real and concrete signs of management mistakes.
In a more recent Barron’s interview in October 2010 he highlights how, without planning, he has shifted away towards Hong Kong:
The Third Avenue Value Fund has hit its 20th anniversary. What’s the biggest chaherbange since you launched it?
Twenty years ago, our investments were strictly in North America, and now we are over 60% in Asia. Our emphasis is on safety; we need and want full disclosure and tremendous regulatory protections. Considering what we do, I wouldn’t have dreamed 20 years ago that the largest area where we would be invested is Hong Kong, not the United States and Canada. It’s a big change.
Is it harder to find opportunities in the East than in North America?
No. In looking for full disclosure and well-regulated markets, there is not a lot of difference.
His view on modern portfolio theories is quite clear:
There have been a lot of investment ideas, such as modern portfolio theory, that started in the academic world. How important are they to what you do?
They may be of some use to day traders and high-frequency traders. But as far as value investing, control investing, distress investing and credit analysis is concerned, that stuff is absolute garbage.
He made very interesting comment on value investors on the short side:
You mentioned the importance of knowledge. As an investor, is it harder to get an edge today?
Oh, no. There are many bargains around, based on our criteria and what we look for.
What is the state of value investing today?
A lot of the value managers are very good and very skilled. The thing that troubles me, though, is that some of the best value investors are on the short side. In the history of man, the markets have never been better than they are now for shorts. But some of these fellows are out to destroy businesses, such as when a business needs continuous access to capital markets—whether it is Bear Stearns or Lehman or, believe it or not, Goldman Sachs [GS] in 2009, and General Electric [GE]. Shorts, with present methods of communication that include blogs and cable television, might be able to bring any of them down. Because some of these value people are so good and so powerful, we at Third Avenue don’t invest in companies that need relatively continuous access to the capital markets.
As mentioned in one of my last posts Herbalife’s fall is an interesting case study. It exemplifies the power of shorting, based on value considerations, helped by modern day communication tools.
One of his most interesting comments about value investing is it’s absence of stress:
How involved are you in running the value fund?
Very. Ian Lapey and I co-manage it. One of the things about buy-and-hold value investing is that it is not labor-intensive. It is not stressful, unlike most things on Wall Street. Just look of the number of value guys who have survived to over 100. I give you Roy Neuberger and Irving Kahn. It is a nice business.
I seize the opportunity here to mention other old value investors, I have written about, that exercised until very late in life: Walter Schloss, Phil Carret and the great Philip Fisher. All three were admired by Buffett. Fisher was also admired by Charlie Munger and Benjamin Graham. In a footnote from The Intelligent Investor Graham refers to Fisher’s deep analysis method: Exceptional analysts, who can tell in advance what companies are likely to deserve intensive study and have the facilities and capability to make it, may have continued success with this work. For details of such an approach see Philip Fisher, Common Stocks and Uncommon Profits, Harper & Row, 1960.
Martin Whitman as the ones mentioned above has apparently done very well in his career. Independent of his results what attracts me more to him is how much sense his investing philosophy makes and how clearly he exposes it in his book. He interestingly commented this on the 2002 interview:
Somebody once described our style of investing as how the rich get richer. I think that’s sort of accurate. It’s unsuitable for people who’ve got to make a killing next week.
Cheers and Happy New Year !