The Public Be Damned - Martin Whitman of Third Avenue Value Fund

Kiplinger's Personal Finance Magazine, July, 1999 by Fred W. Frailey

Marty Whitman is annoyed. How can he make money for people if they're clamoring to get out of his mutual fund?

Considering what it invests in--stocks or debt of smallish companies whose near-term outlook is deplorable--Third Avenue Value fund hasn't done badly in a market that until recently has favored rapidly growing global behemoths, Internet start-ups and very little else. Lots of fund managers who plumb for woebegone, undervalued companies would trade numbers with Martin Whitman: a total return in 1998 of 4% and a modest gain thus far in 1999 (1% to May 11).

But the 74-year-old Whitman is not comforted much these days by knowing he's done better than many of his peers. Investors were taking money out of Third Avenue Value at a rate of about $55 million a month, and if this keeps up into fall, the fund could shrink to half its former size. That leaves Whitman always deciding what to sell rather than what to buy. "As for dealing with the public," he says with undisguised relish, "you may quote me: Screw 'em."

This is vintage Marty Whitman. People who know him expect no less from someone who arrives for work on Manhattan's Third Avenue dressed in an open-collared plaid work shirt, baggy blue cotton pants, white socks and worn sneakers. You could mistake this centimillionaire for a street person. But when most of today's investment bankers were still suffering from diaper rash, Whitman had already become a fixture on Wall Street, one of a small cadre of experts--"vulture investors" is the impolite term--who picked over the balance sheets of troubled companies in search of opportune investments.

So Whitman's seen a lot, and how better to sum up today's fractured mutual fund scene--a few funds doing great, the rest gasping for breath--than to drop in on him and take his measure while he's under some stress? Now the genial but blunt Whitman has eased himself into a comfortable chair, the tape is rolling and ...

Kiplinger's: Two lousy years in a row for you. Ever think of going into a different line of work?

Whitman: No.

The companies you invest in--are they not doing well or are they doing well but nobody cares?

They are doing well. The reason we are down is largely because of our large positions in two title-insurance stocks, First American Financial and Stewart Information Services. Their earnings are holding up, but their price-earnings ratios went from 10 to 5. Since we take big positions, if nothing is really going up, it takes only a few bad stocks to send the fund down. [Both stocks subsequently advanced.]

Is the market now veering toward your sort of stock?

I don't think much has changed. Seeing what was happening in the general market, in Internet stocks and in S&P 500 stocks, you'd have thought the inmates were running the asylum. Maybe things are different this time, but I doubt it. When companies sell for seven times book value and 35 times earnings, it's almost impossible to figure out how you make the numbers work.

But don't you think that great historical divides like the end of the Cold War and the taming of inflation can beget whole new investment climates?

No. What counts is the deal, not all the other stuff. The last time that global events were more important to long-term investors than the deal in moving the stock market was 1933.

Just what do you want to see in a stock you buy?

Something that's cheap and safe. The first things I want are high-quality resources, the absence of liability and the presence of cash. Second, I want the price to be at a big discount to the resources--that is, to the net asset value per share. For instance, we have a huge position in Forest City Enterprises. When we were buyers, in the early 1990s, its income-producing properties were appraised at $80 to $90 per share. But you could buy all the shares you wanted for $17. Another way of describing net asset value is what a company would bring in a takeover. But more important than cheap is safe.

So you don't like debt?

I don't like unmanageable debt. Forest City has a lot of debt but it is nonrecourse. In other words, the debt is on individual properties. The lender can't come against the parent company if there's a default.

Do you pay attention to earnings estimates?

No. Earnings are vastly overrated. Look at the title of my new book, Value Investing: A Balanced Approach (John Wiley & Sons). No smart businessman treats one accounting number as more important than another. They are all part of the whole. The goal of any business person is to create wealth, and except on Wall Street, profits are viewed as the least desirable way to create wealth because of the income-tax disadvantage. It's a lot easier to look at the quantity and quality of resources a company has than to forecast its earnings. If you have good management, it will convert those resources into something of value.

What are the financial numbers you key on?

It depends on the company. When it's income-producing real estate, you look for appraisals. With a mortgage portfolio, you want a credit analysis and to see what your yield is to maturity. With companies like Legg Mason and Nuveen, you focus on assets under management. When we do the financial-guaranty insurers, it's adjusted book value--a publicly disclosed number that is book value plus the equity in the present value of certain future premiums.