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

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

When you buy a stock, do you set a target price for selling it?

No. That's a terrible mistake. If you are doing it right, value is a very dynamic concept--it's always increasing. Furthermore, I think it's a mistake to look at a business all by itself. Go back five or so years and ask how many of the companies in the Dow Jones industrial average or the S&P 500 engaged in mergers and acquisitions, massive financings, and changes in control. Almost all did. I call these events resource conversions. And during a resource conversion, pricing is absolutely different than it is in the public stock market. In other words, what a private buyer will pay to control a company has nothing to do with what the stock sells for on the stock market.

Of course, you sometimes ignore your own rules. For example, you just bought a huge chunk of Repap Enterprises, which you say is up to its armpits in debt and financially vulnerable because of it.

Yes, but what the hell--it cost us just $7 million and it bought us 20%--a controlling interest--in a company with annual sales of almost $500 million. We can refinance it sooner or later. It's the best mill turning out coated paper in North America, and our guy came in as CEO. But you're right, I shouldn't violate my own rules.

I'm not perfect. I miss a lot. Third Avenue came within a hair of buying Intel, Compaq and Sun Microsystems when they were down a few years ago, but I never pulled the trigger. Shame on me.

Speaking of CEOs, do you spend much time talking to managements?

The answer is yes, but I'm much more document-driven than other people. Evaluating management is the toughest thing I do. By comparison, everything else is easy. We have all these semiconductor-equipment managers coming through here. I am so shocked--each guy is more impressive than the next. You see these really great managements that have a sense of urgency--great engineers trying to do good things. Then I go visit Japan, where we invest in some property-and-casualty insurers, and boy, am I dealing with deadheads.

You mean you can't communicate with them?

No. They have no sense of urgency. You'd think that if you were the only capital-rich financial institution in that economy, you would see yourself as something more than just an insurance company. I may be wrong, but they strike me as sort of like a lot of midwestern managements in the 1960s.

Asleep at the wheel?

Yes.

How difficult would it be for the average investor to do what you do?

Read my book. I think it's easier than trying to play the market and forecast the market's gyrations. Most investors are outlook-conscious. I'm price-conscious. I have this easy way of measuring price, quantity and quality. Everything is in the balance sheet--the only way you know whether you've covered all the bases is to look at the balance sheet.

And the kind of investing I do doesn't really depend on how the public stock market does. If I'm right, these very undervalued companies will be taken over, liquidated or refinanced, and that's where you make your money. For example, six months ago we owned more than 5% of 22 companies. Since then, three were taken over, we have been approached about joining hostile takeovers of four others and six have made acquisitions, which shows their ability to convert cash into future earnings.