The latest from Marty Whitmanmarty whitman image

Dear Fellow Shareholders:
In the main body of this letter I discuss, after re-reading
Graham and Dodd’s writings on Value Investing, how the
various Third Avenue Fund managers are followers of
Graham and Dodd, and how these managers are different.
Before doing that, there is one macro point in which I
believe strongly, and of which you should be aware. There
is no way that I can see that those countries involved with
the Euro can be made credit-worthy unless all European
Sovereign Debt is assumed, or guaranteed, by each member
country including, especially, Germany. Such an
amalgamation would make Euro Sovereign Debt more
comparable to U.S. Treasuries than is now the case. I do not
know how the forthcoming European upheavals will work
out. But cash rich economies with a plethora of investable
funds ought to do okay, provided they are opportunistic. It
is comforting to know that so much of Third Avenue
Management’s common stock investments are in
companies operating in Hong Kong, mainland China,
South Korea, Canada, Brazil, Australia and Sweden.
GRAHAM AND DODD
REVISED, UPDATED AND PLACED IN CONTEXT
Benjamin Graham and David Dodd (“G&D”) were
prolific writers, publishing volumes in 1934, 1940, 1951,
1962 and by Ben Graham alone in 1971. A principal
problem with G&D is that almost everyone in finance
talks about G&D but very few seem to have actually read

G&D. This letter is based essentially on the 1962 edition,
Security Analysis Principles and Technique by Graham,
Dodd and Cottle; and the 1971 edition of The Intelligent Investor by Graham.
Because so many have such a superficial understanding of
G&D, their names have become synonymous with the
term “value investing”. This, in turn, has led to some
confusion about what it is that value investors do,
particularly, the way that value investing in equities is
practiced at Third Avenue Management (“TAM”).
Though we are influenced by G&D, our methods,
developed over the life of the firm, are basically different.
Value Investing is one area of fundamental finance (“FF”).
It involves investments in marketable securities by noncontrol
outside passive minority investors (“OPMIs”). The
other areas of Fundamental Finance involve the following:
• Distress Investing
• Control Investing
• Credit Analysis
• First and Second Stage Venture Capital Investments
Modern Capital Theory (“MCT”), like Value Investing,
focuses on investments by OPMIs. Unlike Value Investors,
MCT focuses strictly on near-term changes in market
prices. In a number of special cases the factors important
in MCT are also important in Value Investing. MCT is
discussed briefly at the end of this paper.
G&D made three great contributions to Value Investing:
1) G&D distinguished between market price and intrinsic
value (a concept that still seems alien to MCT).
2) G&D pioneered the concept of investing with a
margin of safety.
3) G&D promulgated the belief that investment
decisions ought to be based on ascertainable facts.
(This was before the modern era – say after 1964,
when for OPMIs the amount of factual material

exploded and the reliability of factual materials became
much enhanced).
The equity analysts at Third Avenue Management tend to
follow the basic rule promulgated by G&D: acquire at
attractive prices the common stocks issued by primary
companies in their industries.
Both G&D and MCT focus on the investment process from
the points of view of the OPMI. Little, or no, attention is
paid to other points of view; and the particular factors needed
to understand the dynamics driving individual companies,
particular industries, control
persons and putative control
persons, as well as creditors. This
emphasis on the OPMI is in sharp
contrast to other areas of FF –
control investing, distress investing
and first and second stage Venture
Capital. Here, the analysis does not
focus on OPMI needs and
decisions, but is rather a four-legged
stool:
(1) Understanding the OPMI’s
needs and desires.
(2) Understanding the company
in some depth.
(3) Understanding the needs and desires of control
persons and entities, present and future.
(4) Understanding the needs and desires of creditors.

Full article in scribd:

TAF 2011 Annual Report