MARTIN J. W HITMAN

The Third Avenue investment team approaches security analysis from a different perspective than most conventional security analysts. In fact, the Third Avenue approach has more in common with corporate finance than it does with the conventional approach. The conventional approach is accepted as basic tenets by Modern Capital Theory (“MCT”), in Graham and Dodd valuations (“G&D”) and,to some extent, in Generally Accepted Accounting Principles (“GAAP”). The differences between conventional security analysis and other financial analysis bottom on conventional security analysis’ over emphasis of three factors and consequent under emphasis of other factors that are equally important, and even more important, in most fundamental financial analyses. These other areas of finance include running a private business, control investing, most of distress investing, credit analysis and venture capital. The three factors overemphasized in conventional security analysis are as follows:

1) Primacy of the Income Account, i.e., the primacy of flows generated from operations as a valuation determinant –whether those flows are earnings flow or cash flows. (Earnings flows are streams of income which create wealth for economic entities while consuming cash. In the corporate world earnings flows probably are more common than cash flows available for securities holders)

2) Primacy of Short-Termism – Prediction of, and reliance, on immediate market prices and changes in those prices; these are crucial to equity pricing insecurities markets dominated by Outside Passive Minority Investors (“OPMIs”). Determining near-term outlooks for a company tends to be a much more important variable in conventional analysis than is determining underlying value.
3) Primacy of Top Down Analysis – The most important element in predicting market prices in conventional analysis are macro factors such as Gross Domestic Product (“GDP”), the level of interest rates,technical market considerations, industry sectors and the trends in stock market indices. For conventional analysis, micro factors looked at from the bottom-up,such as loan covenants, appraisals of management,strength of financial positions and access to capital markets are down-weighted compared to top-down considerations.

Third Avenue Management 1Q 2012 Report and Letters