From Marty Whitman’s annual report

Dear Fellow Shareholders:

Academics involved with finance restrict their studies to analyzing markets and securities prices. As far as they are concerned, the study of companies and the securities they issue are someone else’s business. I am disappointed that a Nobel Prize was awarded to Eugene Fama, who studies only markets and prices; and whom, I daresay, does not focus on Form 10-Ks or the footnotes to a corporation’s audited financial statements. In fact there is no way of determining whether any market is efficient or not in measuring underlying values unless the analyst understands, and analyzes, the specific securities that are the components of that specific market.

Third Avenue Marty whitman modern security analysis

Market participants make two types of decisions—market decisions and investment decisions. Market decisions involve predicting security prices and are, virtually, always very short-run oriented. Investment decisions involve, inter alia, determining underlying value, resource conversion probabilities; terms of securities; credit analysis, and probable access to capital markets particularly for providing bailouts to public markets at high prices (versus cost) for promoters, insiders and private investors.

Modern Capital Theory (“MCT”) concentrates on market decisions and provides valuable lessons for specific markets consisting of Outside Passive Minority Investors (“OPMIs”) who deal in “sudden death” securities, i.e., options, warrants, risk arbitrage, heavily margined portfolios, trading strategies and performing loans with short-fuse maturities.

MCT is of little or no help to those involved primarily with making investment decisions—value investors, control investors, most distress investors, credit analysts, and first and second stage venture capital investors.

The most basic problem for MCT, and all believers in efficient markets, is that they take a very narrow special case—OPMIs dealing in “sudden death” securities, and claim, as the Nobel Prize winner does, that their theories apply to all markets universally. What utter nonsense!

Marty Whitman full letter in PDF and scribd


Annual 2013 Report and Letters