Marty Whitman Q3 Letter: Importance Of NAV Valuation

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Marty Whitman’s Third Avenue Management letter to shareholders.

Dear Fellow Shareholders,

Most businesses (and governments) which are successful achieve success by creating wealth while consuming cash. In most cases, consuming cash carries a fair amount of
investment risk because consuming cash requires the business to have access to capital markets, sometimes continuously as is the case for commercial banks and broker dealers. Capital markets are notoriously capricious, sometimes not available at all – see the 2008 2009 financial meltdown; and sometimes are a source of almost free money – see the 1999 – 2000 IPO bubble.

Other businesses, a minority I expect, are designed to create wealth by having positive cash flows from operations; for example  single income producing real estate projects,
investment companies and investment management companies. Other things being equal, or close to equal, Third Avenue Management (TAM)  analysts and portfolio
managers prefer to invest in the common stocks of companies with positive cash flows from operations, but not to the exclusion of the common stocks of companies creating wealth while consuming cash. As a practical matter, TAM is very price conscious and gives price, especially as related to estimated Net Asset Value (NAV), great weight in making buy, hold, or sell decisions whether the business creates wealth by consuming cash or is a cash generator.

In analyzing cash flows, it is super important that the analyst distinguish between project finance and corporate finance. Project finance looks at periodic net cash flows with a
defined termination date. For any project to make sense it has to be based on forecasts of a positive Net Present Value (NPV), i.e., the present worth of  the cash flows to be received over the life of the project plus cash to be received at the termination of the project, if any, has to be greater than the present worth of the cash costs involved with the project.

See full Marty Whitman’s Letter to Shareholders in PDF format here.

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