Book Review: 'The Aggressive Conservative Investor' by Martin Whitman

Select Highlights

• One of the few books to address stock investing from a real-world perspective — i.e. the payoff (or “bailout” as Whitman calls it) vs. a stock’s theoretical value.
• Whitman gives the reader a more nuanced look into stock analysis than most other value investing books.  Some examples of topics not found in other books include an examination of the different stakeholders in a corporation, non-GAAP assets like access to cheap debt & tax loss shelters, different views on accounting as it represents a business’ true financial position, just to name a few.
• Comes with two in-depth examinations that are instructive despite the dated information.
• Discusses multiple approaches to examining companies and de-emphasizes the primacy of earnings and the income statement.

Weak Points

• The writing style is a little archaic, reminiscent of that pseudo-professor speak in Ben Graham’s The Intelligent Investor.
• The corporate landscape has changed drastically and the book could use an updated edition.

The nuance and refined points discussed by Whitman resist neat summarizing.  Most value investing books sound much like the value tome that preceded it — buy low based on intrinsic value, invest for the long term, profit from being contrarian, etc.  For investors who have digested the basics of value investing, Whitman offers the next step up.

Whitman’s investment philosophy is centered around his “Financial Integrity Approach” outlined by 4 basic tenets governing an investment position:

1. a strong financial position as marked by lack of encumbrances (note the subtle difference between this and “lack of debt” – not all debt is bad)
2. honest management and/or control groups who won’t abuse their inside position at the expense of other stakeholders
3. good corporate disclosure
4. current share price below net asset value (not necessarily based on GAAP standards)

Whitman then lays out the rationale behind this approach in a mostly coherent fashion, though he does tend to lack focus and the dry, drawn-out writing style doesn’t help in this regard.  Consistent with the intermediate level and nuanced perspective, I didn’t discover any epiphanies in this book but instead discovered little nuggets that can incrementally improve an investor’s analytical approach.  Some of my favorite gems from Whitman:

• A corporation is composed of different stakeholders with varying degrees of access from management to employees to debtors to suppliers, etc..  In some cases, the executive suite views shareholders as slightly less troublesome than the IRS.
• There are different types of accounting useful for different purposes, which may or may not reflect a business’ true financial position.  As Whitman puts it, there is a difference between what the numbers are and what they mean.
• Somewhat related to the last point, different stakeholders may view an investment situation from varying angles.  These different perspectives can be seen in the disparity between a company’s quoted stock price and what it would cost to buy the company outright as traders buy stock based on earnings while private concerns may focus more on cash flow or balance sheet assets.
• A business can have assets or other positive qualities that may not be reflected in its financial statements.  Whitman brings up the case of earnings sheltered by tax loss carry-forwards, which would be more valuable than earnings without that tax shield.  Access to debt and assets carried at cost or with low carrying costs are some other examples.

Perhaps the most important point that Whitman makes is that investors should always be looking for the pay-off, which he calls the bail-out.  At some point, investors need to realize cash profits to make an investment worthwhile and it would behoove investors to keep this in mind at all times.  While most investors view the sale of stock as the pay-off, Whitman seems to prefer to be less beholden to the whims of Mr. Market.  He advocates looking for stocks with catalysts that will help realize value for the shareholder. This perspective comes as no surprise given Whitman’s history as an activist and vulture investor.

In summary, a worthwhile read for value investors who are looking to move beyond buying “wide-moat” companies at small discounts.

Comments

[Blair:]

In a 'normal' market, value investing makes sense.

In a bear market, such as we have right now, it is impossible to know when you have 'good value.'

For example, consider Citigroup (C).

Except for the 2002 bear market when C traded down to $25, C traded in the $45-50 range.

So, from a value point of view, one would think that when C again traded at $25, it would be a good value buy.

Well, before last week's rally, C traded down to $15. In other words, a 40% hit. Even with the rally, C is still down 20%.

The point to be made is that value investing has its place in a 'reasonable' market environment. When you are in a bear market, you want to do technical market investing.

By the way, some months ago I recall reading in the Wall Street Journal that the brokerage firms were laying off technicians because they were not needed -- they were just overhead.

2008 Sep 23 01:11 AM