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Martin Whitman on value investing

The following was originally published on my website a week ago. SA has an increasing number of new book reviews it can re-post and thus didn't want to re-post one from 1999 unless it happened to be short on content, even though my second line begins with, "Don't let the date of the publication fool you into thinking his (Marty Whitman's) approach is dated." Anyhow, I tracked down a copy of Whitman and Martin Shubik's The Aggressive Conservative Investor (1979), and I'll tell you only having just opened it, the ideas in Value Investing: A Balanced Approach had certainly been cultivated over a long, long time.  If you aren't familiar with Whitman, perhaps this will compel you to learn more. And if you are familiar, it can only reinforce sound investment practice.

I recently finished reading Martin Whitman's, "Value Investing: A Balanced Approach" (1999). Don't let the date of publication fool you into thinking his approach is dated. In his interviews over the past few years one hears the same terms and mindset as described in the book. Whitman's firm, Third Avenue Management, is recognized for its track record in value and distress investing; the latter has led Whitman to be regarded as a "vulture" investor, which is apparently something he doesn't mind, especially considering all of his success. Value Investing will probably not be a fun read for casual or passive investors ("OPMIs" according to Whitman; more on that later) and it certainly won't be for traders who would have a hard time finding current assets on the balance sheet. However, for those devoted to value investing (thinking at times like control investors), this book is among the best.

Readers will appreciate Whitman's effort to hammer home what exactly is meant by true value investing. While he concedes that there are some similarities between what he calls value investing and Graham & Dodd fundamentalism, he for instance, emphasizes that the income statement (its primacy) is far less a concern, and macroeconomics is really not a concern -- that includes the trading levels of whatever market benchmarks. Interestingly, while he obviously is no proponent of academic finance (efficient markets/portfolio), he says, "no market participant is assumed to be stupid or crazy." Still, he mentions that the best in the value investing business, such as Buffett, are basically control activists, who are not in the business of predicting securities prices. Accordingly, they are not weighed down by "analytic baggage."

Regarding the mention of OPMI above, which stands for Outside Passive Minority Investors, Whitman argues there is an over-emphasis on stock prices as pertains to effectively the greater fool theory. Instead, Whitman espouses the view that there are other markets and means for which prices can be derived and attained (e.g. LBO, MBO, going private, M&A, etc), and thus focuses on what he calls "resource conversion activities." So, for Whitman, value investing is about what you buy, and it had better be safe and cheap. He talks of quantity and quality of assets, in addition to long-term wealth creation potential. One doesn't get the impression of cigar butt investing, and that is not Whitman's game either.

In conclusion, I want to leave readers with Whitman's argument that value investors use available information in a superior manner; lack of access to superior information (e.g. insider or material) is immaterial. Value Investing provides readers with very limited examples of actual how-to (value a company), mostly appearing as brief anecdotal references. However, the wisdom of what is value investing that Whitman shares is invaluable and found magnanimously within some 260 pages.

Disclosure: The author of does not have money invested in, or managed by, Third Avenue, nor does he have any business relationship.