AT 81, MARTY WHITMAN SHOWS NO SIGNS of slowing down. And why should he when he's at the top of his game? He's also got lots of wisdom to impart to B-school students steeped in the shibboleths of modern portfolio theory, which he contradicts with his outsized returns from value investing -- and his generous charitable contributions. Read and learn a few things from the master.
A Whitman Sampler
AT 81, MARTY WHITMAN HAS REACHED THE POINT where he can appreciate the ironies of life. These days, he gets to enjoy his time on the tennis court -- but he's scored his biggest points in bankruptcy court.
Whitman's legendary investment wins also have generated vast wealth for himself and his investors. And that's afforded him the luxury of being able to choose to walk to work in a polo shirt. But his shirt doesn't sport the logo of a polo player but of a business school adorned with Whitman's name. The further irony is that the accepted orthodoxy taught at B-schools says that what he has done so well and for so long -- value investing -- is an impossibility.
That doesn't mean Whitman plans to retire anytime soon. "What would I do?" he asks, the same response given by the growing roster of vigorous septuagenarians and octogenarians who remain active in their businesses. Why sell? "I did it to make my grandchildren rich. None of my kids seem to take the same interest in money management as I do. We also had to keep our talent by giving them the proper incentives. My colleagues do all the work. I still pull the trigger on the Third Avenue Value fund."
The flagship of the operation, Third Avenue Value, accounts for $6.3 billion in assets. Whitman himself has almost $78 million in the main fund, with more in the three other funds and hedge-fund accounts. He and his wife, Lois, are active givers to human-rights causes, with Lois often taking an active role with her charities.
Over the years, Whitman has become the paterfamilias of value investing in New York, mentoring bright students from Syracuse and Yale Universities, nudging promising managers, fostering talent within his Third Avenue firm, and giving advice to powerful policymakers -- whether they like it or not.
"He's the first guy I call to get advice outside of my office -- the most unassuming rich person you'd ever meet," says Robert Morgenthau, an equally legendary contemporary who also shows no sign of slowing down. "He's public spirited. Back in the early stages of the BCCI case, he gave us a lot of help pro bono," says the 86-year-old Manhattan District Attorney, a friend and investor who consults Whitman on the phone and for lunch. "He reads balance sheets the way that some of us read the sports section of a newspaper."
Warren Buffett may have popularized and exemplified the teachings of his Columbia University professor Ben Graham, co-founder of the value school of investing along with David Dodd, his co-author of Security Analysis, the bible of value investors to this day. But Whitman is every bit as important for having taken Graham and Dodd a step or two further. Says Stan Garstka, Deputy Dean of the Yale School of Management, and a former director of Danielson Holdings: "A lot of people talk about value investing. Marty is one of the few people who actually does it."
According to Whitman, fundamental analysis has received only lip service from academia, which favors scientific theories, including the Efficient Market Hypothesis embodied in modern portfolio theory.
To Whitman, those notions have little practical value for the long-term investor. Folks may talk about Graham and Dodd, but surprisingly "few people seem to have actually read the early editions of Security Analysis or The Intelligent Investor," Whitman told Columbia Business School back in 1997. He still feels the same way today.
Whitman believes the information revolution has eclipsed large parts of Graham and Dodd's work. The weakness, according to him, comes in the gentlemanly way they handled credit analysis. They do just enough to assure the public company avoids default, concerning themselves primarily with valuing the stream of earnings and revenue thrown off by public companies.
Whitman draws his ideas from the scrum of bankruptcy court, where companies get retooled under the intense pressure of rival creditor interests. "My fundamental credit analysis involves the assumption that a money default will occur, and then gauging how the security will work out either in an out-of-court restructuring or a Chapter 11," says Whitman. This requires intensive research because in workouts, both debt covenants and levels of seniority become crucial to understanding how value can be garnered and traded as the company moves toward resolution.
Whitman concentrates especially hard on the balance sheet of a company, which means de-emphasizing the income statement and contradicting the market's obsessive compulsion with predicting earnings. Explains Gerald Pinkerton, a former Third Avenue employee who now runs a managed-account business called NBC Securities in Birmingham, Ala.: "Most of the companies in which Marty invests have serious short-term problems, and thus have their earnings impaired. The challenge is to properly value the quality of the assets."
According to Whitman, few, if any, major public companies go five years without some major restructuring event that involves resource conversion. It could be a buyback, spinoff, writedown or merger.
Naturally Whitman buys into out-of-favor sectors. The discount he aims for is 50 cents on the private dollar. The purchase price is where he builds in the kind of margin of safety that allows him to sleep easy.
But such a strategy often means buying when the market is selling. When the value of Armonk, N.Y.-based MBIA (ticker: MBI) dropped to the mid- 50s on news it was under investigation by the Securities and Exchange Commission and the New York Attorney General over alleged reinsurance deals done to offset losses, Whitman turned into a buyer. That, despite his running against a rising tide of headline risk, capped by a Barron's article outlining further investigations of impropriety
"Having Marty as an owner puts management in the position of being able to deliver solid results over extended periods of time, without having to fret over normal short-term fluctuations in business conditions or reported earnings," says Jay Brown, chief executive officer of MBIA. "Marty's brutally honest observations are a good reminder to all of us that the truth is obvious if we just keep our eyes and minds open."
When it comes to the question of value, Whitman takes no prisoners. For example, in his latest shareholder report he defends selling a swath of Sears Holdings common (SHLD) because the stock appears to be fully valued. Wrote Whitman: Sears Holdings "has to succeed in a big way in order to justify these prices." Third Avenue had acquired a stake in Sears Holding as the result of his holdings of Kmart debt purchased at deep discounts, which was exchanged for stock after the discounter emerged from bankruptcy. Sears' acquisition of Kmart made for another classic Whitman win.
Whitman buys these value-laden companies with strong business franchises and stronger management, and bets that short-term issues will soon fade and the basic value propositions will eventually shine through. Just don't ask him when. Says Whitman: "When may be important for individual securities. But it isn't for portfolios. And Third Avenue runs portfolios."
Whitman built his expertise from the ground up -- not from the top down, as promoted by many of the theories that now dominate the business-school curricula. These theories assume uninterrupted liquidity and functioning markets for all assets -- a questionable proposition at best, he says.
"The guy is a real stickler for detail, he really does his homework," says Tim Collins, founder of Ripplewood, one of the most successful private-equity investors in the Japanese market, and a former teaching assistant. "Marty has to do his homework because unlike a private-equity investor, he doesn't have the ability to change management if they make a mistake. He's had a profound impact on the attention I pay to details."
THE BOTTOM LINE
Third Avenue Value's Marty Whitman continues to prove you can buy low and sell high, notwithstanding what the efficient-market theorists assert.
Whitman has earned the respect of the business community for both his longevity and willingness to share his knowledge. For 33 years, he has taught an investment seminar at Yale University and, more recently, at Syracuse via teleconference. Morgenthau tells the story of how astonished the Yalies were when this balding guy in a sweatshirt, who was fiddling with the radiators and was assumed to be the janitor, suddenly strode to the podium and started lecturing them about investing.
"He's totally unassuming," says Yale's Garstka. "He spends at least half of the seminar refuting the top-down theories propounded in most business schools."
A lot of Whitman's success comes from voracious reading and scholarship. Says Garstka: "These days, the more disclosure we have, the less people read. Marty can read through reams of material and find the two or three key things that need to be analyzed in detail."
One of the keys to Whitman's success has been an ability to sort out the community of interest, and the conflicts of interest, in any given crisis situation. By knowing these he can find allies in a corporate bankruptcy or workout, while steering away from the hidden shoals.
Value investor James C. Roumell, founder of Roumell Asset Management based in Bethesda, Md., remembers the strict price parameters Whitman gave him for his first order in June 1997, when Roumell was a broker. Recalls Roumell: "He buys at his price and if it gets away, he just goes hunting elsewhere."
The hunt for deep value has led Whitman into foreign markets. Now almost 40% of Third Avenue's assets lie in foreign jurisdictions, mainly subject to English corporate laws, which carry few if any of the stockholder protections present in the American system.
He notes that asset manager Tweedy Brown would not have been able to oust Conrad Black from Hollinger if the activities were done solely in domains subject to the English system. Under pressure from U.S. shareholders, the Toronto-based publishing company forced former top executives Conrad Black and David Radler to step down nearly two years ago amid allegations that they siphoned tens of millions of dollars from the company, often through entities they control in Canada, where they both live.
For years prospective clients keep holding out concern over Whitman's advancing age. But Whitman has outlasted many of them already and he intends to be the last value investor standing. Saith the Sage of Syracuse: "Our whole approach is less stressful than anything on Wall Street."
Moreover, Third Avenue is in good hands when Whitman finally steps aside. In recent decades potential investors have sometimes dragged their feet about investing in Third Avenue, concerned about Whitman's age.
Curtis Jensen, 43, became co-chief investment officer some years after distinguishing himself in the Yale seminar. Jensen also manages the Third Avenue Small-Cap Value fund. As Whitman's protégé he's a prime acolyte of the "Buy Right" strategy. "It's that discount that gives us our anchor to windward," providing shelter against raging market storms, he says. Meanwhile, Whitman remains firmly at the helm.
