May 11, 2005  Notes from a discussion given by Marty Whitman at an American Association of Individual Investors (AAII) meeting

Marty is the founder of Third Avenue Value Fund. He is a legendary value investor.

1. Marty gave his criteria for owning stock of a company. Here are some of the items he mentioned:

a. Super strong financial position. He looks for cleanly stated liabilities and high quality assets. My guess is that he works with typical financial statement analysis and tries to adjust GAAP numbers to a more meaningful set of data. For example, perhaps he will look at quality of cash flows, stock options, inventory turns and such.

b. Reasonable management. He mentioned that this is an area where they make many mistakes.

c. Understand the company. He does not sway from his core competence.

2. He likes to buy companies when the environment “sucks”. He doesn’t care about the short term. He mentioned that since 1960, essentially every industry has gone through a depression. He mentioned that these depressions were as bad as the 1930’s for the specific industry group. He mentioned that every theater chain in the US went bankrupt and same with every bank in Texas. (Please note, I have not verified these comments, they sound severe and potentially incorrect statements, but I understand where he is coming from). I have studied the telecommunications industry since 1998, a depression definitely existed in that sector. He mentioned that his requirement for “super strong financials”, will let the company weather depressions and other severe adverse financial conditions.

3. Value Investing – “It’s not rocket science”. “It’s low stress”. “It’s fun”. It is the basis for wealth creation.

4. He pays no attention to macro factors. I think he considers various factors to be noise and many factors repeat themselves. Examples of this might be recessions, inflation, deflation, deficits, etc.

5. He commented on the following companies:

a. Toyota Industries – He mentioned that you can not just look at Toyota earnings, as much of their financial worth comes from investments of theirs.

b. Posco – Symbol PKX in ADR’s. Claims to have a ” huge position”

c. AVX Corp – slight mention.

d. Suncor Energy – “3 bagger, I love it” is what he said.

e. Tejon Ranch – “love it”

f. St. Joe Company – like Tejon, a great long term play. “might have to wait 20 to 30 years”

6. Books to read – He mentioned Graham and Dodd. Emphasized that the greatest analyst was Freud. People laughed, yet he mentioned he was serious. He mentioned that a Freud biography would be an important read. He also mentioned Robert Rubin’s, “In an Uncertain World”. He stressed chapter 2.

7. He claims his turnover ratio is around 10%. We try to keep turnover ratio at a low level as well.

8. When will Marty sell an investment?

a. If security becomes materially overpriced.

b. If he finds an error in the analysis. He will admit and correct a mistake.

c. If the company is no longer credit worthy.

d. If there is a change in the company, which creates a permanent impairment in value.