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The Chairman
Victor Niederhoffer

12/26/2004
Review: Writings of Marty Whitman

Reading through his books, “The Aggressive Conservative Investor” (with our good friend Martin Shubik) and “Value Investing,” and the chapter precis " Value With a Difference" in “Forbes: Greatest investing Stories,” and following up on the 100 first entries about him on Google , one is impressed with the sagacity, intelligence , and fruitful hypotheses that jump from this 80-year-old investor whose Third Avenue Value Fund, was about the best-performing mutual fund in 2004.                                                                  

Yet it wasn’t always so. When he was at the height of his fame in 1999, his fund was losing assets at the rate of $50 million a month , or about 33% a year, because of his lackluster performance. His fund was about unchanged in 1998 and 1999 while his peers were racking up 25% a year.  Characteristically, he told Kiplinger's: "As for dealing with the public, screw him. You may quote me."

The main elements of his style are to find vulture investments in such things as bankruptcies, underutilized assets, turnarounds and beaten-down technology companies. He looks for stocks and bonds that are so far down that if almost everything  goes wrong, shareholders should still come out ahead -- i.e., things that everyone else hates that appear to have reached a dead end. A very conventional method, but one that he seems quite expert at, disregarding his lackluster performance.                  

Some of his ideas are: "Safe is better than cheap. The less the risk the greater the potential reward." But this shows he hasn't kept up with the main wisdom of modern finance, that you get paid for undiversified risk. It also is against studies like prospective yield-based studies of Value Line, which would show that Timeliness Group 1, the least safe, perform much better than Safety Group 1.  It also would preclude him from doing what Collab and I told everyone to do in the last two years: to buy every new issue and make 50% a year or so the easy way.                                    

Much more to the point is Whitman's focus on bankruptcies. He's an expert on this, knows everything there is to know about it, made his first fortune in Penn Central debt (achieving a 500% return). He is good at spotting value in the debt of certain troubled companies, especially those that possess substantial physical assets or perform vital services, like utilities and railroads.

Like many people without much of an education, he's a frustrated academic." Whitman suffers from the Marilyn Monroe syndrome. He's proudest of the things he doesn't have and sees his two books  and  his 25-year-old value course at Yale as his proudest achievements. "The course was absolutely terrific," he told Syracuse University Magazine, in a puff piece. "The students were absolutely super." He believes he has displaced the father of security analysis and is convinced his seminar "will shed new light on the subject and make a major contribution to finance."

There is much of the "just plain folks" technique of seeming small that the Sage possesses. "He is proud of his rolled-up sleeves and corduroy, the mail-order,  extreme casual, open-collared mind set. "After all , I'm just a poor man who just happens to have a lot of money. He succumbs and has been snatched  by  the fund-raisers rather guilelessly." Lois and I are fortunate to be able to support the causes that mean so much to us, empowering others, leaving an imprint on the future." The kind of person that you'd think might be a friend of  the financial weekly cult leader., and indeed when his performance was better he used to sit next to the others at the leading financial weekly's round table.  

He likes to buy discounted debt when the only good stocks outside tech are things like "the biggest and the best"  (may they pay their policies when the holders lose) (ACE, et al.). He made a killing in Kmart on this, debt and common, and apparently this is one of reasons he reached the top of the bottle of vipers in 2004. 

He suggests that audit reports are much more important than earnings forecasts and this, I believe, a person could make a few meals for a life time. "Bad enough that estimates are often wildly inaccurate . . . that's lateral thinking." He likes to buy them when they're really down in the dumps in earnings and no one will buy them, and all the forecasts are bad. This seems very good to me , especially when the things such as the Starmine and IBES and Value Line ratings are lowest.  

He points out that where entry is difficult and capital spending and research necessary to get in is highest, these companies tend to come back. This should be tested and is probably why so many of us have found that the companies that perform the worst in any year tend to come back the next year, especially in the earliest years.

Like most, Marty and his partner Martin have prospered and suffered mightily in the Orient.They are always finding companies with market values of assets 10 times as great as their market value. But they get hurt by institutional features and the old boy network there. A good reading of "Shogun" and a viewing of Sondheim's "Pacific Overtures," as well as a review of the Chair's own downfall, might be a good remedy here.  

He uses multistage reasoning often. First he looks to the probability of default when a company's stock or debt is in the dumps. Then he looks to see what he can get when it does default. And since he works with lawyers all the time, there's a third stage when he directly or indirectly uses the legal threat as a tool for profits.  

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