Steve Forbes: Now, you've said that equity investors have to learn to understand credit worthiness. And people will say, "Well, the credit rating agencies didn't do a good job." But you feel if you do a little bit of homework, you can do better than the credit rating agencies and some of these companies?You can read the rest of the interview at the link.
Marty Whitman: Yeah, you had better. I don't think it's that difficult in common stock investing by industry. [It's] the first criteria we have in any common stock investment, except when we make capital infusions.
Steve Forbes: Right.
Marty Whitman: But in passive common stock investing, our first criteria is super-strong financial position. If a company doesn't have it, we are not there. We will be a creditor; we won't be a common stock holder. Now, I would say there are three elements that you could look at for credit worthiness. First, a relative absence of liabilities, whether on the balance sheet, in the footnotes or out in the world. Second, the presence of high-quality assets, which means things that are convertible to cash, or near-cash.
Steve Forbes: Right.
Marty Whitman: Like a triple-A net lease on an office building. And you start out with those two things. You can pretty much say that somebody is eminently credit worthy.
Steve Forbes: So, just as we were taught in school, look at the balance sheet and you can pick up a lot, most people seem to think.
Marty Whitman: Yeah, well, it is balanced. You look at the income account. I mean, the third element of a strong financial position, which may or may not be available, is cash flow from operations available for the stockholders. You take those three elements, maybe with some emphasis on the first two, and you can make a pretty good judgment as to credit worthiness.
Steve Forbes: So, in terms of what the market has taught us about credit risk, it's really just taught us to go back to the basics, and you'll avoid a lot of the problems?
Marty Whitman: Yeah, well, look, you read the literature, starting with Graham and Dodd, and looking at all these academic tests, looking at generally accepted accounting principles. They all believe and they all promulgate a primacy of the income accounts. And they are in error. You have to be balanced. Like I say, to be in value investment today, cheapness is not a sufficient condition. You'd better combine it with credit worthiness.
Steve Forbes: So, not just P&L, you've got to look at the balance sheet?
Marty Whitman: Right, right.
Tuesday, April 14, 2009
Forbes Interviews Whitman
Steve Forbes recently interviewed Marty Whitman. They discussed everything from performing loans analysis to his biggest financial commitments.