Third Avenue Hires David Resnick

So, according to this report from Morningstar, David Resnick will be joining Morningstar in September 2012.

Who is David Resnick?

Resnick "made his name as an advisor on bankruptcies and restructurings for many years and who in fact had worked with fund-family founder Marty Whitman on Public Service of New Hampshire's restructuring in the late 1980s."


What does his hire mean for fundholders?


Again according to the report, "In the tight-knit network of bankruptcies and reorganizations, Resnick's rolodex and expertise...should come in handy for many years to come. Overall, it's a positive development for a firm that has succeeded with distressed investing in the past."

8 Tips on Investing The Third Avenue Way

In a recent report by Third Avenue Value, Ian Lapey discussed the philosophy which has led to Third Avenue's investing success. Here are eight tips from that report, that you might find helpful:

1. "Focus on the balance sheet and readily ascertainable net asset value."
2. "Only invest in common stocks issued by companies with strong financial positions."
3. "Focus on the long term."
4. "Worry about investment risk, not market risk."
5. "Do not try to pick the bottom."
6. "Avoid industries in secular decline."
7. "Own the fulcrum security [in a company's capital structure]."
8. "Pay close attention to a management team's long-term track record and incentives."

For more on each, click over to read a paragraph going into more detail on each. And then, having done that, I wish you the best in applying them for profit!

Marty Whitman Retires

Chuck Jaffe generously praises Marty Whitman in this short piece on his decision to step down from managing the Third Avenue Value Fund.

While I disagree with parts of it, Jaffe accurately identifies Whitman's admirable long-term track record--and the three words that Whitman's style boils down to: "safe and cheap."

The whole thing's worth a read, even for those of us who have been following the fund for some time and give Ian Lapey more credit than Jaffe seems to.

Marty Whitman Quotes (from Third Avenue's Recent Letter)

Third Avenue's latest shareholder letter is a great read.

At its start, Marty Whitman basically provides a condensed view of his book, Value Investing: A Balanced Approach--which serves as either a nice teaser for those who haven't read the book or a nice refresher for those who have.

Throughout the letter, a number of one-liners are made. Whitman points out, for example, that "analysts really ought not to use the word 'risk' without putting an adjective in front of it." Similarly, he says, "Economists have it wrong when they say, 'There is no free lunch.' What they should say is, 'Somebody has to pay for lunch.'"

Later, James Montier is quoted saying, "The idea that the risk of an investment, or indeed, a portfolio of investments can be reduced to a single number is utter madness." And Thomas LaPointe observes that, "A disorderly Italian default would be at least ten times greater than a Lehman Brothers event."

Anyhow, there's much more in the letter; you can read it here.

Third Avenue Discusses their Leucadia Investment

In the latest annual report for Third Avenue Value, Amit Wadhwaney discusses his fund's investment in Leucadia. Here is the relevant excerpt:

Leucadia National Corp. (“Leucadia”) is a NYSE-listed holding company. Run by Ian Cumming and Joe Steinberg since its founding in the late seventies, Leucadia has compounded the NAV of its portfolio by about 18.5% per annum, on average, over the last 30 years.

Given such a long-term track record, it is hardly surprising that Leucadia’s stock has rarely been inexpensive. There have, however, been opportunities to purchase these shares at attractive valuations following sizable double-digit declines in stated book value, as occurred in 1999 and 2008. In 2008, mark-to-market losses on several of its investments resulted in a decline of over 55% in its stated book value. The company also took sizable accounting write-downs to its deferred tax asset. The resultant negative impacts on reported earnings and book value drew the ire of the market at large, and the company’s stock price plummeted to what we deemed to be unusually attractive levels.

While the mark-to-market declines and writedowns in these various assets conformed to accounting standards, the resultant declines in reported earnings and book value pushed many investors to the exits and provided us with precisely the type of opportunity that we look for – a short-term distraction which allowed us to partner, at bargain prices, with a management team which has proven its ability to grow NAV at truly exceptional rates over the past 30 years.

It was not particularly surprising that Leucadia recognized substantial accounting losses during the depths of the financial crisis, in early 2009. Its portfolio included equity and royalty interests in a large-scale, Australian iron ore mining operation and another base metals mining company, the market values of which had declined reflecting expectations of poor near-term profitability. In addition it held significant investments in a U.S.-based, full-service investment banking and securities firm, which, while its security price declined during the financial crisis,

had employed its strong balance sheet to expand its work force and build its market presence during a period when its competitors closed shop or retrenched. Our conclusion was that these reported losses did not represent a true permanent impairment to the underlying businesses and the long-term fundamentals of the businesses remained attractive.

Additionally, the sizable write-downs of deferred tax assets, which exceeded $1.5 billion in 2008 alone, were prompted by a mechanical interpretation of accounting law; but, had neither any negative effects on cash-flow, nor, we suspected, any longer-term economic repercussions. Presumably, when business conditions were to moderate, these substantial tax assets would once again be available to provide protection from taxes on future realized investment results; and given the aforementioned track record of the company, we believed that the odds of Leucadia delivering value realization in the future were in our favor.

Let us look more closely at these mark-to-market writedowns which helped spark a sell-off in Leucadia’s share price. Did they instill widespread fear in the market? Yes. Would such write-downs be undeniably unpleasant, if not downright scary, for those investors/speculators with shortterm time horizons and/or leveraged portfolios? Certainly. But from Third Avenue’s perspective – that of a long-term, fundamental investor which does not employ financial leverage – these accounting write-downs were merely distractions from the key factors in our analysis, and largely irrelevant to the consideration of economic book values which were considerably longer term in nature.

We find a bit of irony in that last point; specifically, that the environment which scared many investors out of Leucadia stock was precisely the type of environment in which Leucadia has historically been able to sow the seeds of long-term value creation. This point is one that should be clear to anybody who has analyzed Leucadia’s history, but also one which was, to many, drowned out by the noise of reported accounting statistics and general market anxiety. In this case, such noise ultimately lacked relevance to the fundamental, long-term health of the underlying business, and to the key factors which played into our decision to invest. Among these factors were the unusually cheap valuation at which we were able to invest, the longterm track record of value creation and the aforementioned exceptional tax attributes.

As usual, Marty Whitman and the rest of the Third Avenue team not only give you a lot of insight into their own picks but also into the mechanics of good investing. You can read the full report here.

Whitman Likes HK Real Estate

Marty Whitman likes Hong Kong real estate? That's probably not a secret to those of us who have been following him a long time.

But in Third Avenue's latest letter, Whitman presents some up-to-date information showing in numbers why he likes the great Hong Kong companies.

For example, the adjusted NAV for Cheung Kong Holdings is 100.38; for Henderson Land Development Company, it is 59.21; for Wheelock, it is 32.72.

Updating Whitman's data for the recent rise in share prices, but keeping the same adjusted NAV numbers, Cheung Kong is selling at a 15% discount, Henderson Land is 31% off, and Wheelock is still very cheap at a 41% discount.

"Most importantly," says Whitman, "all of the companies continue to have extremely strong financial positions and are very well poised to take advantage of opportunities presented by the current global recession and credit crunch."

This, he backs up by showing that the net debt to capital at Cheung Kong is 13.2%; at Henderson Land Development Company, 14.1%; and at Wheelock, a very low 1% (as it excludes debt at a major subsidiary which is non-recourse to the parent).

Insider ownership is around 50% at each of the companies--a fact with both postive and negative implications.

Third Avenue Sues MBIA

While Marty Whitman was given a few soundbites in reports about Third Avenue's litigation against MBIA, as a reader here you may be interested in reading more--direct from the source.

What, exactly, does the Complaint against MBIA allege?

The Complaint alleges, among other things, that the recent corporate “transformation” announced by MBIA, Inc. (“MBIA”) was illegal and was accomplished without due consideration in an attempt to defraud holders of MBIA Insurance Corporation’s debt.

The Complaint describes how the Third Avenue Funds purchased notes issued by MBIA Insurance Corporation in February 2008 (the “Surplus Notes”) based upon the balance sheet of that entity and representations that this and other capital raises would be conducted to recapitalize and revitalize MBIA Insurance Corporation following losses in its structured finance insurance business.

Little more than a year later, however, MBIA announced that MBIA Insurance Corporation was transferring approximately $5 billion in cash and its entire profitable domestic public finance business to another entity (MBIA Insurance Corporation of Illinois) that has no obligation under the Surplus Notes...

The Complaint asserts that these transfers have left MBIA Insurance Corporation only with “toxic” structured finance and credit derivative insurance liabilities and a credit rating that was downgraded deep into junk territory. The Complaint asserts that, as a result, MBIA Insurance Corp now has no viable business or earnings. The Complaint alleges that these transfers were illegal and unfair and resulted in damages to the Third Avenue Funds’ investment in the Surplus Notes. Third Avenue seeks an unwinding of the transfers discussed above or the award of appropriate monetary damages.

What are Marty Whitman's personal thoughts on the matter?

“We are now being improperly denied the benefit of our investment – namely, a well-capitalized insurance company that is able to conduct a profitable business insuring municipal bonds,” said Mr. Whitman. “MBIA has stripped that business away from us and left us with a run-off portfolio that is likely worthless.

Ironically, MBIA is now in the marketplace attempting to raise capital for the new entity, despite Third Avenue’s bad experience with MBIA’s last capital raise, which has given rise to this litigation,” he continued.

Does this have any relation to your portfolio--today or in the future?

Actually, even if you don't have money invested with Third Avenue, or MBIA, it does. The question of who you are investing your money with is a crucially important part of investing--as important at times as looking at the balance sheet.

How do you judge managers though? Are there any good rules of thumb that help you in determining another's credibility?

I have already posted some of my own but would love to hear your own thoughts on this, or any books you might have read on the subject.

Sell in Europe, Buy in China

Marty Whitman and the Third Avenue team recently announced that they will launch a series of funds for European investors.

The asset manager is to launch an Ireland domiciled Third Avenue Capital umbrella fund with four sub-funds, including a Value, Small Cap, Real Estate Value and International Value funds.

The Ucits funds, which were rolled out on Tuesday will have the same portfolio management team as Third Avenue's US mutual funds.

The firm's investment philosophy will centre around investing in undervalued securities of well capitalised and well managed companies with attractive growth prospects.

So it's really the same strategy, with no changes, being sold in simply a different place.

Where Whitman is buying hasn't changed at all. As recent filings and this recent article show, he's buying performing loans in the US that should yield 25% to maturity--and he continues to look overseas for opportunity in the equity markets.

Companies listed on the stock exchange in Hong Kong are particularly attractive at the moment, especially if these companies have a considerable presence in mainland China, he said.

The Marty Whitman Way

I'm not always kind to business journalists, especially some of them on CNBC, so when one does an exceptionally good job, I like to pause and give them their just praise.

Levi Folk, of the Financial Post, wrote a truly excellent piece of business journalism--showing Marty Whitman's strategy by reference to Graham's. It should be read by all, and I'll show why below.

He starts off by accurately summarizing Graham's views on net-nets--"companies whose liquidation values exceed by a wide margin their market capitalizations net of all liabilities." And then he goes on to show how Marty Whitman refines Ben Graham's net-net concept.

First and foremost, companies must be well-financed in keeping with the core tenet of Third Avenue's "safe and cheap" method of value investing...

...The second adjustment is to the assets themselves. Graham and Dodd focused exclusively on current assets when calculating liquidation value whereas Whitman includes long-term assets that are easily liquidated.

...The third adjustment is the inclusion of off-balance-sheet liabilities.

...The fourth and final adjustment to Graham and Dodd is the inclusion of "some property, plant and equipment" for their liquidated cash value and associated tax losses that often produce cash savings.

I edited out the examples given below the adjustments above--which included US banks, Encana Corp, and two long-term holdings of Third Avenue: Henderson Land Development Company and Toyota Industries.

With those examples edited out it is easier to see Whitman's method stripped bare. To understand how it is applied is tougher of course, and that is what the examples in the article allow you to do.

Are you sold that Levi Folk is a business journalist to keep an eye on? You should be. Folk does miss making one point, but it comes after the following few paragraphs--which provide an actionable net-net idea:

Sycamore Networks Inc. (SCMR/NASDAQ) is the most compelling example of a net-net situation in the United States offered up by Lapey.

The telecom equipment company has more cash -- US$935-million in all -- than the total value assessed to it by the market, in light of its US$800-million market capitalization and US$38-million in total liabilities.

...Lapey is also attracted to the one-third of outstanding share ownership by management because it presents an important alignment of their interests with those of Third Avenue, who are by and large passive investors.

The fifth adjustment Whitman and his team make in looking at net-nets (or investments in general) is an inclusion of how all the different interests within and around a company are aligned.

As is made clear in their annual reports, in Whitman's books, and in this recent article at Morninstar, Third Avenue looks to enter positions that are not only cheap (on the above basis) but also one's where they are investing alongside managers with successful long-term track records and aligned interests with stockholders.

Marty Whitman's strategy of investing in what is versus an estimate of what will be has proven to be a very successful one over the years--and has proven particularly successful when stocks are wildly mispriced.

Are they mispriced wildly now? Marty Whitman thinks so but feel free to differ in the comments section below.

Whitman's Kmart Investment

In an article that focuses on contrarian investing, Marty Whitman's old Kmart investment is detailed:

Also during that time, Marty Whitman, manager of the Third Avenue Value Fund, purchased bonds of K-Mart both before and after it filed for bankruptcy protection in 2002. He only paid about 20 cents on the dollar for the bonds. Even though, for a while, it looked like the company would shut its doors for good, Whitman was vindicated when the K-Mart emerged from bankruptcy and his bonds were exchanged for stock in the new company.

Shares jumped much higher in the years following the reorganization, and then were taken over by Sears Holding (nasdaq: SHLD - news - people ), which produced a nice profit for Whitman. Thanks to moves like this, the Third Avenue Value Fund has earned a market-beating 14.3% return since Whitman founded the fund in 1990.

The same post also takes a look at Buffett's initial investment in The Washington Post, which he bought during the bear market of '73-'74.

While the article is focused on contrarian investing--a style that we think has serious limitations (in that the main focus is on what others think as opposed to the true value for a stock and its price), it is well worth reading. Head to Forbes and see for yourself.

Closed Funds Opening?

In an article at CNNMoney, Yuval Rosenberg points out a silver lining in the dark clouds over the stock market: many previously closed funds are now opening to new investors. Third Avenue's Small Cap Value gets a nice mention, excerpted below:

Manager Curtis Jensen has been at the helm since the fund's inception in 1997. The fund lost nearly 35% last year, but it bested the S&P 500 (SPX) by 2.4 percentage points. Over the last decade, it has topped the Russell 2000 (RUT) index by 3 percentage points a year and beaten the S&P 500 by better than seven percentage points a year.

Like Samra and O'Keefe, Jensen looks for well-financed companies trading at deep discounts of 30% or more to their intrinsic values. He's willing to buy bargains wherever he finds them, whether it be Japanese firms like brewer and beer hall operator Sapporo Holdings, his top holding, and shopping mall operator PARCO, No. 2, or Denver-based oil and natural gas producer St. Mary Land & Exploration Co. (SM), No. 3.

At the link above, more information on this fund and others. If you're interested in some of the holdings mentioned above, we highly recommend you read the investor letters. Third Avenue as a whole provides great information on why they like what they like--and Jenson is no exception.

Third Avenue Real Estate Value

A recent article in Kiplingers, authored by Steven T. Goldberg, mentioned one of the real estate funds run by Michael Winer--under the Third Avenue Value umbrella of funds.

Personally, I prefer another fund, Third Avenue Real Estate Value (TAREX). The main reason: Less than half of its assets are in REITs. Manager Mike Winer, who spent many years in the real estate industry before becoming a professional investor, likes the freedom that real estate operating companies have to deploy their earnings.

They don't make the huge payouts to shareholders that REITs must. In today's market, where cash is king, operating companies often have much bigger cash troves than REITs do.

Third Avenue is quirky. It yields just 2.9%--low for a real estate fund. Expenses are higher than I'd like to see them, at 1.1%. Plus, Winer can--and does--invest anywhere; more than 60% of the fund's assets are in foreign stocks.

But returns have been solid. The fund gained 8.5% annualized over the past ten years. Winer is a disciple of Third Avenue founder Marty Whitman's "safe and cheap" school of investing. (Note that the fund has a $10,000 initial minimum, although many discount brokers let you in for less.)

Read the full article at the link above for more information. We'll just add that the article nailed one of the main characteristics of the real estate fund run by Winer: it's emphasis on real-estate operating companies over the trusts.