Tag Archives: Whitman

Marty Whitman Classic, Devastating Losses, and More Classics

Book Aggr Inv


and http://www.thirdave.com/ta/

Marty Whitman is an asset based investor who prefers safe and cheap. Unfortunately, the 2008/2009 crash put a dent in his mortgage insurer stocks which turned out to be neither safe nor cheap. Third Avenue Value Fund (TAVFX) tumbled 63% in a year. Humbling.


Vs. S &P 500

Index tavfx



Whitman Takes on Ackman Over Bond Insurers

A respected value investor, Martin Whitman, is going toe-to-toe with another well-known value investor, the hedge fund manager William Ackman, over the future of the bond insurance industry.

Mr. Whitman, founder and co-chief investment officer of Third Avenue Funds, increased his holdings in the two largest bond insurers — MBIA and the Ambac Financial Group — during the fund’s first quarter, which ended Jan. 31. He also increased his stakes in the mortgage insurersMGIC Investment and the Radian Group.

In doing so, Mr. Whitman, has, in effect, put his reputation up against that of Mr. Ackman, whose big bets on share price plunges in the industry have received wide media attention.

There is “much profit to be made in” the bond insurers, whether the companies continue as going concerns or write no new policies and sell off their existing business, in part or in whole, Mr. Whitman said in a letter to fund shareholders.

The 82-year old Mr. Whitman devoted a substantial chunk of the letter to defending his MBIA stake, saying that the company appears to be “very well financed” — a claim William Ackman has disputed vigorously.

Mr. Whitman, who has made a name by buying assets most other investors shun, in January increased his stake in MBIA, the largest bond insurer, at $12.15 a share and now holds about 10 percent of its outstanding shares. Third Avenue also has bought $326 million of the $2.6 billion MBIA has raised in new capital through note sales, which Mr. Whitman said made the company “strongly capitalized.”

“It ought to qualify easily for an AAA rating with a $17 billion claims-paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business,” Mr. Whitman wrote in the letter.

But Mr. Whitman noted that among the impediments that might prevent MBIA from winning a stable outlook was the possibility that Mr. Ackman might adversely affect the company.

Mr. Ackman, who has been shorting the bond insurers for some time, has argued that they do not have enough capital to handle a surge in claims.

“MBIA is being victimized by an apparently well-organized bear raid headed by William Ackman of Pershing Square Capital Management,” Mr. Whitman wrote.

Mr. Whitman said that while Mr. Ackman’s bearish views had made it possible to buy MBIA at depressed prices — he noted that the common stock of the four companies has been selling at discounts of about 70 percent from tangible book value — his arguments are “off-base.”

“Ackman believes the bond insurer model does not work because the insureds are able to buy an AAA rating so cheaply,” Mr. Whitman wrote. “The facts are that bond insurance is one of the more profitable P&C businesses.”

Mr. Whitman has proven a master at turning debt bought at distressed prices into something far higher value. For example, he paid about $10 a share for Sears Holdings, some of which he later sold at more than $130 a share and higher.

MBIA activities  http://en.wikipedia.org/wiki/Bill_Ackman

In 2002, Ackman began research which concentrated on challenging MBIA‘s AAA rating, despite an ongoing probe of his trading by New York State and federal authorities. He was charged copying fees for copying 725,000 pages of statements regarding the financial services company, in his law firm’s compliance with a subpoena.[6] Ackman has called for a division between MBIA’s bond insurers’ structured finance business and their municipal bond insurance side, despite statements from the insurance companies that this would not be a viable option.[7]

He argued that the billions of dollars of CDS protection MBIA had sold against various mortgage backed CDOs was going to be a problem. He also argued that it was not proper for MBIA, which was legally restricted from trading in CDS, to instead do it through a second corporation, LaCrosse Financial Products, which MBIA described as an “orphaned transformer”. Ackman bought credit default swaps against MBIA corporate debt as a way to bet that it would crash. When MBIA did, in fact, crash as the financial crisis of 2008 came to a head, he sold the swaps for a large profit. Ackman reportedly attempted to warn regulators, rating agencies and investors about the bond insurers’ high risk business models. The story of Ackman’s battle with MBIA was turned into a book called Confidence Game (Wiley, 2010) by Bloomberg News reporter Christine Richard.[8] He reported covering his short position on MBIA on January 16, 2009 according to the 13D filed with the SEC.[9]

Bill Ackman is a “slick salesman who does not know much about insurance and certainly doesn’t know much about restructuring secure debt”

If you said Carl Icahn you are incorrect.

The previous statement was made by Mr. Martin Whitman – octogenarian and Chairman of Third Avenue Funds Inc.

During the financial crisis, Bill Ackman was short MBIA. Mr. Whitman took a large long position in MBIA and Ambac after the stocks dropped in the crisis and after Mr. Ackman revealed his short. Not only was Mr. Whitman determined to state that MBIA was worth $35 per share, but he also made particular efforts to insult Mr. Ackman’s research efforts and intelligence.

This article on Dealbook summarizes some of Mr. Whitman’s arguments.

What can we learn from this history?

1) Both parties were convinced they were correct.

2) Both parties took significant stakes in the company in question/backed-up their trades.

3) In the end, only Mr. Ackman was left standing.


CSInvesting: So what are the lessons for us, the mortal, individual investors?

  • First, anyone and everyone can err. Don’t rely on a guru. Do your own work.
  • Second, financial firms can be laden with unforeseen risks based on their dependence on outside capital and ratings.
  • Third, Mr. Whitman underestimated the amount of bad debt and the quality of the assets that the mortgage insurers insured. Knowledge of the Austrian Business Cycle Theory might have helped.
  • Ackman challenged the conventional wisdom and saw the flaw in the ratings game.

I hope you study this case further. Ackman wrote a book about MBIA, The Confidence Game. Read more: http://brontecapital.blogspot.com/2010/07/confidence-game-commentary-on-ackman.html

More Classics: Paths to Wealth https://www.hightail.com/download/bWJvTkZ0WkJtUUVVV01UQw

100 Minds https://www.hightail.com/download/bWJvTkZ0WkJEbUlQWWNUQw

Search Strategy: Copying Others

Search Strategy

If you plan to look through the investment positions of other known investors like Marty Whitman, Michael Price, Seth Klarman, etc., make sure you have as good an understanding or better of the particular company that you buy. Never cease to do your own work or you will neither learn nor probably profit.  Mr. Mohnish of www.pabraifunds.com uses this technique shamelessly. I personally doubt that Mr. Pabrai has a solid grasp of what a franchise is by his investments in Pinnacle Airlines, Exide (XIDE), a battery company, and Lend, a subprime originator. You may be copying others who, in turn, are copying others–a reflexive circle of ignorance and sloth.

An interesting blog post: Trolling through 13-Fs or a Search Strategy: http://classicvalueinvestors.com/i/2012/04/i-am-an-investor-not-an-inventor/

Don’t forget to view other blogs:www.simoleonsense.com and www.greenbackd.com

Enjoy Your Easter.

Search Strategies and Learning from Professional Investors

They called Baruch “the Lone Eagle.” Men turned to whisper as he passed, runs a highly colored account of Baruch at the end of the century, “tall, aquiline, smiling, but uncommunicative among the excited stock dealers.” He was alone. He was always alone. He was deaf to tips, indifferent to advice or information. –Mr. Baruch by Margaret L. Coit

You can learn occasionally from viewing the libraries of money management firms, but never cease to do your own thinking and beware of marketing.

Epoch Investment Partners (“EIPNY”): http://www.eipny.com/index.php/epoch_insights/white_papers

Free cash flow investing:http://www.eipny.com/assets/pdfs/free-cash-flow-investing-04-18-11.pdf

For example, an excerpt from the above white paper, “What sets us apart from the rest of the investing world is our focus on the generation of free cash flow and the allocation of capital. While most traditional value and growth managers use accounting measures like earnings or book value to underpin their process, we believe that the true value proposition of a company lies within its sources and uses of free cash flow. In this way, we approach the investment problem in much the same way as the managers of the very firms in which we invest. It is akin to a capital budgeting decision.”

Epoch wants to walk a dollar of revenue through the financial statements until the generation of a dollar of income to the investor. Good advice for how to analyze certain companies. That method of analysis might not fit a resource conversion investment like an oil exploration company.

Readers of CSinvesting know everything in investing occurs in context. A business growing rapidly and investing heavily in its infrastructure and growth would not show much free cash flow, however capital redeployment would be crucial for success. Wal-Mart in its early growth stages as it built its economy of scale advantage might be such an example.

But for more mature companies like Coke, JNJ, MSFT, etc., those companies will invest in growth but often have more cash than can be redeployed into their business, so following their uses of cash would give you an understanding of management’s capital allocation abilities and/or shareholder friendliness.

If you then look at EIPNY’s filings (13F-HR), you can see whether the companies in their portfolio like Coke, Pepsi, Ingersol-Rand, Praxair, Lab Corp of America, Comcast, Abbott Labs, Amex, Anh-Busch, Aetna, Texas Instruments, and Kimberly Clark match well with their philosophy. If you agree with their approach, then there may be ideas available for you to look at. Just remember that they are constrained by diversification and size with $18 billion under management.

Another fund with an accounting orientation is Mr. Robert Olstein’s fund: http://www.olsteinfunds.com/home.html. See his white papers like Depreciation: http://webreprints.djreprints.com/2664880057465.pdf

Third Avenue Value Fund is more focused on Net Asset Values and high quality assets than just free cash flows. Marty Whitman recently brought on a new co-manager. http://www.thirdave.com/ta/documents/reports/TAF%201Q%20Report%20and%20Letters.pdf

Davis Funds has an education center for investors here: http://davisfunds.com/education/ The Davis funds like Bill Miller’s and Richard Pzena’s firms took a pounding during their ownership of some financial stocks like AIG during 2009. What you don’t understand and can’t value, you should avoid.

An entrepreneur, Sara Blakely, turned $5,000 into $billion. Perhaps she was able to redeploy capital at a high rate for a long time—the power of compounding?  Are there lessons here for the investor?

Short Video on Sara Blakely’s Success in Women’s Undergarments http://youtu.be/7a6wGw_9lk8

Forbes Article: http://www.forbes.com/sites/clareoconnor/2012/03/07/undercover-billionaire-sara-blakely-joins-the-rich-list-thanks-to-spanx/print/

MF Global

For those who have money in a brokerage account, an important read–how funds were vaporized in MF Glboal. Will your account be next?


Imagine for a moment that MF Global was your bank. One day you woke up and discovered that the account holding your college savings was gone. Poof! The money in your retirement accounts and related checking accounts had just been “vaporized.” You go to ask the bank where you money is and you are locked out of the bank while strangers who are not depositors are allowed to enter and take assets from the bank, including the contents of the “safe” deposit boxes. You finally hear from the bank and the authorities, who essentially say that while they can see all the transactions of the bank over the last month, for some reason, there is just no longer any trace of the money, and no explanation of what happened. The funds just “vaporized.” And after a few weeks of minimal information dribbles, you hear the search has gone cold. You are told the money disappeared in a chaotic tsunami of transactions and there is no evidence of any criminal actions. But, if money happens to get found, you might get some of it. Oh, and the contents of your safe deposit box are going to be auctioned off, with only a portion of the funds returned to you (this was the fate of the unlucky souls who held gold and silver bars on deposit in their own name with MF Global). That’s all…talk to you later. Good bye and good luck.

Whitman Critiques Prof. Greenwald’s Value Investing Book.

A reader, the Great Sandesh, alerted me to this. By the way, I am not a fan of Prof. Greenwald’s book, Value Investing — From Graham to Buffett and Beyond written by Bruce C.N. Greenwald, Judd Kahn, Paul D. Sonkin and Michael van Biema. But I do highly recommend his book, Competition Demystified, to learn  strategic analysis.

Whitman discusses the book in his 2001 TAVF Shareholder Letter


There seems to be a general misunderstanding about wealth creation companies in the financial community and in academic circles. First, there is scant recognition of the fact that outside of Wall Street, where one deals with privately owned businesses, the vast majority of economic endeavor involves striving to create wealth in the most tax effective manner. Where control persons have choices, they would rather create wealth by some means other than having ordinary income from operations simply because striving for cash flows or earnings from operations tends to be highly inefficient tax-wise.

Second, in their new book, Value Investing — From Graham to Buffett and Beyond written by Bruce C.N. Greenwald, Judd Kahn, Paul D. Sonkin and Michael van Biema (Greenwald and van Biema are faculty members at Columbia Business School), the authors seem to have trouble identifying, and valuing, net assets. They state, “in the contemporary investment world net-nets are, only with the rarest exceptions, a distant memory.” In fact, though, each of the nine wealth-creation common stocks Third Avenue acquired during the quarter is a net-net by any economic, non-accounting convention, definition of net-nets.

Greenwald, et al define net-nets only by looking at accounting convention, not economic reality. They define net-nets as a common stock available at a price that represents a discount from a company’s current assets after deducting all book liabilities, both short-term and long-term. The problem with this measurement is that for going concerns, much of their current assets are not current assets at all, but rather fixed assets of the most dubious value. For example, Sears Roebuck, like any other retailer, could not stay in business if it did not maintain inventories continually, which in Sears’ case have a carrying value of over $5 billion. In the aggregate, these inventories are a fixed asset for the going concern, not a current asset. Individual inventory items do turn to cash within 12 months and thus are, for accounting purposes, called current assets. In fact, though, Sears’ aggregate $5 billion investment in inventory is a permanent investment, particularly vulnerable to seasonal mark-downs, theft, obsolescence and mislocations.

Contrast this with Forest City’s developed real estate projects. While Forest City’s developed real estate is called a fixed asset, a substantial portion of these assets is really quite current, a source of almost immediate cash through sale or refinancing, without interfering with Forest City as a going-concern. Forest City Common is a true net-net. The same is true for other wealth creation common stocks acquired during the quarter at substantial discounts from readily ascertainable net asset values; — including the probable real estate values in Alexander & Baldwin and Catellus; the probable securities values in Brascan (including real estate), Phoenix Companies, MONY and Toyota Industries; and the probable values of Assets Under Management (AUM) for BKF and Legg Mason.


The back of the Greenwald book describes the investment approaches of a number of highly competent value investors:

— Warren Buffett; Mario Gabelli; Glen Greenberg; Robert H. Heilbrum; Seth Klarman; Michael Price; Walter and Edwin Schloss and Paul D. Sonkin. It’s a worthwhile read. Third Avenue, in its practices, seems to have much in common with these investors. The front of the Greenwald book, though, describes underlying theories about value investing.

These theories seem to have nothing to do with the basic assumptions under which Third Avenue operates. Contrasting the Third Avenue approach with the Greenwald approach ought to be helpful in getting investors to understand the Third Avenue modus operandi.

A major difference between the Greenwald approach and the Third Avenue approach revolves around valuing a company and valuing a security. Greenwald, et al state, “There is general agreement that the value of a company is the sum of the cash flows it will produce for investors over the life of the company, discounted back to the present.” The Greenwald approach is far too general to be useful for Third Avenue. For TAVF, there exist four factors which contribute to corporate value and three factors which determine the theoretical value of a security.

The four elements of corporate value:

1. Free cash flow from operations available for the security holder: Very few companies ever actually achieve such free cash flows on a reasonably regular basis. While for any individual project to make sense it has to return a cash positive net profit over its life, this is not true for most companies (as distinct from stand-alone projects), especially expanding companies. Most businesses consume cash. TAVF likes to invest in the common stocks of those few companies in a position to create cash flows on a regular basis. The principal area where this takes place in the Fund’s portfolio is in money management companies: — BKF, John Nuveen, Liberty Financial and Legg Mason.

2. Earnings: Most prosperous going concerns create earnings, not free cash flows. Earnings exist where a company creates intrinsic wealth from operations while consuming cash. Since most going concerns consume cash, their earnings streams may be of limited value unless such flows are also combined with access to capital markets, either credit markets or equity markets or both. TAVF, in acquiring the common stocks of earnings companies, limits its acquisitions to businesses with exceptionally strong financial positions. This means, most of time, that the companies have far less need to have access to capital markets during any given period than run-of-the mill, less well capitalized, going concerns. More importantly, though, the companies whose issues the Fund acquires have rather complete control over the timing as to when they want to access debt markets or equity markets. Capital markets are notoriously capricious in terms of both pricing and availability. TAVF tries to avoid investing in the common stocks of less well capitalized companies, in part because such issuers frequently are forced to raise outside capital at the most disadvantageous times. Well-capitalized earnings companies whose common stocks were acquired by TAVF during the quarter include Energizer, Trammell Crow, American Power, Applied Materials, AVX, Credence, Electro Scientific, KEMET, MBIA, Nabors, and Vishay.

Most Wall Streeters and most academics, including Greenwald, et al, subscribe to a primacy of the income account point of view and believe that the dominant, and sometimes even the sole, sources of corporate value are flows from operations: — both cash flows and earnings flows. At TAVF, we have a balanced approach. Indeed, we think more corporate wealth is created in the U.S. by the two factors discussed below than by flows, even though frequently there tends to be a close, symbiotic relationship between flows, whether cash or earnings, on the one hand; and asset values and access to capital markets on the other.

3. Resource conversion activities encompass repositioning assets to higher uses, other ownership or control, or all three; the financing of asset acquisitions, the refinancing of liabilities or both; and the creation of tax advantages. These activities take the form of mergers and acquisitions, contests for control, leveraged buyouts, restructuring troubled companies, spin-offs, liquidations, massive securities repurchases, and acquiring securities in bulk through cash tender offers or exchange offers. Within the Third Avenue portfolio, it appears as if some 3% to 5% of the common stocks held are subject to takeover bids of some sort by control investors every quarter. Common stock issues acquired during the quarter which may very well be involved in getting taken over in the years ahead include Energizer, Phoenix, Alexander & Baldwin, BKF, Catellus and MONY, albeit Fund management has never been really good at identifying which companies will be “in play” at any given time in the future.

4. Access to capital markets at super-attractive prices: There seems little question that far more corporate wealth has been created in this country by taking advantage of attractive access to outside capital than by any other single source. The Greenwald book, and indeed virtually all economic literature,  ignores this factor as a source of wealth, or a source of franchise. Unfortunately, as a passive value investor, the Fund does not often get to benefit from super-crazy prices that exist in equity markets from time to time. To benefit from these super-crazy prices as a price conscious value investor, TAVF would have to become a venture capital investor seeking IPO bailouts; something that seems to be outside Fund management’s sphere of competence. Fortunately though, many of the companies in whose common stocks Third Avenue has invested have super attractive access to credit markets where they are able to obtain low interest, long-term, non-recourse financing for major portions of the projects which they build, or in which they invest. Companies whose common stocks the Fund invested in during the quarter, with such attractive access to capital markets, include Alexander & Baldwin, Brascan, Catellus and Forest City.

The language used by all academics, including Greenwald, et al, that securities values are a function of the present worth of “cash flows” is unfortunate. From the point of view of any security holder, that holder is seeking a “cash bailout”, not a “cash flow”. One really cannot understand securities’ values unless one is also aware of the three sources of cash bailouts.

A security (with the minor exception of hybrids such as convertibles) has to represent either a promise by the issuer to pay a holder cash, sooner or later; or ownership. A legally enforceable promise to pay is a credit instrument. Ownership is mostly represented by common stock.

There are three sources from which a security holder can get a cash bailout. The first mostly involves holding performing loans; the second and third mostly involve owners as well as holders of distressed credits.

1. Payments by the company in the form of interest or dividends, repayment of principal (or share repurchases), or payment of a premium. Insofar as TAVF seeks income exclusively, it restricts its investments to corporate AAA’s, or U.S. Treasuries and other U.S. government guaranteed debt issues.

2. Sale to a market. There are myriad markets, not just the New York Stock Exchange or NASDAQ. There are takeover markets, Merger and Acquisition (“M&A”) markets, Leveraged Buyout (“LBO”) markets and reorganization of distressed companies markets. Historically, most of TAVF’s exits from investments have been to these other markets, especially LBO, takeover and M&A markets.

3. Control. TAVF is an outside passive minority investor that does not seek control of companies, even though we try to be highly influential in the reorganization process when dealing with the credit instruments of troubled companies.

It is likely that a majority of funds involved in value investing are in the hands of control investors such as Warren Buffett at Berkshire Hathaway, the various LBO firms and many venture capitalists. Unlike TAVF, many control investors do not need a market-out because they obtain cash bailouts, at least in part, from home office charges, tax treaties, salaries, fees and perks.

I am continually amazed by how little appreciation there is by government authorities in both the U.S. and Japan that non-control ownership of securities which do not pay cash dividends is of little or no value to an owner unless that owner obtains opportunities to sell to a market. Indeed, I have been convinced for many years now that Japan will be unable to solve the problem of bad loans held by banks unless a substantial portion of these loans are converted to ownership, and the banks are given opportunities for cash bailouts by sales of these ownership positions to a market.

Greenwald, et al have a monolithic approach to analysis using three tools to analyze all companies — replacement cost of assets, earnings power, and franchise value. TAVF, on the other hand, analyzes different businesses differently, ranging from analyzing strict going concerns by giving heavy weight to earnings power, as for example AVX or Nabors; to analyzing businesses which are really investment companies masquerading as something else. Here, heavy weight is assigned to readily measurable asset values as well as an appraisal of managements’ abilities to increase these net asset values over the long-term. Catellus, Forest City, Hutchison Whampoa, Investor AB, and Toyota Industries are examples of such situations.

Greenwald, et al, like almost all academics, consciously or unconsciously, look at companies as substantively consolidated with shareholders. This tends to be a non-productive approach almost all the time. At the Fund, companies are analyzed as stand-alones or parent-subsidiary. The common stock for TAVF is a different constituency from the company, or its management — separate and apart.

Most academics pay much attention to an artificial calculation: — the Weighted Average Cost of Capital (“WACC”). WACC measures the cost of outside capital to a company as a blend of after-tax interest rates and capitalization values for common stocks based on references to current common stock prices in public markets. Interest is, of course, a cash cost, while capitalization rates for publicly traded common stocks have nothing to do with most companies since they do the bulk of their equity financing by retaining earnings rather than by selling new issues of common stock to the public. More importantly, though, WACC is not very meaningful for companies who have rather complete control of the timing as to when, or if, to access capital markets. Such companies will access outside sources of capital at the time WACC type pricing is most attractive to them. These are the companies in whose common stocks TAVF invests. A contemporaneous calculation of WACC for these companies tends to be not meaningful.

Greenwald, et al discuss risk in general but do admit that relative price volatility in the securities market may not be an adequate measure of risk. For TAVF, the word risk cannot be used without putting an adjective in front of it. There is no general risk. There is market risk, investment risk, currency risk, terrorism risk, inflation risk, failure to match maturities risk, commodity risk, etc. The Fund tries to avoid investment risk; i.e., that the companies in whose securities we have invested will suffer permanent impairments. The Fund ignores market risk; i.e. that the trading prices of the securities held will fluctuate.

Greenwald, et al assume, quite properly, that an overpriced common stock will attract new competition. Greenwald, et al, however, ignore something that may be much more important. An overpriced common stock, in the hands of a reasonably competent management, is frequently a most important corporate asset. Much of the small-cap high-tech investments of the Fund are in companies which were able to build up huge cash positions by taking advantage of the crazy prices that existed in IPO markets in the late 1990’s.

I suggest readers heed Mr. Whitman’s comments since he is a practitioner rather than an academic. Also, his comments make sense.

Marty Whitman Comments on How TAVF Differs from Graham & Dodd

TAVF’s 4th Qtr. Letter to Shareholders

The letters from Marty Whitman of TAVF are worth the effort to read for buyers of non-franchise companies.


This is an interesting read on how Marty Whitman differs from the principles of Graham and Dodd (“G&D”). He says analysts at Third Avenue Value Fund (“TAVF”) think like owners, like private acquirers or like creditors, emphasizing elements of fundamental finance that differentiate TAVF from G&D.  For example, G&D emphasizes the importance of dividends for outside passive minority investors (“OPMI”). In contrast,  TAVF looks instead at the corporation optimizing its uses of cash. In general, corporate cash can be dispensed in three areas:

  1. Expand assets
  2. Reduce liabilities
  3. Distribute to equity owners
  •      Via dividends
  •      Via stock buybacks

There are comparative advantages and disadvantages for dividends and buybacks, which are never discussed by G&D because they only mention the stock buyback alternative as it relates to stock options for management.

There is no discussion by G&D of stock buybacks as a method of enhancing a common stock’s market price over the long run, giving management the flexibility to retain cash in troubled times, and also increasing the percentage ownership interest of each non-selling stockholder.

VALUATION lesson in fundamental finance:

GAAP recognizes three classifications on the right hand side of the balance sheet: liabilities; redeemable preferred stock; and net worth.

In economic fact, there are many liabilities that have an equity component. It is up to the analyst to decide what percentages of certain liabilities are close to equivalent to payables and what percentage are close to equivalent to net worth. Take the liability account, deferred income taxes payable, in a going concern. If the cash saved from deferring income taxes are invested in depreciable assets, the tax may never become payable.

However, the deferred tax payable account can never be worth as much as tax paid retained earnings (part of net worth) because the tax may someday become payable, especially if the company engages in resource conversion activity, such as being acquired in a change of control transaction. So, maybe there is as much as a 90% equity value in the deferred income tax accounts payable. On the other hand, deferred income taxes payable can never be as much of a liability as current accounts payable or interest bearing debt. Maybe, at the maximum, there is a 5% to 10% equity in the deferred tax payable account. GAAP is based on a rigid set of rules; it is no longer principles based. The appraisal of an account, such as deferred income taxes payable, is in the province of the users of financial statements, not the preparers of financial statements.

And another lesson:

Most OPMIs involved with common stock believe in substantively consolidating the company with its common stock owners. They believe they are buying General Electric (“GE”), not GE common stock. In fundamental finance, the company is a stand alone, separate and distinct from its shareholders, its management, its control group and its creditors. Essential for understanding the dynamics of many companies are not only consolidated financial statements but, also, how financial statements are consolidated. In many cases, it is important to know which liabilities of particular parents or subsidiaries are assumed or guaranteed by other companies which are part of a consolidation.

Try to read Marty’s letters and the other managers of Third Avenue Value Fund each quarter, especially if you like asset-based investments.

QUIZ. Good Learning Resources: Net Nets, Liquidations and Special Situations

Net/Nets, Liquidations and Special Situations

I have a large library on special situation investing and eventually all will be posted or in the value vault. However………

The near-term focus of this blog will be strategic logic and valuation, but I want  investors who are starting their journey to have access to resources for asset-based (non-franchise) investing.

You can learn how to invest just as if you were analyzing a company. Start with the balance sheet and work down from simple to complex.  Cash is a more solid asset than a tax asset, for example.

But as you read the following resources always be thinking as a business person. Ask what is the economic reality of this asset or liability.


Can YOU name a fixed asset on a balance sheet that really is economically the same as a current asset, almost as liquid as cash?  Conversely, can you name a situation where a current asset is less liquid than a typical fixed asset?   Hint: Marty Whitman of Third Avenue Value Fund has preached this lesson often. (see links below).

Please take no more than 20 seconds to answer the first question. Prize: A tip from Jim Cramer on CNBC. C’mon, you can’t expect to win much on such a simple quiz!

This document has several excerpts from Graham, Klarman and Whitman on liquidation values.  A good primer on liquidation analysis.


If you are going to pursue asset-based investing then you need to study Marty Whitman. Read his first book (not a breezy read, though)


And his shareholder letters: http://www.thirdavenuefunds.com/ta/shareholder-letters-mf.asp

If you are a shareholder or a student you can call his office and ask for his book of shareholder letters: 1990 to 2005.  Highly recommended.

Marty Whitman on value and corporate governance

You can learn from blogs that focus on this type of investing.

My favorites: www.greenbackd.com (excellent. If you read all his posts and analyze past investment ideas you will have a solid grounding in net/nets.)

For podcasts on investing and net/nets from a self-taught investor: www.gannononinvesting.com

Also: http://www.manualofideas.com/blog/



Another good overall resource:


A reader kindly offered to share his resources here: http://motiwalacapital.com/blog/

And he suggested viewing these videos and materials: http://www.bengrahaminvesting.ca/resources/videos.htm

You are on your way………….