MARTIN Whitman, the 85-year-old chief investment officer of Third Avenue Fund, who once described it as "better than the toll booth on George Washington Bridge", lost 45% of his fund last year.
Prior to 2007, Whitman, who is a legend at picking over the balance sheets of troubled companies in search of hidden treasures, had achieved a track record of approximately 17% a year going back to 1990.
Despite having lost 24% of the fund's value during 1998 and 1999, Whitman - who calls himself the "safe and cheap" investor - only buys at a "big" discount to net asset value.
His definition of net asset value being what a company would sell for in a takeover or on auction.
So, how much of a discount? "Don't pay more than 50%-60% of what a business is worth," he advised in a 2006 interview.
"It is . crazy to pay more than 60c on a dollar for noncontrolling interests in businesses. Outsiders always face agency problems."
Besides cheap, Whitman also wants a strong balance sheet; competent, shareholder-oriented management as well as "understandable and honest disclosure documents". Balance sheets are much more important than the income statement, he says.
"Security analysis would be simpler if one focuses on the balance sheet while placing no emphasis on the income statement and earnings estimates."
Whitman has developed the following rules of thumb for valuating various companies :
n Financial services: book value.
n Small banks: 80% of book value.
n Insurance: adjusted book value.
n Real estate: independent appraisal value.
n Operating companies: 10 times peak earnings or less than net asset value.
n Tech companies: twice book value, less than 10 times peak earnings, twice revenue and more cash than liabilities.
Whitman also doesn't believe in traditional growth investing . "We are growth investors, too," he says. "We buy into the kind of growth that is not generally recognis ed while most other growth investors buy into generally recognised growth and have to pay up for that." The key is to figure out the value of future growth.
"Many people on Wall Street know the price of everything but the value of nothing."
In a recent Shareholders Letter, Whitman says there are at least three lessons investors should have learned from the 2007- 08 debacle:
n Not to invest in the common stocks of companies that need continuous access to capital markets, especially credit markets. "The short sellers have become too powerful."
n Not to borrow money to finance portfolio holdings. "Prices . are just too capricious to permit this activity to be undertaken safely."
n Fund redemptions interfere with portfolio management, "forcing fund managers to sell precisely when they should be buying".
MICHEL PIREU: firstname.lastname@example.org