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April 22, 2004
The Bottom Line
7
Profiles in Investing by Eli Rabinowich
Martin J. Whitman: Economic vs. Academic Reality
ER: How did you get started in the investment business? MW: I was in graduate school at Princeton and I realized I wasn’t cut out to be an economist - I couldn’t make a living. In 1950, I was hired by Shearson Hamill to be a research trainee. I was in research for four years and their investment banking division for two years. I then spent a few years working for the Rosen
April 22, 2004
The Bottom Line
7
Profiles in Investing by Eli Rabinowich
Martin J. Whitman: Economic vs. Academic Reality
ER: How did you get started in the investment business? MW: I was in graduate school at Princeton and I realized I wasn’t cut out to be an economist - I couldn’t make a living. In 1950, I was hired by Shearson Hamill to be a research trainee. I was in research for four years and their investment banking division for two years. I then spent a few years working for the Rosen
Copyright:
Attribution Non-Commercial (BY-NC)
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Scarica in formato PDF, TXT o leggi online su Scribd
April 22, 2004
The Bottom Line
7
Profiles in Investing by Eli Rabinowich
Martin J. Whitman: Economic vs. Academic Reality
ER: How did you get started in the investment business? MW: I was in graduate school at Princeton and I realized I wasn’t cut out to be an economist - I couldn’t make a living. In 1950, I was hired by Shearson Hamill to be a research trainee. I was in research for four years and their investment banking division for two years. I then spent a few years working for the Rosen
Copyright:
Attribution Non-Commercial (BY-NC)
Formati disponibili
Scarica in formato PDF, TXT o leggi online su Scribd
Martin J. Whitman: Economic vs. Academic Reality ER: How did you get started in the it should be geared towards creditors investment business? not stockholders. A creditor needs MW: I was in graduate school at to look at what’s in the business and Princeton and I realized I wasn’t cut how the business needs to perform out to be an economist - I couldn’t to get its money back. One of the big make a living. In 1950, I was hired issues in accounting now is whether or by Shearson Hamill to be a research not companies should expense stock trainee. I was in research for four years options. From a creditors point of and their investment banking division view there is just a world of difference for two years. I then spent a few years between cash payments and the issuance working for the Rosenwald family of of common stock. They ought to go Sears Roebuck fortune where we did back to the old days where financials both passive and control investing. statements where basically prepared for Rosenwald was a great education. creditors. You have an impossible task if In the early seventies I wanted to go you think you can make GAAP relevant into business for myself and so I did for stockholders. And by stockholders I stock holder litigation and bankruptcy, mean speculators who trade in and out two areas which no self-respecting of securities. investment banker would then touch. We did ok in those areas and in 1984 we ER: In your writings you seem to did a hostile takeover of a closed-end very dismissive of WACC… trust called Equity Strategies. MW: Oh yeah. In order for WACC to In those days it was a lot easier to do a make sense theoretically you need to takeover. The real value in taking over assume the company has unfettered an investment company was, and is, access to the capital markets. And getting the management contracts. After that is just not true. Most companies we got control of Equity Strategies we finance their operations from retained open-ended it and used it to buy out the earnings. The cost of retained earnings bank debt of Anglo Energy which a few has nothing to do with the market price years later emerged from bankruptcy as Vital Statistics of common stock. Nabors Industries, the world’s largest • Co-CIO of Third Avenue Management LLC land drilling oil service company. • Professor Yale School of Management ER: What are you sell criteria? It was a spectacularly successful • MA, New School for Social Research MW: We never sell. Our whole investment. At this time I discovered technique works much better on the what a license to steal the mutual fund • BS, Syracuse University buy-side. Since we continue to attract business was – it was like having your new money there is very little pressure own toll booth on a bridge. So in 1990 25 years and I even taught one year in what your income or asset value is any to sell. We sell in the open market when I started up the Third Avenue Fund and Columbia’s Executive MBA program. more than the Internal Revenue code things become grossly overvalued. We now we have a little bit over $8 billion. It’s unbelievable how bad academic does. GAAP defines current assets as are just not that good at selling when finance is. When academics talk about assets that can be converted to cash things are moderately over priced. We ER: Has it gotten harder to invest as risk they mean market risk - whether the in less than one year and arbitrarily also sell when we make a mistake. you’ve gotten much bigger? security is going to fluctuate in price. classifies certain assets as current and Mostly we sell when our companies get MW: Yes and no. We still do a fair They are talking about beta, alpha and others as fixed. If Kmart has $3 billion taken over. Most of our sales are not to amount of distress investing as a all that baloney. I would say that that is in inventory, it can only liquidate its the market. I’ve been doing this for a creditor and boy is that a tough a very valuable concept if you are a day- inventory if it goes out of business. long time and I’ve held securities for business if your not big enough to be an trader or are fully margined up. We are Inventory in retail is a fixed asset of the three years and sold them after they’ve important player. In smaller deals, like most concerned about investment risk worst type. Not only is it permanent in doubled only to see them triple over the Haynes International, we strive to own and properly evaluating management. the aggregate, but it’s hard to value and next six months. When you don’t know or otherwise tie-up fifty percent of the is subject to shrinkage and style change. what you are doing, doing nothing is the class. For example, we are in a control ER: So how do you manage risk? To call it a current asset is not realistic. best course of action. group at Kmart which is a several MW: Many investor use diversification Retail inventory is only a current asset hundred million dollar position. to manage risk, but diversification in the case of liquidation not in the case ER: In your estimation what it is a surrogate, and usually a really of a going concern. On the other hand if separates good investors from great ER: So your size gives you an poor one, for knowledge, control and a company owns income producing real investors? advantage over smaller funds? price consciousness. We use some estate and has triple A tenants with long- MW: Great investors all think like MW: Absolutely. I would hate to be diversification because we are not term leases in class A office buildings, control people or are control investors in this business riding the coattails control investors but above all we then it can easily pick up the telephone like Buffett. of somebody else. Distress is a are very, very price conscience. Third and sell the properties or refinance confrontational business. Avenue Value Fund has about $3 billion them. The company can quickly get the ER: What advice do you have for ER: Do you typically buy the most and we own approximately 90 common cash out. It may be called PPE but it is graduating students? secured debt? stocks. The average other fund of the a much more current asset than Kmart’s MW: I would suggest going to work MW: We will usually try to buy the same size will own 300 or 400 stocks. inventory. So we define current assets for a bulge bracket investment bank, most senior level of debt which will as assets that are readily liquefiable. because there you combine know who participate in the reorganization. ER: You’ve been quoted as saying Using this definition we certainly do with know how. There are worst things that it is still possible to find Ben find companies which are trading below in life than being a Goldman Sachs or ER: You have some fairly specific Graham’s “net-nets”, is this still their economic ‘net-net’ value. First Boston alumnus. views on risks which are perhaps true? not widely known to business school MW: Yes. However we need to realize ER: How would you change GAAP to ER: Thank you very much Mr. students can you talk about them? that GAAP is not really reality. It is make it useful? Whitman. MW: I’ve taught at Yale for more than not economic truth. It doesn’t tell you MW: In order for GAAP to be useful