The investment world recently lost a legend when Marty Whitman, a money manager and financial theorist, passed away on April 16th at the age of 93. Whitman was a pioneer in the field of deep-value investing. His insights have guided several generations of investors.
Whitman referred to his approach as “safe and cheap” investing. Like many value investors, Whitman was critical of many of the finance concepts which emerged from academia in the latter half of the 20th century. He was particularly critical of the efficient markets hypothesis (EMH), a theory which holds that stock prices accurately reflect all available information. Whitman viewed investing as an “offshoot of control investing” and defined a bargain stock as “an acquisition price for a common stock that appears to represent a substantial discount from what the common stock would be worth were the company a private business or a takeover candidate.” This view was incompatible with the EMH: “To assume equilibrium pricing for all purposes and all markets is to put yourself in a straightjacket precluding your undertaking any analysis of most of what goes on in the financial community – M&As, IPOs, LBOs, and contests for control.” Whitman, however, did acknowledge the general efficiency of markets, he simply didn’t believe the mechanism was immediate: “All markets tend towards efficiency. Most markets, though, do not achieve instantaneous efficiency.”
The EMH was not the only investment theory in Whitman’s sights. He was also highly critical of what he labeled “Graham and Dodd fundamentalism.” It may sound odd for Whitman as a self-described value investor to criticize the authors of Security Analysis, a book many consider the foundational text of fundamental stock analysis. But Whitman recognized that many of Graham and Dodd’s early methods, particularly their focus on “net-net” stocks (stocks selling for less than the company’s current assets minus all liabilities) needed updating. Whitman believed that analysts should primarily focus on the balance sheet but felt that long-term assets, such as real estate, should not be excluded from the calculation of a company’s per-share net asset value (NAV).
Whitman successfully put his theories to work in managing the Third Avenue Value Fund from 1990 until 2012, where he achieved average investment returns of 12 percent versus 9 percent for the S&P 500 Index. However, the fund has faltered since Whitman’s retirement.
Whitman was generous with his knowledge and will be most affectionately remembered as a teacher. He taught courses at Yale, Syracuse, and Columbia. He also authored and co-authored several books, all of which are still in print.