Marty Whitman: ‘FF’ Superior To Ben Graham [Third Ave Annual Report]

Marty Whitman’s Third Avenue’s annual report is out. The legendary value investor has some interesting comments. He focuses on the methods used by the fund, which he terms ‘fundamental finance’. Whitman notes the differences between Ben Graham’s method of value investing and FF. Below is a brief excerpt followed by the full document in scribd:

Dear Fellow Shareholders:

The Third Avenue Management (“Third Avenue”) mode of operation is to emphasize Fundamental Finance (“FF”), rather that trading strategies. FF encompasses Value Investing, Control Investing, Distress Investing, Credit Analysis and First and Second Stage Venture Capital Investing. Third Avenue is, of course, primarily a Value Investor that is a passive, non-control investor.

It seems to me that almost all other approaches to investing and academic finance ranging from Principles of Corporate Finance by Brealey and Myers to Security Analysis: Principles and Techniques by Graham, Dodd and Cottle (“G&D”) to tracts on trading techniques focus on forecasting and explaining short-run market prices, especially on prices at which securities are traded in markets populated by Outside Passive Minority Investors (“OPMIs”). In sharp contrast, FF focuses strictly on explaining and understanding commercial enterprises and the securities they issue.

To me, short run market prices in OPMI markets are “random walks” except for the special cases of “sudden death securities”, such as options, warrants, certain convertibles and risk arbitrage situations where there will be relatively determinant workouts in relatively determinant periods of time. As a consequence of the 2008 economic meltdown an FF approach to investing became more relevant, and MCT and G & D approaches seem to have become less relevant.

Scribd:

Third avenue fund 2012 Annual Report