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MJ WHITMAN ADVISERS
Third Quarter Commentary
September 30, 1996
Commentary

Commentary

The Art and Science of Good Enough Investing
The Buy Side

MJ Whitman Advisers' analysis of the value of a common stock stops at the point where we arrive at an opinion as to what we think a company is worth as a private business or a takeover. In contrast, all other types of analysis of passive investments of which we are aware, from Graham & Dodd fundamentalism to academic finance, have as the goal of their analysis a determination of the price, or prices, at which they believe the security will sell as it is traded on a stock exchange or on NASDAQ. We do not try to predict stock or bond prices or stock or bond market levels, because we are unable to do so. Further, we think the same is true for almost everybody else in the financial community.

Ignoring the prices at which a security might sell is the very essence of good enough Investing for a passive investor such as MJ Whitman Advisers. We know enough about the price mechanism prevailing in securities markets to conclude that, however low we think prices can go for a security held in the portfolio, those prices can in fact, go a lot lower. Provided that the business seems to have staying power, and the security's price seems to represent a discount from private business value, MJ Whitman Advisers will average down as part of good enough investing. No attempt is ever made, nor could it be made while ignoring stock market factors, to buy at, or near, a bottom.

Control investors, from Warren Buffett to Richard Rainwater to Carl Icahn, are very MJ Whitman Advisers-like. They focus on underlying business values and do not clutter up their analysis with stock market considerations such as forecasting a market outlook, an interest rate outlook, predictions of macro factors such as Gross Domestic Product or unemployment rates. Like MJ Whitman Advisers, in company analysis they worry little, or not at all, about near-term earnings trends, dividend rates, sponsorship, industry identification, or price:earnings ratios. Rather, the focus is on long-term outlooks and the ability to finance operations and transactions.

In some other types of passive analyses, private business value is one component of an overall analysis. This seems true of Graham & Dodd; but here, what a business might be worth is only a very small consideration within the analytic context. Major emphasis is on stock market factors such as reaching judgments about the outlook for the general stock market and interest rates simply because the goal of the analysis is to reach a judgment about where the common stock of a going-concern will sell. Rarely will an analysis focus on viewing a business as a takeover candidate.

The vast majority of stock market analysis, though, involves considering a whole host of other factors and ignoring completely any analysis of what a business is worth. These other investment styles go under the names of momentum investing, IPO investing, trading, technical-chartist approaches, and academic finance as embodied in the Efficient Market Hypothesis ("EMH"). In EMH the world is turned upside down. Here, private business value is determined by equating market value, as determined by stock market prices, with private business value. Bizarre!

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