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THIRD AVENUE FUNDS'
Page 1 of 19
CURTIS JENSEN & YANG LIE
A long-time proponent of buying securities that he terms "safe and cheap" as a means
of achieving high returns without incurring high risks,
Third Avenue's
Marty Whitman
has demonstrated the benefits of his approach - first at Equity Strategies Fund and, more recently,
at Third Avenue Value Fund.
For example, before withholding for potential tax liabilities, Equity Strategies Fund's
shareholders earned a compound return of 18.7% per year after all fees and expenses during the
nine years ended December 31, 1993.
IF YOU CAN'T PREDICT THE FUTURE, STACK THE DECK.
BUT THE BROAD INDICES ARE STACKED AGAINST YOU.
OID: In your conference call, I believe you said that the bargains you've been finding
recently remind you of those that you were finding in 1974.
Marty Whitman: That's right.
OID: With most stock prices up since then, I imagine that comparison would no longer
apply.
Whitman: Actually, I think it does.
OID: How can that be?
Whitman: Well, we don't buy indices. All I know is that
we're finding terrific bargains in selected sectors. We've been buying some mortgage-backed
securities and junk bonds, for example, at absolutely fantastic prices. For example, we were
buying Imperial Credit Mortgage
down around $7 per share when its hard book value on a mark-to-market basis was more than $14 and
it had almost no borrowings outstanding.
OID: And where's that one trading today?
Whitman: Today, it's trading slightly north of $9.50 - or less
than 70% or so of hard book. So I think it clearly remains a 1974-style bargain.
And we were buying junk bonds - believe it or not, convertibles
- yielding 30% to maturity. Granted, that opportunity's receded a bit. Today, there's only one
that we're buying. And its yield-to-maturity is down to 25%.
A number of real estate securities also continue to trade at depressed
prices - at discounts of 30-50% from their appraised value - including
Forest City Enterprises,
Koger Equity,
Alexander and Baldwin,
Commercial Equity, Catellus
and Alico.
OID: We don't mean to look a gift horse in the mouth, but are discounts of 30-50%
1974-style bargains?
Whitman: I think they're compelling. However, if they aren't at
1974 prices, they're certainly at 1982 prices. But if it's 1974-level prices that you're after,
we should tell you about some semiconductor equipment companies.
OID: How can that be? I read somewhere that the average stock in the group that includes
that sector had risen 67% over a recent 8-week period.
Whitman: It's been unbelievable, all right. I can't give you the
statistics for the sector as a whole. However, it's true that the semiconductor equipment segment
of our portfolio has risen 54% since October 15th.
OID: On the other hand, an associate with better genes tells me that the sector is actually
down for the year...
Whitman: I'll have to rely on your associate there. But our
semiconductor equipment stocks as a group aren't up very much from our cost. We've invested
approximately $288 million in the group and their market value at their current prices is around
$300 million. So as a group, they're not up materially from what we've paid.
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