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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
But let me answer you another way: Value investors deal in probabilities, not predictions - because the future is generally unpredictable. And however much or little stock prices have gone up or down recently, it's nothing more than random walk. If you pay attention to the stock market, you'll go crazy - because it truly defies reason.
OID: That may partly explain my state of mind.
Whitman: The primary way that an investor can compensate for uncertainty is with pricing. Low prices put the odds on your side. High prices put them against you. That's nothing more than plain Graham and Dodd.
One measure of valuation, of course, is the multiple of price-to-book - simply stock price divided by book value. Unfortunately, book value in and of itself doesn't mean a whole lot for most companies because you have to adjust that book value up or down on a case-by-case basis to assess the resources you get relative to the price you pay.
But for an index, I think the price-to-book multiple is a pretty good measure as-is. Therefore, let me give you the price-to-book multiple of the Dow Jones Industrial Average at year end 1974 and a few other points in time:
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Date Price to Book |
OID: Are you trying to scare us or what?
Whitman: That isn't my intention. However, clearly, if you buy the Dow Jones Industrial Average, or almost any other broad index today, you're accepting very lousy odds. They're stacked pretty heavily against you - because you pay an awful lot relative to the resources that you get.
WE THINK THESE THINGS ARE TERRIFIC BARGAINS.
OID: And presumably, these statistics relate somehow to your semiconductor equipment companies...
Whitman: They do. The price-to-book multiples of our semiconductor equipment companies contrast starkly with that of the Dow Jones Industrial Average and most other broad indices. For example, as of December 17th, Silicon Valley Group, C.P. Clare, Speedfam International and FSI International all sold at discounts to book value of 40%, 29%, 19% and 20%, respectively I- in other words, at price-to-book multiples of 60%, 71%, 81% and 80%].
OID: Those sound mighty cheap, all right.
Whitman: They're very cheap - because not only are they trading at very low multiples of book, but they're also trading at very low multiples of hard book. There are virtually no intangibles whatsoever on the balance sheets of any of these companies.
But rather than tell you about these companies myself, let me bring in a couple of my associates.
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