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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
HERE'S WHAT COUNTS IN THIS BUSINESS....
OID: On the other hand, I see no moat. The area seems to consist mostly of cyclical commodity businesses.
Whitman: Yep.
OID: Plus, their customers are other businesses - many of whom are far larger and nearly all of whom, by necessity, are extremely price sensitive. It sounds like Berkshire Hathaway old suit liner business...
Whitman: Go on.
OID: And don't these companies always run the risk of one or more customers achieving sufficient clout to make their own equipment, transfer the leading share to a competitor or, at the very least, squeeze prices and profits down to razor-thin levels?
Whitman: Don't stop. I can tell you're on a roll.
OID: And Bob Rodriguez, the chief investment officer of First Pacific Advisors and portfolio manager of FPA Capital, suggested to us earlier this year that a recession is overdue and that it probably wouldn't be kind to semiconductor equipment companies.
Whitman: Yep. We read that.
OID: For all of those reasons, aren't these companies what Bill Ruane of Sequoia Fund might refer to as "trading sardines" as opposed to "eating sardines"?
Whitman: I don't think so. I think the industry's going to be so good and that the good companies are going to do so well - spectacularly well, in fact - that they are "buy-and-hold". So I think everything you've said is right, but I put it all down as irrelevant.
OID: I beg your pardon.
Whitman: Based on my own personal experience - both as an investor in recent years and an expert witness in years past - rarely do more than three or four variables really count. Everything else is noise.
OID: That's easy for you to say. If you had 64 pages...
Whitman: We think only three or four things count in this industry, too. What are those three or four things here? The first is that we think there's going to be explosive growth over the next decade and beyond. Why? First of all, semiconductors are no longer only used in computers. They're becoming ubiquitous - getting incorporated in everything from telephones to televisions to toys to cars and even credit cards.
OID: Even greeting cards, for God's sake.
And Rodriguez told us that high definition TVs utilize something like 500 microprocessors each - versus less than 10 in present day Tvs.
Whitman: Yep. The whole world is going "digital". There's no question about it. And that digital revolution in telecommunications, media and so forth is another reason why we think that it's very likely that there's going to be explosive growth in the demand for semiconductors and, therefore, semiconductor equipment.
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