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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
Also, basic advances in semiconductor technology - for example, the use of smaller and smaller circuits to achieve increased circuit density - will in and of itself result in semiconductor manufacturers having no choice but to replace and/or re-equip the equipment in their facilities simply in order to stay competitive. They have to ante up for the latest tools as a cost of doing business.
OID: It's hard to argue with you there.
Whitman: The second important factor, we believe, is that the industry has always been highly cyclical and characterized by a recurring series of booms and busts. And we don't expect that to change. We believe it's a primary and permanent characteristic of the industry which anyone investing in the area should anticipate and incorporate in their security selection.
Third, the industry is very venture-capital-like - in other words, excruciatingly competitive, characterized by rapid change and a high incidence of both strike outs and home runs. Thus, it's highly management-skill-intensive.
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PORTFOLIO REPORTS estimates the following were
Third Avenue Small-Cap Value Fund's largest equity
purchases during the quarter ended 10/31/98: 1. EVANS & SUTHERLAND COMPUTER 2. FINANCIAL SECURITY ASSURANCE HLDGS 3. FBL FINANCIAL GROUP CL A 4. DELTIC TIMBER CORP 5. CAPITAL RE CORP 6. ELECTROGLAS INC 7. KOGER EQUITY INC 8. SPEEDFAM INTL INC 9. HOLOGIC INC 10. CP CLARE CORP
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And we expect that characteristic to persist, as well.
Therefore, even though we believe that the industry is going to experience explosive growth, we don't believe that every company will. And therefore, we expect merger and acquisition activity on a relatively large scale to occur within the industry.
So if we were smart enough, we'd just buy the ones that are going to be the winners that are cheapest today. But, sadly, we're not that good. Even worse, we don't know which ones are going to be the losers. And in fact, we don't believe anyone does. We believe the industry is that tough and unpredictable.
OID: Like I said...
Whitman: So we would rather not have to diversify - since diversification is a surrogate for knowledge, control and/or price consciousness. And if we could predict the future of these companies, we'd be less diversified. However, we can't. So we have to diversify.
Also, given those uncertainties, we only want to own companies that we think possess incredible staying power. And those are the ones we're buying. For example, I'm not aware of any semiconductor equipment company we own that doesn't have cash exceeding its total liabilities.
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