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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
OID: Certainly, investors can resort to diversification and/or staying power to offset a lack of knowledge. But couldn't you also just pass on the area?
Whitman: We could. But as I said earlier, the valuations in this industry are very attractive. And given the explosive growth in demand that lies ahead, most of these companies are venture-capital-like investments. Only they have two big advantages over venture capital:
First, their prices are far better. I've already given you an indication of their valuations relative to book value. Well, they're also very cheap relative to past peak earnings. For example, three of the four companies that I mentioned earlier are trading for between 5-1/2 and 8-1/2 times their past peak earnings. And one - Lam Research - is trading around 4-1/2 times its past peak earnings.
And we're very confident that the next earnings peak for most of these semiconductor equipment companies is going to be higher than their last peak - a lot higher.
OID: Would you like to hold on while I call my broker or would you prefer that I call you back?
Whitman: And besides their returns being higher, more often than not, they're also better companies - much more solid than most start-ups.
OID: 50 despite all of the negatives, the stock market is offering you a risk/reward ratio that you can't resist.
Whitman: That's right. And that's what counts. The immediate earnings outlook and predictions about how long the current industry depression will last is just noise and irrelevant to what we do as buy-and-hold investors.
OID: So much for my next two questions...
FAB BUSINESS IS FABULOUS, CHIP MAKING AIN'T....
OID: But why semiconductor equipment companies rather than semiconductor manufacturers or some other equally unfathomable high-tech company?
Whitman: To me, the semiconductor equipment industry is more understandable, for example, than semiconductor manufacturers or computer manufacturers. And I'm more comfortable with these companies than I am with all of the poor schmoes who have to go head-to-head against Intel. We also own some software companies that we think are properly situated. And we've put together a little portfolio of medical device manufacturers on much the same theory. We just don't have the same discomfort owning those that we might owning Lattice Semiconductor, National Semiconductor or Micron Technology.
Lie: I agree. Semiconductor equipment companies tend to be concentrated in niches - most often based on proprietary technologies. Semiconductor manufacturers, on the other hand, tend to be exposed to competition from the big players. And, of course, it's hard for smaller players to compete against gorillas like Intel.
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