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Hedge Funds with Stock Symbols

By Tom Dyson, publisher, The Palm Beach Letter
Monday, December 19, 2005

Here’s how Steve described Marty Whitman to me the other day...

“He’s crazy, and he takes gigantic risks... well, actually he’s not crazy at all. And those gigantic risks, they are among the safest investments you can make. They just seem crazy when Marty buys them.”

Marty Whitman is manager of the Third Avenue Value Fund. He’s been around the markets for 40 years. And he’s been the portfolio manager of this fund since inception.

In last Friday’s column, we explained how index investing had become a victim of its own success. If you want to own a mutual fund, we advised, avoid the trendy index and closet-index funds in favor of the true stock pickers... or as we like to call them, “hedge funds with stock symbols.”

The Third Avenue Value Fund is one of these funds.

I’ll get to Marty’s strategy in a moment. Before I do, I want to mention two other important features.

First, Marty set up the company himself. He’s the boss. In the age of the closet indexer, this is important. No one makes him conform to his peer group. In other words, he answers to the market – and nobody else.

Secondly, he recently signed a new long-term contract, so he’s not going anywhere on us.

Marty’s motto is simple: “safe & cheap.”

When he says safe, he means he only buys investments with a strong financial position. He defines this as “an absence of liabilities” along with “high-quality, saleable assets.”

When he says cheap, he means cheap. He wants to pay less than what a private buyer might pay for control of the business. He says he tries not to pay more than 50% of what he thinks the investment is worth.

Distressed debt is one of vehicles Marty uses... it’s the reason they call him a “Vulture Investor.” He buys up the debts of fallen companies like WorldCom, Kmart, Qwest Communications, and USG. Marty usually has about 15% of his fund in distressed investments.

Why should we be interested in the debts of corporate wrecks like these? After all, aren’t they bankrupt?

That’s the beauty of distressed debt. Distressed companies have to pay extraordinarily high interest rates on their bonds – often in excess of 20%. But the best part is, if the company fails to meet the interest payments, the bondholders inherit the company and all of its under-priced assets.

Investing in a bankrupt company may appear to be risky, but as long as your homework is sound, you can’t lose.

Undervalued real estate is another of Marty’s favorites. It makes up 12% of his portfolio.

Marty buys stocks like Tejon Ranch (TRC). Tejon owns the largest private chunk of land in California. It owns 270,000 acres - just sixty miles north of Los Angeles, along I-5.

In 1999, Whitman appraised this land at $5,000 an acre. That would mean the value of Tejon’s land alone is $1.35 billion... at 1999 prices! However, the market value of Tejon’s stock, in 2005, is only $685 million – nearly a billion dollar difference.

Tejon is just one of many real estate bargains Whitman owns in his fund. Two of his other big real estate holdings are Alexander & Baldwin (Hawaii) and St. Joe (Florida coast)...both trading at over 50% discounts to the value of the land alone.

All his investments have the same profile... he buys things so cheap, with such intrinsic value, that the downside is limited. In most cases, he’s buying below the liquidation price. The strategy has worked. He’s beaten the pants off the benchmark index. He has returned 16% per annum since 1990 – a 10-fold increase - and nearly 27% a year over the last three years.

You can also find “hedge funds with stock symbols” beyond the mutual fund industry.

Some individual companies work just as well. Take BHP Billiton as an example.

BHP is the world’s largest diversified resources company. This $92 billion outfit operates in 25 different countries, mining copper, coal, nickel, uranium, aluminum, oil, gas, and diamonds. How’s that for a commodity investment?

These guys know as much about the commodity sector as Whitman knows about value investing. In effect, an investment in BHP Billiton is an investment in a world-class commodity hedge fund. The symbol is BHP.

Good Investing,

Tom Dyson

P.S. You can find Tejon Ranch, Marty Whitman’s cheap real estate play, in Dan Ferris’s Extreme Value portfolio.

P.P.S. The symbol for Whitman’s Third Avenue Value Fund is (TAVFX). The minimum investment is only $1,000 if you buy the fund directly from Third Avenue (contact them at or 800-880-8442). You can also own it directly in your Schwab or Fidelity account with varying (but low) minimums.

Market Notes

Any good contrarian investor hunts for stocks and commodities that have been bombed out… and trading near multi-year lows. Despite the bull market in raw materials, the grain complex qualifies for a sector in the dumps.

Record crops in Brazil… mountains of surplus corn piled on the ground in Iowa… genetically altered seeds producing huge yields… has the all the “bearish news” been priced in? We’re watching.

A look at the beating that corn, wheat, and soybean prices have taken over the past few years:


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