From Third Avenue semi annual letter to shareholders. Marty Whitman discusses the superiority of the low NAV deep value investing approach. Dear Fellow Shareholders: One conservative, but highly productive, approach to long term common stock investing is to acquire issues which have the following characteristics: 1) The issuer has an especially strong financial position. 2) The common stock is selling at prices that reflect at least a 20% discount from readily ascertainable Net Asset Value (“NAV”) as of the latest balance sheet date. 3) There is comprehensive disclosure including reliable audited financial statements; and the common stock trades in markets where regulations provide substantial protections for Outside, Passive Minority Shareholders (“OPMI’s”). 4) The prospects seem good that over the next three to sevenyearsNAVwillbeincreasingbynotlessthan10% compounded annually after adding back dividends. Characteristics 1), 2) and 3), are easily ascertainable but Characteristic 4)requires considerable analytic skill. Concentrating on long-term growth in NAV ought to give OPMI’s far greater downside protection than would the conventional approach where the emphasis is on predicting periodic future operating cash flows or earnings (with earnings defined as creating wealth while consuming cash). For perhaps 90% or more of companies whose common stocks are publicly traded, 90% to 95% [...]
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