WWII 048: Martin J. Whitman and Distress Investing, How to Research Industry Data, How Much Cash To Have Laying Around, February Payroll Crushes Estimate
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Main Topic: This episode is about Marty Whitman of Third Avenue Value Fund and his book "Distress Investing"
Marty has his own philosophy of value investing in general. In early books, he uses the following language and focuses on these topics:
- OPMI’s “outside passive minority investors” – retail investors as we know them
- Rants against Efficient Market Theory, Efficient Portfolio Theory, and Modern Capital Theory – these are to be understood purely to take advantage of those who believe in it.
Marty defines different types of value investing at a granular level including:
- Control Investing
- SOTT – something off the top
- OPM – ability to use Other People’s Money
- Tax advantages (TSs)
Marty also defines the realization of value as “resource conversion activities”. These activities include:
- Mergers and acquisitions
- Proxy fights
- Leveraged buyouts
- Management buyouts
The book I review in this episode is "Distress Investing: Principles and Techniques" and is about investing in the most distressed securities and covers these topics in a logical way
Here is a broad overview of how the book is organized. The first six chapters comprises the "General Landscape of Distress Investing" where Marty:
§ Talks about the players
§ The growth of corporate debt
§ The 2007-2008 Financial meltdown
§ Provisions in the 2005 Bankruptcy Act as they affect Chapter 11
§ Causes of financial distress
§ Deal expenses and who bears them
In chapter six of this section, Marty lays out 5 basic truths of distressed investing
1. No One Can take away a corporate creditor’s right to a money payment outside of Chapter 11 or Chapter 7
2. Chapter 11 Rules Influence all Reorganizations
3. Substantive Characteristics of Securities
4. Restructurings are costly for creditors
5. Creditors Have only contractual rights
The next section of the book is called "Restructuring Troubled Issuers" and goes on to describe Chapter 7 and Chapter 11s and the workout processes
Chapter 14 are case studies from 2009 and 2009 and are very interesting
Chapter 15 is a case study of Home Products International
Chapter 16 is a case study of KMART Corporation which Eddie Lampert ended up owning
Here is a list of books that Marty has written or co-written that I suggest picking up:
Distress Investing is Marty's treatise on investing in severely distressed companies, including Chapter 11 reorganizations. This book is for the advanced investor and contains some in depth and well-documented case studies. You won't be a complete investor without the tools the Marty teaches in this book.
Modern Security Analysis is Marty's answer to Benjamin Graham's book Security Analysis, the bible of value investing. In Graham's time, company reporting was not as heavily regulated and there were no Generally Accepted Accounting Principles (GAAP) to standardize reporting. Marty updated the concept of value investing using modern tools and modern reporting.
Value Investing: A Balanced Approach is Marty's beginner-focused book on value investing. This book is a great place to start if you want to learn the Whitman way. The book is structured to provide an excellent overview of the art of value investing, including a number of "resource conversion" strategies.
The Aggressive Conservative Investor is Marty's book for investors that already have a fundamental understanding of value investing basics. This book focuses on more in-depth explanations of various security analysis techniques, and evaluation of a company's paper trail.
Very little in distress investing lends itself to certainty. Rather, the investor always deals in probabilities. "
Third Avenue Value Fund
Ask JB: Where to find industry statistics and how much cash should I have laying around?
submitted 7 hours ago by Noah0
JB Says: Check out the companies website, their 10-K and annual report, quarterly reports, investor relations, conference calls. Find out what industry associations are and request a copy of their recent reports.
submitted 2 days ago by ITS_MAJOR_TOM_YO
JB Says: The answer depends on a lot of factors, but here are some rules of thumb. Have one year of living expenses in cash in an FDIC insured account (most bank accounts and savings accounts are insured up to a certain limit). This is your emergency fund in case things go wrong. Also allocate some cash to known large expenses coming up (college tuition, surgery, vacations, etc)/
Other than that, you should keep your cash working for you and have it invested in something.
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