Thursday, August 27, 2009

Marty Whitman's Lessons from 2008

Over and above concluding that cheap is not a sufficient condition for common stock investing – it has to be combined with credit-worthiness – there are several other lessons investors should have learned from the 2007 -
2008 debacle:

  1. Don't invest in the common stocks of companies which need relatively continual access to capital markets, especially credit markets. The short sellers, i.e., bear raiders, have become too powerful. Even the strongest, best quality issuers can be brought down, or almost brought down, if they continually have to refinance. Goldman Sachs Group and General Electric were two such examples in the first half of calendar 2009.
  2. Don't borrow money to finance portfolio holdings of common stocks and low-rated mezzanine securities. Prices in markets populated by Outside Passive Minority Investors ("OPMI's") are just too capricious to permit this activity to be undertaken safely and conservatively. If a market participant is to use leverage, that market participant ought to be involved in either control investing or in financing portfolios of performing loans where analysis shows that there are only minimal probabilities of money defaults.
  3. Shareholders having rights to daily redemptions interfere with sound portfolio management. TAVF's common shares outstanding decreased from approximately 180,000,000 shares, at November 1, 2007, to about 129,000,000 shares, at April 30, 2009. This caused Fund Management to be forced sellers at exactly the precise time when Third Avenue should have been acquiring securities at ultra depressed prices.
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