Martin Whitman

Profile:

Martin Whitman is Founder and Portfolio Manager of the Third Avenue Value Fund (TAVFX). From inception in November 1990 through October 2007, his fund has returned an annualized average of 16.83%. In the same period, the S&P 500 index returned an average 12.33% annually.

Investing Philosophy:

Whitman is a "buy and hold" value investor. He buys stock in companies when he thinks that the company has strong finances, competent management, and the business is understandable. Also the company's stock must be cheap, meaning it trades at a significant discount to intrinsic value. The market price must lie substantially below a conservative valuation of the business as a private entity, or as a takeover candidate. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is overpriced relative to its intrinsic value.

A Value Approach to Investing

Since the founding in 1986, Third Avenue Management has utilized a disciplined fundamental, bottom-up approach to identify appropriate investments with the sole objective of delivering superior returns with limited investment risk, over the long term.

Martin Whitman is guided by one proven value philosophy, which focuses on the strength of a company's balance sheet and the discounted price of its securities. The belief is that a strong, well-managed company can survive difficult environments, and the price of its securities will eventually reflect its true intrinsic value.

Third Avenue Management's research approach is opportunistic and not constrained by market capitalization, industry sector, or geographic location.

What He Looks For

One proven value philosophy guides each of the investments. He seeks to invest in safe companies that are cheaply priced. Key criteria are as follows:

Safe Companies

• Strong finances
• Competent management
• Understandable business

Cheaply Priced

• Significant discount to intrinsic value

Martin Whitman analyzes companies from the bottom up, reviewing all public documents, speaking with outside experts and contacts, identifying value and risk drivers and interviewing management before making an investment decision.

He analyzes the quality and quantity of resources existing in a business, rather than its projected future revenues and earnings. He thinks that the current balance sheet is the best, albeit not the only, measure of a company's value. Predictions based on future operating earnings do not capture the possible impact of corporate events such as mergers and acquisitions, changes of control, management buyouts, share repurchases, refinancing, reorganizations, asset sales, spin-offs, investments in new ventures and corporate liquidations.

His stringent research gives him conviction in his best ideas, allowing him to establish concentrated positions.

He invests only in companies that he believes to have the potential to create value for his clients over the long term, withstanding cyclical downturns and evolving as leaders among their competition. His long-term focus is to minimize portfolio turnover and enhances the tax efficiency of his funds and private portfolios.

John Paulson

John Paulson Made Billions on Drop in Housing Values

Born in the lower middle-class New York borough of Queens, John Paulson is the biggest-earning man in the world's top-earning industry. He took home $3.7bn (about £2bn) last year, putting him top of Alpha magazine's ranking of hedge fund managers.

He made this fortune by outsmarting Wall Street's top financial institutions. Unlike Citigroup, Bear Stearns, Lehman Brothers and Merrill Lynch, he predicted that the sub-prime mortgage industry would collapse - and he placed a huge bet on a downturn in home loans. Paulson's success from others' misfortune has drawn comparisons with George Soros, who made millions from the Bank of England's woes in 1992 by betting against the pound on Black Wednesday.

One group representing homeowners struggling to keep their properties dubbed Paulson's profits "obscene". Paulson has responded by donating $15m to a charity aiding people who are fighting foreclosure.

Paulson, 52, is married with two daughters. He enjoys skiing and running. He studied science at New York University, has an MBA from Harvard and set up his fund, Paulson & Co, in 1994. He never gives interviews and is guarded about his methods - he even embeds hi-tech software in his emails to prevent them being forwarded. He is now the President of Paulson & Co., Inc., New York.

Paulson & Co.’s merger arbitrage/event-driven focus derived from Mr. Paulson’s early experience as an investment banker. After a first job with Odyssey Partners, his career went into high gear when he joined the mergers and acquisition practice at Bear Stearns Cos. Inc. Prior to founding Paulson & Co. in 1995, he was a general partner of Gruss Partners LP, a merger arbitrage specialist. In the course of his career, Mr. Paulson has dealt with a wide range of company transactions, including both friendly and hostile tender offers, mergers, divestitures, recapitalizations and other company reorganizations and financings.

What induced you to move into money management?

When I in was in M&A at Bear Stearns, one of our clients was Marty Gruss. He ran a very successful risk arbitrage firm, Gruss Partners. … It was a small partnership and very profitable. Bears Stearns also was a partnership at the time and also very profitable. But it didn’t really compare to the type of profits that could be made in principal investing, investing your own money and earning the returns, rather than earning fees. I realized that there’s a limitation on what you can earn from fees and that the highest rewards would come from investing your own money, where there are no limitations on your earnings. That’s when I decided to move from investment banking to money management, and I became a general partner of Gruss Partners.

Describe your investment philosophy.

I really picked up my investment philosophy from Marty and his father, Joseph Gruss. He had two sayings that guided me going forward.

The first was: Watch the downside, the upside will take care of itself. That’s been a very important guiding philosophy for me. Our goal is to preserve principal, not to lose money. Our investors will forgive us if our returns don’t beat the S&P in a given year, but we are not forgiven if we have significant drawdowns.

The other saying really drives the same point from a different angle: Risk arbitrage is not about making money, it’s about not losing money. If you can minimize the downside, you get to keep all your earnings and that helps performance.

Would you say that your investment style is concentrated?

Yes and no. No, when you look at most activist funds, they tend to have five or 10 positions and that’s 100% of their portfolio. Some have only five positions. We’re much more diversified; our average position size is just 2.5%. However, when we do feel strongly about a position, we will take that up to 12% in our merger fund and 10% in our event fund. That is (higher) than some funds. We feel it’s important to have the flexibility to go to 10% because in order to outperform, you have to be able to allocate a sizable position to what you think could be a high-return investment. It’s only when you have a substantial allocation to a high-return (security) that you can influence the overall portfolio.

Are you tired of talking about subprime mortgages yet?

No, I’m still excited about it. I think we’ve got a winner with this. It’s been a very profitable investment for us, but we think we have only realized 25% of the (potential) that we expect to make in this area. The investment is very much consistent with our overall philosophy that if you watch the downside, the upside will take care of itself.

What attracted us to this particular position is that overall, we feel that we are in a credit bubble. We feel that there is too much risk going long (in) credit instruments since spreads are so tight. So we concluded that the best opportunities were on the short side.

The beauty of shorting a bond is that the maximum you can lose is the spread over the benchmark; yet if the bond defaults, you can potentially make more. So it’s an asymmetrical risk-return tradeoff. In the case of subprime securities, we targeted the triple-B bonds, which are the lowest tranches in the subprime securitization.

In a typical securitization, you have 18 to 20 different tranches with the lowest … taking the first loss. The triple-B bond has about 5% subordination, meaning that if the loss is greater than 5%, the bond will be impaired. And if it’s more than 6%, the bond will be extinguished. The yield was only 1% over LIBOR (the London interbank offered rate) so by shorting this particular bond, if I was wrong, I could lose 1%, but if I was right, I could make 100%. The downside was very limited but it had very substantial upside, and we like those types of investments.

We felt the exuberance in the credit markets and the massive liquidity was severely mispricing these securities. The more we analyzed the underlying quality of these loans, we thought it was highly probable that the losses in these pools would be more than 5%, that the bonds would be impaired and in many instances, extinguished. We thought it was a terrific risk-return tradeoff where you can risk 1% and make 100%.

We decided to put that investment either as a hedge or an absolute-return investment in all of our funds with the amount and the specific security depending on the nature of the funds. But generally, in our merger funds we agreed to spend about 1.5% on the short position and then we set up separate credit funds where we took a more concentrated position for investors who wanted that.

Ultimately in 2007, initially in January, but then in February, the market re-evaluated the risk of these securities. People paid more attention to the underlying credit quality of these securities and the potential losses that could occur. That caused the securities to fall materially in value and for the spreads to widen resulting in margin calls on these funds.

Are you still committed to subprime?

Yes. The performance of these pools will not be decided over one month or two months. They will be decided over the next three years. Our investment (commitment is not based on) looking at what these bonds trade at today or tomorrow, but what the losses in these pools will be two or three years from now. Our estimates are that the losses will be well in excess of 6% or 7% and that as time goes on and these losses are realized, the bonds will be downgraded and they will fall much further.

Have you considered going public?

For us, we don’t really need to. I think it would be premature (at this point) in our evolution to consider selling the firm or a piece of it. Our goal is to continue to focus on performance and building our capabilities, building … the investment platform. I’d like the firm to exist without me and (that requires) a developed infrastructure. So at some point in the future, going public or selling part of the firm will be issues we will have to think about. But it’s not on our radar screen now.

Peter Lynch

Background

Peter Lynch was born in 1944 and graduated from Boston College in 1965 with a degree in finance. He served two years in the military before attending and graduating from the Wharton School at the University of Pennsylvania with a Master of Business Administration in 1968.

He went to work for Fidelity Investments as an investment analyst, eventually becoming the firm's director of research, a position he held from 1974 to 1977. Lynch was named manager of the little known Magellan Fund in 1977 and achieved historic portfolio results in the ensuing years until his retirement in 1990.

In 2007, Peter Lynch served as vice-chairman of Fidelity's investment adviser, Fidelity Management & Research Co. Since his retirement, he has been an active participant in a variety of philanthropic endeavors.

Peter Lynch is one of the most famous mutual fund manager.  He started to manage the Fidelity Magellan Fund in 1978.  When he started, the fund had assets of US$ 20 million dollars.  When he retired in 1990, the Fidelity Fund had assets of US$ 14 billion.  Today the fund has assets of over US$ 50 billion dollars.

Investment Terminology

Lynch coined some of the best known mantras of modern individual investing strategies. His most famous investment principle is simply, "Invest in what you know," popularizing the economic concept of "local knowledge". This simple principle resonates well with average non-professional investors who don't have time to learn complicated quantitative stock measures or read lengthy financial reports. Since most people tend to become expert in certain fields, applying this basic "invest in what you know" principle helps individual investors find good undervalued stocks.

Lynch uses this principle as a starting point for investors. He has also often said that the individual investor is more capable of making money from stocks than a fund manager, because they are able to spot good investments in their day-to-day lives before Wall Street. Throughout his two classic investment primers, he has outlined many of the investments he found when not in his office - he found them when he was out with his family, driving around or making a purchase at the mall. Lynch believes the individual investor is able to do this, too.

Lynch did consistently apply a set of eight fundamental principles to his stock selection process. According to an article by Kaushal Majmudar, a CFA at The Ridgewood Group, Lynch shares his checklist with the audience at an investment conference in New York in 2005:

• Know what you own.
• It's futile to predict the economy and interest rates.
• You have plenty of time to identify and recognize exceptional companies.
• Avoid long shots.
• Good management is very important - buy good businesses.
• Be flexible and humble, and learn from mistakes.
• Before you make a purchase, you should be able to explain why you're buying.
• There's always something to worry about.

In picking stocks (good companies), Peter Lynch stuck to what he knew and/or could easily understand. That was a core position for him. He also dedicated himself to a level of due diligence and stock research that left few stones unturned. He shut out market noise and concentrated on a company's fundamentals, using a bottom-up approach. He only invested for the long run and paid little attention to short-term market fluctuations.

After Peter retired he wrote two books on stock selection, “One Up on Wall Street” in 1989 and “Beating the Street” in 1994. Both of which are considered essential reading for any serious investor. Peter has found many of his big investments when not in his office - instead found them when out with his family, driving around or shopping at the mall. Peter believes the individual investor is able to do this too.

[More superinvestors...]

Peter Lynch Quotes

Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.

If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them.

Investing without research is like playing stud poker and never looking at the cards.

Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide.

If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes.

The person that turns over the most rocks wins the game. And that's always been my philosophy.

The key to making money in stocks is not to get scared out of them.

I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.

In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten.

You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.

When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom.

I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'

There are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.

If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored.

In stocks as in romance, ease of divorce is not a sound basis for commitment.

There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating.

Stock picking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to.

A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed.

In business, competition is never as healthy as total domination.

Investing is fun, exciting, and dangerous if you don't do any work.

Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

Brian Marber

Brian Marber can make a fair claim to be the most widely experienced technical analyst in the world, having been one since 1963.

A Fellow of the Society of Technical Analysts, he has been a blue button (stockbroker's clerk), stock market dealer, member of two UK stock exchanges, and managing partner of the London office of one of the largest regional broking houses.

At IOS and then at NM Rothschild & Sons, totally eschewing the fundamental approach, he was the first fund manager in the UK to manage large funds using only technical analysis.

Between 1976 and 1981, as a stockbroker, Brian Marber was voted by institutional investors No.1 technical analyst in the City for six successive years, a unique record.

When he started managing FX accounts in the 1990s, he was given exemption from the SFA Exams because of his ‘long and distinguished career in the investment industry.’

In 1980, in a survey conducted by the Treasurer of the Singer Company, Brian Marber had the best FX forecasting record in the world. For 15 years he wrote monthly for Euromoney Currency Report, and more recently for the Financial Times.

In the 1980s, Brian Marber was a Member of the Visiting Faculty of IMI (Geneva), the oldest established business school in Europe. In 1981, he founded a company which, with clients in 20 countries, became the world’s largest independent FX consultancy.

As a lecturer and teacher, Brian Marber has spoken at six Financial Times World Gold conferences, three Australian Gold Conferences, Johannesburg 100, Comex, and the Washington Gold & Silver Institute, and has also conducted seminars and teach-ins in Australia, Hong Kong, Singapore, Abu Dhabi, South Africa, Israel, Italy, UK, Eire, France, Germany, Denmark, Norway, Belgium, Holland, Switzerland and Luxembourg.

A one-time member of the Investment Panel of The Observer and regular broadcaster on TV and radio, Brian Marber is still an FX Consultant to banks, large corporations, hedge fund companies (including Europe’s oldest, Odey Asset Management), and private clients.

Oei Hong Leong

Singapore tycoon Mr. Oei Hong Leong bought one million American International Group (AIG) shares on Tuesday (16 Sep 2008) when the stock was in freefall and many investors were bailing out of the giant insurer.

Mr Oei bought in on the upswing and landed his average cost of purchasing at US$1.80. The stock price closed at US$3.75 at the end of the trading. He had looked hard at the unfolding AIG crisis and calculated that the firm was just too big and important to be allowed to fail.

He bought the shares when AIG shares price was dropping due to the rumor that AIG encountered short-term shortages of cash flows and grabbed one million shares of AIG.

Mr. Oei then sold the shares on Monday (22 Sep 2008) at US$5.00. The selling price rose more than double compared to the bidding price.

He donated the shares which have already shot up in value (about S$ 890 million) as promised to LKY School to mark Minister Mentor Lee Kuan Yew's 85th birthday, which fell on Tuesday. In other words, the school will receive about US$ 5 million from the shrewd investor.

Mr. Oei actually had donated S$ 1 million to LKY school 5 years ago felicitating Lee's 80th birthday.

Brief Biography

Mr. Oei Hong Leong estranged from his father, Eka Tjipta Widjaja who was one of the richest men in Indonesia. This Singapore citizen is now considered as a savvy investor with stakes in steel, coffee, real estate and health care industries. He committed to invest $10 million in waste-management firm Citiraya whose stock hasn't traded in over a year following a corporate scandal.

He was ranked number tenth in the Singapore's 40 Richest Men by Forbes Magazine. He is now 58 years old and has a net worth of about US$ 475 million.