The Aggressive Conservative Investor (Martin Whitman) 2 comments
This book is actually co-written by Martin Whitman and Martin Shubik; the former is the better-known of the two as he is founder of Third Avenue Value Fund and is well-known in value- and distressed-investing. Offhand I recall that Third Avenue was a key shareholder of Chuan Hup which was privatised at big profits to the holders; it also has holdings in undeniably "value-type" stocks like Boardroom and Yellow Pages, though it seems to have been quieter on the SGX in recent years.
The book was written in the late 1970s, when the stock market was in the pits due to stagflation. The timing of its origination might partly explain its value bent, which might not be evident from the title but becomes clear as one reads the book.
The "aggressive" part of the title actually refers to investors who are "aggressive" within their own contexts because they expect a well-above-average return over the long term, and NOT because it wants to introduce a trading approach to stocks. This is strictly a book on fundamental analysis. In fact, its stockpicking approach is very simple and can be summarised in 4 points:
- Strong financial position
- Honest management that is creditor-aware and shareholder-oriented
- Adequate disclosure of information relevant to the success of the company
- The stock can be bought for less than the net asset value (adjusted book value) of the firm
The conservative nature of the stockpicking approach clearly suggests a bear market strategy (which might be useful currently).
It is refreshing to read a book that is so focused on fundamental analysis (in particular, financial statements) and yet does not go too hard on numbers, which tends to alienate readers. There are many good insights that are made, such as:
- stock investors should analyse a company from a creditor's perspective which would lead them to have greater focus on its financial strength, ability to meet obligations as well as the value of assets on its books.
- audited financial statements are the investor's boon and should be utilised extensively, since they are so comprehensive and the auditors will not risk their professionalism to lie for their clients (unless their interests are extremely intertwined)
- the P&L statement should not be over-emphasised because it can distort interpretation of real economic value if one relies too heavily on it; the balance sheet is just as, if not more, important
- earnings is just one facet of the value-generating activities of a company; value generated from asset conversion (sales of assets, restructuring, even use of tax-loss carryforwards) should not be ignored as well (hence explaining why balance sheet is also important)
- the need for the investor to consider exit strategy via cash bailouts, which could take place not just through open market sales, but also via privatisation potential and cash dividends issued by the company
The asset conversion approach is interesting and worth documenting down here for future reference. Basically, the authors recommend looking for situations where resources in a company can be used in a better manner, creating value in the process. There are several situations which might suggest potential for capital/operational restructuring that could unlock value:
- Overly conservatively financed company -- borrowing money to buy back stock, or issuing a special dividend could unlock value.
- Divisions that are undermanaged, or which would fit better in another company
- Company looks like it could be better off going private
- Analyzing corporate structures for where the value is (eg. holding company structure and finances)
Given Martin Whitman's interest in distressed investing, there is also a chapter on investing in loss-making companies and another one on merger arbitrage, both pre- and post- (read the book to understand what they mean).
This is not a Wiley Investment Classic for nothing. The concepts expressed inside are timeless and the fact that they were conceived in a bear market mean that the investor would do well to incorporate them into his philosophy in his quest to protect the downside. The book, however, is not recommended for those who are less than adept with financial statements because even though the authors are sparing with numbers, the writeups on financial statement analysis assume a certain degree of accounting knowledge of the reader.