I'm not sure I can say much about the late, legendary investor Martin "Marty" Whitman that hasn't already been said, but I can do my best to honor his memory by showing you how he approached investing and made his fortune.
Marty, quite frankly, got it done - and left a legacy in the process of crushing the indexes over the course of a storied, 30-year career.
The legendary fund manager died last Monday, April 16, at the age of 93, and the world is worse off for his passing.
Marty managed the Third Avenue Value Fund (MUTF: TVFVX) from 1986 until 2012. He handily outperformed the market during that time. A recent Barron's report showed the fund returned over 600% from 1992 to 2012, beating U.S. value indexes by at least 100%.
Several years ago, I had the pleasure of meeting Marty; we had a splendid 15-minute chat about the lost art of asset-based deep-value investing.
As we enjoyed a few laughs and more than a few cocktails, we lamented that, with the passing of renowned fund manager Peter Cundill in 2011, the two of us were probably the last two asset-based value dinosaurs on the planet.
Now, we weren't besties or anything, but we had a lot in common and shared a nice correspondence over the years. It's safe to say I learned a lot from the man during my career.
Make no mistake: Anyone who's learned anything about his investing style - whether it be through his books, shareholder letters, or even interviews - has also learned what it takes to crush the markets.
His unique philosophy - and insanely good track record - speaks for itself...
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Standing on the Shoulders of a Giant
Whitman's first book, "The Aggressive Conservative Investor," was, along with Ben Graham's "The Intelligent Investor," one of the two seminal books that helped me learn the whole making-money-in-stocks thing as a much younger and less gray man back in the 1980s.
He was considered a value investor who specialized in "distressed securities and deeply undervalued companies." Whitman considered himself a "vulture investor," telling Forbes that he much preferred that nickname because "it's a lot better than being called an indexer or asset allocator."
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You could always depend on Marty for a razor-sharp adage or witty piece of wisdom. One of these in particular has managed to serve me well in the markets, as well as at the racetrack and the poker table, where praying you don't lose $100 in 15 seconds is something of a high art.
He was fond of saying that he dealt in probabilities instead of predictions, and it's a philosophy I have embraced enthusiastically.
As always, Marty summed it up perfectly: "Making forecasts about future general market levels is probably much more in the realm of abnormal psychology than finance."
This has been a large influence on my own investing philosophy for the past three decades, and I can tell you that it's made me a ton of money in that time.
And back in 1993, when my hair was just starting to turn gray, Marty's shareholder letter contained one paragraph that's since paid for most of my bad habits. It's also kept bookmakers and bartenders alike in business for almost 25 years now.
He talked about the banks his fund had been buying at prices well below book value after the savings and loan crisis, saying, "The game plan is for these banks to be run conservatively for five years or so, during which period they ought to earn at least 10% per annum on equity. If at the end of that period, an institution is acquired in a stock swap at, say, two times book, the compound average annual return to the fund will exceed 35%."
This way of targeting returns works just as well today as it did then, and I know several folks who have gotten very rich using exactly this technique
It was also from Marty that I learned something that's been a critical part of my success. He once wrote, "Based on my own personal experience, both as an investor in recent years and an expert witness in years past, rarely do more than three or four variables really count. Everything else is noise."
Using what I learned from Whitman and other deep-value types, I have been able to whittle 90% of security analysis down to three variables for financial stocks and three for REITs, with a great deal of success.
Meanwhile, other folks have laughable 90-factor models, more complicated than programming a VCR.... that achieve mediocre results.
Complicated doesn't always mean better. In fact, that's hardly ever the case at all.
How Marty Became the Grand Curmudgeon of Wall Street
One simple aspect of Marty that I probably admired the most was the joy he took in skewering the rigged game Wall Street was trying to play.
And anyone who's been following my column here for a while knows that skewering the sharks in lower Manhattan is one of my favorite pastimes, as well.
Marty fired many broadsides over the Street's unfair practices, but what he really liked to go after was the banks' mainstream security analysis.
He found their focus on short-term earnings and arbitrary predictions about unpredictable events to be ridiculous.
Late in his career, he stated, "I did what I wanted to do. I showed Wall Street and the academicians - all those efficient-market guys - that they don't know what they're doing."
Martin Whitman was exactly who I aspire to be, the Grand Curmudgeon of Wall Street. From him, I learned to think of stocks as ownership of a business and not just betting slips.
Although he preferred flannel shirts and blue jeans, while I'm more of a shorts-and-tropical-shirts kind of guy, our wardrobes intersected in the lack of overpriced suits and other traditional Wall Street garb.
From his writings and my one brief conversation with this value-investing legend, I've learned the incredible return-generating power of focusing on asset value, safety, and time when it comes to common stocks...
I seem to have inherited much of his disdain of traditional Wall Street and mainstream academic thought on how markets work.
And like him, I think that diversification is "a damn poor surrogate for knowledge, control, and price consciousness."
If I can help as many people find stock market success and unreasonably high returns as he did while keeping those damn asset allocators and indexers off my philosophical lawn, I will consider my life's work a success.
Just as I am sure Martin Whitman did his.
Up Next: Retirees Could See "Piles of Cash"
As you've just seen, owning businesses with true "deep value" and that generate unreasonably good profits is essential if you're going to crush the markets. But there's another type of investment you should know about. It's a favorite of ours, a kind of "desert island fund" you might buy if you ever had to park your money in one place, disappear from civilization for 20 years, and come back to a pile of cash. Click here to learn more...
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.