Remembering Famed Value Investor Marty Whitman

Third Avenue Management Founder Marty Whitman died Monday at age 93.

Many Third Avenue investors will probably remember Whitman as much for his insightful and witty letters to shareholders as for his successful stock-picking approach. But Whitman's record speaks for itself: He won Morningstar's Fund Manager of the Year Award in 1990 for his work running Third Avenue Value TAVFX.

A vulture of a value investor, Whitman would often rummage through the rubble of distressed stocks--those of beaten-down companies, some on the brink of insolvency. But many of Whitman's depressed stock plays eventually turned around for the better. The key to Whitman's stock-picking success was buying companies that were cheap and safe, and holding onto them.

Whitman was a value investor after Benjamin Graham's own heart. Like Graham, Whitman would look for stocks that were dirt cheap, but instead of using a company's price/book ratio (Graham's preferred valuation measure) Whitman would focus on a company's takeover value, or how much he believed a buyer would pay for the whole company.

A shrewd analyst of business accounting, Whitman would comb through a company's financial statements to figure out what he thought the business was worth. He then would determine whether the company’s balance sheet had remained strong in spite of setbacks in the business. He would generally pay no more than 50% of what he thought a buyer would pay to acquire the whole firm.

In addition to a having a very cheap share price, Whitman also favored firms that met the following three criteria:

1. Companies with very little debt on the books. Whitman looked for debt on the balance sheet and in the footnotes of the company's financial statements; he had seen companies downplay hefty liabilities by burying items in notes. Because he often invested in troubled companies, Whitman didn't like firms overburdened by debt: Debt can make a company's troubles even worse.

2. Companies with high-quality assets. Whitman defined high-quality assets as cash or real estate. He looked for assets with value.

3. Companies that don't require a huge overhead to generate cash. Whitman liked companies that could make money without spending a lot of money. A money-management firm, for example, can conduct its business online, via telephone, or in a face-to-face meeting, which doesn't cost a lot.

For more commentary on Whitman's legendary career over the years, see these stories from our archives.

Third Avenue's Marty Whitman Speaks Out (November 2002) Third Avenue founder takes Street to task at conference.

Whitman to Shareholders: Ignore the Market (June 2000) Marty Whitman blasts hedge-fund manager for his short-term focus.

Marty Whitman's 'Safe and Cheap' Approach (February 2006) How to pick stocks that fit Whitman's strict criteria.

Marty Whitman Takes On Warren Buffett (July 2003) Third Avenue opposes Clayton Homes acquisition.

Whitman on the Opportunities Today (Video, June 2009) The Third Avenue Value manager discusses Hong Kong blue chips, his credit investments, and last year's performance.

Whitman to Step Down at Third Avenue Value (February 2012) Current comanager Ian Lapey will take the reins.

Whitman Names Successor (December 2006) Whitman said Third Avenue Management's Ian Lapey will eventually lead the fund.

Whitman, Hawkins, and Browne on Finding Bargains (June 2003) Celebrated value gurus share insights on value investing.