Dear Reader:

Dear Fellow Shareholders… contains copies of Shareholder letters in which I wrote about fundamental finance from 1984 through 2015. Principal conclusions, which are explained more fully in the letters, include the following:

In passive investing in common stocks, it is my belief that a good method of investing encompasses four elements:

  1. The company should be eminently creditworthy
  2. The common stock to be purchased should be priced at, at least, a 20% discount from readily ascertainable Net Asset Value (NAV)
  3. There should be full, meaningful disclosures including reliable audited financial statements, and the common stocks ought to be traded in markets where regulators provide meaningful protections for minority, non-control stockholders
  4. There should be reasonable prospects that NAV growth over the next three-to-seven years will not be less than 10% compounded annually after adding back dividend payout

Financial statements, whether issued under Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting System (IFRS) provide the analyst with vital Objective Benchmarks, not Truth.

The trained financial analyst has enough background in financial accounting, securities law, tax law and corporate law so that the analyst can at least be a well-informed client.

If there is a priority of anything subsequent to the 2008 economic meltdown, it is creditworthiness, not the periodic income account which embodies periodic earnings and/or periodic cash flows from operations.

For most economic entities, whether corporate or governmental, debt in the aggregate is almost never repaid. Rather, maturing debt is refinanced and debt is increased insofar as the economic entity enjoys increasing credit-worthiness.

In Modern Security Analysis, there exist three types of price efficiencies: transaction efficiency, value efficiency and process (or lack of process) efficiency. Transaction markets tend to be highly efficient price-wise; the other markets not so. Transaction markets constitute only a teensy part of what happens on Wall Street.

Long-term buy-and-hold investors differ markedly from shorter term traders in terms of factors deemed important in an analysis. Shorter term traders tend to focus on a primacy of the income account, near-term changes in market prices, top-down analysis and equilibrium pricing (i.e., the market price reflects all-encompassing values). Long-term buy-and-hold investors tend to analyze in the same or highly similar ways as do control investors, distress investors, credit analysts and first and second stage venture capitalists.

Over the long-term economic entities that enjoy earnings, (i.e., creating wealth while consuming cash) need access to capital markets whether credit markets, equity markets or both.

No one not receiving promotional compensations outperforms markets consistently. Consistently is a dirty word meaning “all the time.” Many outside passive minority investors (OPMIs) do outperform on average, most of the time and over the long-term.

Chapter 11, especially pre-packs and Section 363 transactions have become a most valuable tool for reorganizing troubled debtors.

Diversification is only a surrogate and usually a damn poor surrogate, for intimate knowledge of an economic entity, control of that entity and price consciousness (a denial of equilibrium pricing). However, if the investor lacks intimate knowledge about the issuing company and its securities, elements of control or price consciousness, it is important to diversify.

A margin of safety embodies not only quantitative considerations (e.g., discounts from NAV) but also qualitative considerations (e.g., strong financial position).

Companies and their securities should be analyzed as both going concerns and investment trusts.

Book values tend to be more meaningful in an analysis when the companies are well-financed and important assets are separable and salable without diminishing much from a going concern value.

Management ought to be appraised looking at, at least, three factors:

  1. Management as operators
  2. Management as investors
  3. Management as financiers

Enjoy the read.

Martin J. Whitman

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