Martin Whitman Shareholder Letter for the Third Quarter of 2008
Martin Whitman of Third Avenue released his thoughts of the current investment environment in his 3Q 2008 shareholder letter. There is a lot of insightful thoughts in the letter so even if you don't agree with Whitman, it's well worth reading it. In particular, he touches on some of his distress investments and likens the current environment to the 70's (in terms of attractive valuations.) So anyone that thinks you can only match Buffett in the 70's has their chance. I particularly like his explanation for the GMAC Senior Unsecured bonds (not that I have access to them or anthing.)
As to be expected, he comments on MBIA and Ambac. He also raised his stake quite a bit, although it's still quite small for his fund. I was uncertain in the past about Whitman's investments in the monolines; I wasn't sure if he was just testing the waters. With his latest addition, I am pretty certain that he is making a committed bet with the bond insurers. As Whitman points out, unfortunately for monoline sharehders, there has been a fairly large permanent impairment in Ambac and MBIA. Margin of safety generally seems like a fluffy concept floating in the background, but it is taking prominence for any monoline shareholder. The amount of margin of safety will be the determining factor in regards to whether someone loses money--and by how much--for the monolines.
I bought Ambac at around 20% to 50% of book value (lower number is if you use adjusted book value) and even with that I will most likely lose money (except under the most optimistic scenario.) If you had bought Ambac at 75% or 66% of book value, it wouldn't have been good enough. The book value I'm referring to here is before the massive dilution that occurred early in the year. If massive dilution had not occurred, then buying at, say, 2/3 of book value would have been fine. Having said all that, if these companies somehow buy back shares at current (or lower) prices, then it would actually be highly accretive to shareholders and you can make a lot of money. Few think about this and it rarely occurs in practice but if you issue shares at a high price and can somehow buy them back at a much lower price, it is a good method to create shareholder wealth (people who bought at the high price and sold later won't be a happy bunch though.) In practice, this doesn't happen often because when shares drop to really low prices then the company is almost always short of cash and can't buy back shares (so you have the perverse situation where most companies that buy back shares often do it at high prices, when times are good.) The monolines, however, are in a strange situation where they may end up with excess capital without doing anything. They have excess capital right now and it will be even more if some of the mark-to-market losses reverse.
I'll provide my thoughts later (look for an update). I might end up breaking the "fair use" limit but I don't think Whitman will mind :)
As to be expected, he comments on MBIA and Ambac. He also raised his stake quite a bit, although it's still quite small for his fund. I was uncertain in the past about Whitman's investments in the monolines; I wasn't sure if he was just testing the waters. With his latest addition, I am pretty certain that he is making a committed bet with the bond insurers. As Whitman points out, unfortunately for monoline sharehders, there has been a fairly large permanent impairment in Ambac and MBIA. Margin of safety generally seems like a fluffy concept floating in the background, but it is taking prominence for any monoline shareholder. The amount of margin of safety will be the determining factor in regards to whether someone loses money--and by how much--for the monolines.
I bought Ambac at around 20% to 50% of book value (lower number is if you use adjusted book value) and even with that I will most likely lose money (except under the most optimistic scenario.) If you had bought Ambac at 75% or 66% of book value, it wouldn't have been good enough. The book value I'm referring to here is before the massive dilution that occurred early in the year. If massive dilution had not occurred, then buying at, say, 2/3 of book value would have been fine. Having said all that, if these companies somehow buy back shares at current (or lower) prices, then it would actually be highly accretive to shareholders and you can make a lot of money. Few think about this and it rarely occurs in practice but if you issue shares at a high price and can somehow buy them back at a much lower price, it is a good method to create shareholder wealth (people who bought at the high price and sold later won't be a happy bunch though.) In practice, this doesn't happen often because when shares drop to really low prices then the company is almost always short of cash and can't buy back shares (so you have the perverse situation where most companies that buy back shares often do it at high prices, when times are good.) The monolines, however, are in a strange situation where they may end up with excess capital without doing anything. They have excess capital right now and it will be even more if some of the mark-to-market losses reverse.
I'll provide my thoughts later (look for an update). I might end up breaking the "fair use" limit but I don't think Whitman will mind :)
As I read Whitman's latest, I am actually saddened. Saddened about his misguided view on shorts and monolines. Maybe it's senility setting in. I don't know.
ReplyDeleteUnlike my utter contempt and rock-bottom opinion of YMM, I actually had (past tense) a very high regard for Whitman. I (my IRA and my son's custodian account) was a shareholder until November last year. When I got wind of him making a foolish bet on MBIA and Ambac, I sold all my shares as it made no sense to be shorting the monolines then and also owning Whitman's fund.
It doesn't surprise me that you lost faith in him. Kind of makes sense if you were actually short some of his holdings.
ReplyDeleteI'm curious if you will change your mind in the future...or is this a permanent loss of faith... remains to be seen...
We went through a cycle some years ago where people were dumping on guys like Jean-Marie Eveillard and even Buffet. Whitman's flagship fund even had a bad year or two in the same period, if memory serves.
ReplyDeleteBut they generally had the last laugh. We'll see if they get the last laugh again.
Other than Whitman's obsession with the monolines and bizarre notions about the short sellers, I can see his logic in his investment thesis, though I may not agree with his complete disregard to the risk of deleverage in the aftermath of a bursting credit bubble.
ReplyDeleteOne certainly admires his decision to put his money where his mouth is.
I don't know Synchro. I know you are not a big fan of Whitman's monoline bets but his other bets in homebuilder junk bonds, GMAC bonds, etc, are quite similar. If you actually believe in a massive deflationary bust then those other investments are likely going to suffer as well...
ReplyDeleteI suspect you have switched your investing strategy and will never be supportive of Whitman (or similar) investors ever again. There is nothing wrong with doing this. Just find what works and fits within your thinking. I went the other way, where I held macro investors (Jim Rogers & Marc Faber) in high regard but became less of a fan, and started getting more influenced by value investors...
You are right about one thing: Whitman's blind spot about the macro environment shoot my confidence in him. I probably won't invest with him again. However, I eager await Ridriquez's FPA Capital fund reopening.
ReplyDelete