The Aggressive Conservative Investor E-Book

Martin J. Whitman

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Investment Classic Series
• Sprache: Englisch

Seitenzahl: 690

Veröffentlichungsjahr: 2011

Beschreibung

"The Aggressive Conservative Investor will never go out of date. Regulation, disclosure, and other things may change, but the general approach and mindset to successful investing are timeless. Read this book and you will learn the rudiments of 'safe and cheap' investing. An essential read for every amateur and professional investor." --Stan Garstka, Deputy Dean & Professor in the Practice of Faculty & Management, Yale School of Management "Security analysis toward both better odds and higher long-term payoff: A readable, authoritative guide." --Professor Bill Baumol, New York University "In reading this book, one is struck by the simplicity of the ideas and the dependence of the investor on his own understandings of reality as opposed to the myths on the street. The updated version of this 1979 classic incorporates all the modern financial engineering that has occurred as a product of the late 20th century, and the new methodologies refine your abilities to measure risk but don't change the fundamentals of value. The updated version of The Aggressive Conservative Investor is very much a value-added proposition." --Sam Zell, Chairman, Equity Group Investment LLC "I concur with those people who regard Marty Whitman as the 'Dean of Value Investing.' This book is a must-read for everyone interested in understanding the art of investing." --Melvin T. Stith, Dean, Whitman School of Management, Syracuse University This no-holds-barred presentation of one of the most successful investment strategies of all time -- value investing in distressed securities/companie -- shows you how to analyze and evaluate stocks just like controlling owners. Based on the assumption that stock price rarely reflects real value, authors Whitman and Shubik use numerous case studies to present risk-minimizing methods that also provide high rewards. Still relevant today, this classic work includes a new introduction discussing the dramatic changes that have taken place in the value investing world since its first publication in 1979.

Leseprobe

Table of Contents

INTRODUCING WILEY INVESTMENT CLASSICS

Title Page

Copyright Page

Dedication

Acknowledgments

Epigraph

Foreword

Introduction

CHANGES IN TERMINOLOGY

PERFORMANCE DATA

THE DISCLOSURE EXPLOSION

OUR CHANGED, OR MODIFIED, BELIEFS

THE CHANGED ENVIRONMENT

TROUBLESOME REGULATORY PROBLEMS

CONCLUSION

SECTION ONE - THE APPROACH

Chapter 1 - An Overview

Chapter 2 - The Financial-Integrity Approach to Equity Investment

THE FINANCIAL-INTEGRITY APPROACH

THE BENEFITS AND USES OF THE FINANCIAL-INTEGRITY APPROACH TO THE NONCONTROL INVESTOR

THE SHORTCOMINGS OF THE FINANCIAL-INTEGRITY APPROACH

SECTION TWO - THE USES AND LIMITATIONS OF FUNDAMENTAL ANALYSIS AND TECHNICAL ANALYSIS

Chapter 3 - The Significance of Market Performance

THE “IDEALISTIC” VIEW

OUTSIDERS, INSIDERS AND MARKET PRICE

MARKET PERFORMANCE AND OVERALL PORTFOLIOS

MEASURING MARKET PERFORMANCE

PROFESSIONAL MONEY MANAGERS AND BEATING THE MARKET

PERSPECTIVE ON BAILOUTS AND THE SIGNIFICANCE OF MARKET PERFORMANCE

Chapter 4 - Modern Capital Theory

THE COMPUTER AND MATHEMATICAL ANALYSIS

ON SYSTEMS FOR PLAYING THE MARKET

ON ARBITRAGE

PORTFOLIO BALANCING

FUNDAMENTAL SECURITY ANALYSIS AND CORPORATE FINANCE

CALCULATION OR EVALUATION

Chapter 5 - Risk and Uncertainty

ASSESSING THE INVESTMENT ODDS: RISK AND REWARD

QUALITY OF THE ISSUER

PRICE OF THE ISSUE

FINANCIAL POSITION OF THE HOLDER

PORTFOLIO DIVERSIFICATION VERSUS SECURITIES CONCENTRATION

CONSIDERING THE CONSEQUENCES

RISK AND INVESTMENT OBJECTIVES

SECTION THREE - DISCLOSURES AND INFORMATION

Chapter 6 - Following the Paper Trail

A SUMMARY OF A PORTION OF SEC REGULATION 10 (B)5 AS IT PERTAINS TO DISCLOSURE

THE DOCUMENTS AND HOW TO READ THEM

OBTAINING THE DOCUMENTS

WHAT THE PAPER TRAIL DOES FOR THE OUTSIDE INVESTOR

WHAT THE PAPER TRAIL DOESN’T DO

HOW GOOD IS THE PAPER TRAIL?

Chapter 7 - Financial Accounting

TYPES OF ACCOUNTING

HOW TO UNDERSTAND FINANCIAL ACCOUNTING

Chapter 8 - Generally Accepted Accounting Principles

MYTHS AND REALITIES ABOUT THE MEANING OF GENERALLY ACCEPTED ACCOUNTING ...

UNDERLYING GAAP ASSUMPTION 1

UNDERLYING GAAP ASSUMPTION 2

UNDERLYING GAAP ASSUMPTION 3

UNDERLYING GAAP ASSUMPTION 4

UNDERLYING GAAP ASSUMPTION 5

UNDERLYING GAAP ASSUMPTION 6

UNDERLYING GAAP ASSUMPTION 7

UNDERLYING GAAP ASSUMPTION 8

UNDERLYING GAAP ASSUMPTION 9

UNDERLYING GAAP ASSUMPTION 10

UNDERLYING GAAP ASSUMPTION 11

MYTHS ABOUT THE SHORTCOMINGS OF THE CORPORATE AUDIT FUNCTION AND THE ETHICAL ...

SECTION FOUR - THE FINANCIAL AND INVESTMENT ENVIRONMENT

Chapter 9 - Tax Shelter (TS), Other People’s Money (OPM), Accounting Fudge ...

TAX CONSIDERATIONS

OTHER PEOPLE’S MONEY

SOMETHING OFF THE TOP (SOTT): SOME PRELIMINARIES

SOME PRELIMINARIES ON THE ACCOUNTING FUDGE FACTOR (AFF)

HOW IT ALL MESHES

Chapter 10 - Securities Analysis and Securities Markets

REASONS FOR ACQUIRING AND HOLDING SECURITIES

PROFIT MARGINS

SIZE

LIBERAL ACCOUNTING POLICIES

ADVANTAGES OF A LOW NET ASSET VALUE

WALL STREET SPONSORSHIP

THE TRADING ASSUMPTIONS VERSUS THE INVESTMENT ASSUMPTIONS

CONVERTIBLE SECURITIES

LIMITATIONS ON COMPARATIVE ANALYSIS

Chapter 11 - Finance and Business

HEAVY DEBT LOAD

LARGE CASH POSITIONS

DIVERSIFICATION VERSUS CONCENTRATION

MANAGEMENT INCENTIVES

ADVANTAGES OF HIGHLY CYCLICAL COMPANIES IN COMPETITIVE INDUSTRIES

GOING PUBLIC AND GOING PRIVATE

GOVERNMENT REGULATION

WHO RUNS MOST COMPANIES?

CONSOLIDATED VERSUS CONSOLIDATING FINANCIAL STATEMENTS

NEGATIVE VAUES IN OWING ASSETS

SECTION FIVE - TOOLS OF SECURITIES ANALYSIS

Chapter 12 - Net Asset Values

THE USEFULNESS OF BOOK VALUE IN SECURITY ANALYSIS

BOOK VALUE AS ONE MEASURE OF RESOURCES

BOOK VALUE AS ONE MEASURE OF POTENTIAL LIQUIDITY

BOOK VALUE ANALYSIS AS A COMPETITIVE EDGE

LIMITATIONS OF BOOK VALUE IN SECURITY ANALYSES

Chapter 13 - Earnings

WEALTH OR EARNINGS?

THE LONG - TERM EARNINGS RECORD

“PARSING” THE INCOME ACCOUNT

Chapter 14 - Roles of Cash Dividends in Securities Analysis and Portfolio Management

THE THREE CONVENTIONAL THEORIES

CASH DIVIDENDS AS A FACTOR IN MARKET PERFORMANCE

THE PLACEBO EFFECT OF CASH DIVIDENDS

CASH DIVIDENDS AND PORTFOLIO MANAGEMENT

CASH DIVIDENDS AND LEGAL LISTS

CASH DIVIDENDS AND BAILOUTS

THE GOALS OF SECURITIES HOLDERS

Chapter 15 - Shareholder Distributions, Primarily from the Company Point of View

CASH DIVIDENDS OR RETAINED EARNINGS

STOCK DIVIDENDS

DISTRIBUTION OF ASSETS OTHER THAN CASH

LIQUIDATION

STOCK REPURCHASES

Chapter 16 - Losses and Loss Companies

QUALITY CONSIDERATIONS AND TAX - LOSS COMPANIES

ON ACCOUNTING AND INCOME

BE WARY OF ACQUIRING EQUITY SECURITIES OF THE ENCUMBERED FIRM

COMMERCIAL BANKS’ PORTFOLIO LOSSES

THE “TURNED THE CORNER” THEORY

Chapter 16 - Losses and Loss Companies

QUALITY CONSIDERATIONS AND TAX-LOSS COMPANIES

ON ACCOUNTING AND INCOME

BE WARY OF ACQUIRING EQUITY SECURITIES OF THE ENCUMBERED FIRM

COMMERCIAL BANKS’ PORTFOLIO LOSSES

THE “TURNED THE CORNER” THEORY

Chapter 17 - A Short Primer on Asset-Conversion Investing: Prearbitrage and Postarbitrage

POSTARBITRAGE

SECTION SIX - APPENDIXES—CASE STUDIES

Introduction to Appendixes I and II

Appendix I

Appendix II

Appendix III

Appendix IV

ABOUT THE AUTHORS

INDEX

INTRODUCING WILEY INVESTMENT CLASSICS

There are certain books that have redefined the way we see the worlds of finance and investing—books that deserve a place on every investor’s shelf. Wiley Investment Classics will introduce you to these memorable books, which are just as relevant and vital today as when they were first published. Open a Wiley Investment Classic and rediscover the proven strategies, market philosophies, and definitive techniques that continue to stand the test of time.

Copyright © 1979 by Martin J. Whitman and Martin Shubik. All rights reserved.

Foreword copyright © 2006 by John Wiley & Sons, Inc. All rights reserved.

Introduction copyright © 2006 by Martin J. Whitman and Martin Shubik. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

Originally published in 1979 by Random House.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data

Whitman, Martin J.

The aggressive conservative investor / Martin J. Whitman, Martin Shubik. p. cm.

Originally published: New York: Random House, c1979.

Includes bibliographical references and index.

ISBN-13: 978-0-471-76805-0 (pbk.) ISBN-10: 0-471-76805-7 (pbk.)

1. Investments. I. Shubik, Martin, joint author. II. Title.

HG4521.W474 2006

332.67’8—dc22

2005051067

To Lois, Jim, Barbara and Tom Whitman, and to Julie and Claire Shubik

ACKNOWLEDGMENTS

This book had a lengthy gestation period, during which we were helped by numerous people who read the manuscript, or portions of the manuscript, and made many invaluable suggestions. The names are too numerous to mention but our thanks go to them all—family members, friends, students, Wall Street practitioners, accountants, tax lawyers, securities lawyers and academic colleagues at Yale and other universities.

Two people worked especially diligently in bringing this book to fruition—Albert Erskine, our editor, and Marilyn Hainesworth, administrative vice-president of M. J. Whitman and Co. Inc., who oversaw the many housekeeping chores involved in preparing the manuscript.

Errors and shortcomings, of course, belong to us alone.

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those who have been brought up, as most of us have been, into every corner of our minds.

J. M. KEYNES

FOREWORD

I first met Marty Whitman and Martin Shubik while we were students at Princeton Graduate School. We played poker together on a regular basis, often well into the night. I doubt if any real money ever changed hands, probably because we had none to wager, but when we reminisce about that time we each remember being the big winner. While we may have been gamblers at the time, Marty and Martin have taken few gambles since, either with their own money or with the money entrusted to them by investors. I didn’t recognize it then, but they were starting to exhibit the tendencies that would make them successful investors. They knew when to take the calculated risk, when the payoff merited exposure, when to cut their losses, and when to raise the ante. I guess it proves the old adage “If a dog is going to bite, he’s going to do it as a pup.”

Obviously I have known the authors for a long time, Marty Whitman in particular. I know he is smart, honest, and successful, three characteristics I admire not only in business associates but also in friends. That he is successful should come as no surprise and would be a given for anyone who proposes to write a book on investing. After all, who would buy a book from someone with a history of breaking even? But Marty has taken success to levels most portfolio managers are hard-pressed to imagine. For example, since 1984 he has been the principal at Equities Strategies Fund and Third Avenue Value Fund, while Martin served the same two firms as an independent director. During that time, directed by the investment strategies outlined in this book, these funds on average vastly outperformed any relevant market index on a long-term basis, and for a majority of the time.

I can also speak from personal experience. Marty has served on the boards of both public companies of which I have been chief executive officer and today is the lead director on the Nabors Industries board. He is a man of extraordinary wisdom and insight, and I can honestly say I never make a major move without his input. He is the king of due diligence, spending an enormous amount of time collecting and analyzing information before pulling the trigger on any transaction. I have heard it said that he has been extremely fortunate in some of his investment decisions, but I have observed that the harder he works the luckier he gets.

His counsel has served me well on many occasions and in a broad range of situations. For instance, he advised me on a passive investment in a Japanese company called Tokio Marine, which netted the first serious money I ever made. I subsequently sought his counsel on my very first acquisition. I had let my ego usurp my good sense, agreeing to personally guarantee a note we had issued to the seller. Marty told me to get out of the guarantee or get out of the deal, and that if I didn’t take his advice I should never ask for it again. I did, and I still look back on that as representative of the kind of nononsense, pragmatic perspective that has characterized his investment history.

More recently Marty’s financial acumen and market savvy were invaluable in the issuance of a $700 million convertible debenture with zero coupon and zero accrued interest. He recommended that Nabors take advantage of this low-cost capital even though we didn’t need the money at the time. We followed his advice, and it gave us much greater financial flexibility.

So what makes this book unique? It certainly goes against conventional wisdom. For instance, the philosophy of safe and cheap investing ignores price fluctuations for securities and other market risks, guarding only against investment risk, something going wrong with the company, or with the interpretation of securities covenants. Likewise, relying on the “Nifty Fifty” or the top 100 common stocks of large, well-organized companies as the only source of high-quality investments has been abandoned. Discarded also is the notion that a concept of general risk is useful for analysis. Macro data, such as predictions about general stock market averages, interest rates, GDP, and consumer spending, have been abandoned as irrelevant as long as such investments are undertaken in countries marked by political stability and an absence of violence in the streets.

But this book is not about what the authors don’t believe. The nuggets in this book are what they do believe, like the principle of “good enough,” which encourages investors to content themselves when a good return has been realized, even if it is not perfect. Adhering to a long-term philosophy is also bedrock investment advice, which the authors personally subscribe to and encourage, regardless of the age of the investor. Another key principle involves taking advantage of the era of expanded corporate disclosure, closely scrutinizing a company’s public communications to direct or influence investment decisions. Of course, the principle of buying stocks that are safe and cheap is at the heart of this book and is a philosophy every serious investor should embrace.

Who should read this book? The obvious answer would be anyone looking to develop a sound investment strategy, or anyone striving to incorporate into a portfolio some useful ideas that bring value long-term. However, it is equally valuable for anyone who runs a business, or aspires to run one. Many of the principles that direct the Nabors operating philosophy, and that are responsible for the success we have achieved in spite of the cyclical nature of our markets, are direct parallels to personal strategies espoused by the authors. There are many examples. Like the authors, we downplay the macro, refusing to overly concern ourselves with the price of commodities. When prices are up the company has impressive earnings, but when they are down we use our liquidity to make acquisitions, or grow organically if conditions are favorable. We also understand that access to capital is critical for companies in a growth mode, following the authors’ recommendation to gain that access before we need it. Simply stated, the time to borrow is different from the time to spend.

The Aggressive Conservative Investor is a must-read for any investor looking to develop a sound, long-term growth strategy and should be a fixture in every business library. The authors have the ability to take complex financial concepts and articulate them in terms that virtually anyone can understand. They describe this as the bridge between Wall Street and Main Street. I think you will find it a bridge worth crossing.

Eugene M. Isenberg Chairman of the Board Nabors Industries July 2005

INTRODUCTION

Dramatic changes have occurred since The Aggressive Conservative Investor was published in 1979. The basic thesis of the book—emphasizing financial integrity—remains at least as valid today as it was then, and because of subsequent developments, may be even more valid now. Moreover, changes since 1979 in the disclosure area, it seems to us, have made it easier for a diligent person to become a successful aggressive conservative investor than was possible in the late 1970s.

The Aggressive Conservative Investor includes six major areas that warrant review today:

• Changes in terminology

• Performance data

• The disclosure explosion

• Our changed, or modified, beliefs

• The changed environment

• Troublesome regulatory problems

CHANGES IN TERMINOLOGY

When we initially wrote The Aggressive Conservative Investor, we named our strategy “the financial-integrity approach.” We now like to think of it as “the safe and cheap approach” (which sounds less pompous and is more direct).

For a common stock to be an attractive investment, The Aggressive Conservative Investor outlined four essential characteristics:

• The company ought to have a strong financial position that is measured not so much by the presence of assets as by the absence of significant encumbrances, whether a part of a balance sheet, disclosed in financial statement footnotes, or an element that is not disclosed at all in any part of financial statements.

• The company ought to be run by reasonably honest management and control groups, especially in terms of how cognizant the insiders are of the interests of outside security holders.

• There ought to be available to the investor a reasonable amount of relevant information that is akin to full disclosure, though this will always be something that falls somewhat short of the mark.

• The price at which the equity security can be bought ought to be below the investor’s reasonable estimate of net asset value.

These four characteristics describe common stock investment under both a financial-integrity approach and a safe and cheap approach. Especially since there have been quantum improvements in the quantity and quality of information available, these four concepts hold as firm today as in 1979.

The other terminology change is the use of the acronym OPMI (outside passive minority investor) to describe outside investors and passivists as well as non-control and unaffiliated security holders. OPMIs run the gamut from day traders to most institutional investors to safe and cheap investors who do not seek elements of control over the companies in which they hold securities positions. The reason for using the term OPMI rather than investor is that the word investor is one of the most misused and misunderstood words on Wall Street. Most of the time it seems as if those using the term Investor really mean short-run speculator—either individual or institutional—so we’ve mostly discontinued use of the word investor in favor of OPMI.

PERFORMANCE DATA

Since 1984, the authors have been either the principal, or an independent director or trustee of two mutual funds—Equities Strategies Fund and Third Avenue Value Fund—whose modus operandi has been to follow the safe and cheap approach in investing in securities.

How have the two funds fared from 1984 through mid-2005? They have vastly outperformed any relevant market index on a long-term basis, on average, and for a majority of the time. Efficient market theorists will carp that the funds have not outperformed relevant indexes consistently. Consistently is really a dirty word meaning all the time. In investing, consistently should have relevance only for day traders, not long-term buy-and-hold investors.

A comparison of the Equity Strategies Fund’s performance with that of the Standard & Poor’s 500 Index is contained in Table I.1. We took over management of Equity Strategies in April 1984. Prior to that, the fund was invested in options. In 1994, Equities Strategies Fund was merged into Nabors Industries on a basis where each one share of Equity Strategies received 5.84 shares of Nabors Industries common. An investor investing $10,000 in Equity Strategies in April 1984 would own Nabors common stock with a market value of over $286,000, in April 2005. This equals a compound annual return for the 21 years of 17.2%.