The Aggressive Conservative Investor: Martin Whitman

Financial Position:

“Our underlying thesis is that in both fundamental security analysis and corporate finance a key element to be emphasized is financial position, measured by a concern’s ability to have and to create liquidity (either from surplus cash or from other assets readily convertible into cash, such as a portfolio of blue-chip corporate stocks and bonds whose resale is not restricted); by an ability to generate surplus cash from operations; by an ability to borrow; or by an ability to market new issues of equity securities.” p.5

The Financial Integrity Approach:

“In looking at a transaction, the single most important question seems to be, What have I got to lose?  Only when it seems that risks can be controlled or minimized does the second question come up: How much can I make?” p.17

Always know the downside.  Personally, I like to be in operations where my downside is nonexistent. Lazarus Partners put it best in a recent article when they said, “Either we make a lot of money, or we really make a lot of money”.  I’ve got to run it by the team, but that sounds like our new mission statement.  This commitment to avoid permanent capital loss is central to our investment creed. Albeit less severe, another category of risk is the opportunity cost associated with tying up precious capital for years on end while waiting to be vindicated.  But here are several points to consider regarding that scenario:

  • Benjamin Graham says that we should avoid operations that test the limits of human fortitude.  (Security Analysis, p.104)
  • Martin J. Whitman points out that some of the greatest stock price appreciations have followed a two to four year period of paper losses and no dividends.  He recommends averaging down in these situations. (The Aggressive Conservative Investor, p.75)
  • Warren Buffett always keeps dry powder on hand so that there will be few missed opportunities. (Berkshire Hathaway Letters to Shareholders, p.660)

Only when you understand the risk and are sure it can be minimized should you think about how much you can make.  Value investors measure risk internally, meaning we look at the condition and performance of the underlying business, not stock charts.  Financial position is the tool we use it to gauge risk and to assess the growth-potential of a business.

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