Course 509: Great Investors: Marty Whitman
Cheap as Measured by Takeover Value
In this course
1 Introduction
2 Cheap as Measured by Takeover Value
3 Patience

Whitman is a value investor after Benjamin Graham's own heart. (We discuss Graham in Stocks 506.) Like Graham, Whitman looks for stocks that are dirt cheap, but the two investors use different measuring sticks. Graham used a company's price/book ratio to determine whether its stock was cheap. He wouldn't buy a company unless its stock was trading for less than 1.2 times book value per share. (A company's book value is essentially its assets minus its debts.) Whitman takes a different approach. He focuses on a company's takeover value, or how much he thinks a buyer would pay to buy the whole company. Whitman doesn't like to use book value because he says it overlooks too many intangibles. For instance, a money-management firm can sell its services over the telephone. Such telephone calls are assets, so to speak, but they don't appear as such on a company's balance sheet. According to Whitman, takeover value accounts for such intangibles. Whitman combs through a company's financial statements to figure out what he thinks the business is worth. He then looks to see whether the company’s balance sheet has remained strong in spite of setbacks in the business. He will generally pay no more than 50% of what he thinks a buyer would pay to acquire the whole firm. Whitman's criteria for a safe stock could be represented in this way: Safe = little debt + great assets + low overhead According to Whitman, a stock is safe if it meets three criteria:

1. The company has very little debt on its books.
Whitman looks for debt on the balance sheet and in the footnotes of the company's financial statements as he has seen companies downplay hefty liabilities by burying items in notes. Because he is sometimes investing in troubled companies, Whitman doesn’t like firms overburdened by debt: Debt can make a company’s troubles even worse. 2. The company has high-quality assets.
Whitman defines a high-quality asset as cash or real estate. He’s looking for assets with value, and what could have more value than cold, hard cash or lucrative real estate? 3. The company doesn't require a huge overhead to generate cash.
Whitman likes his companies to be able to make money without spending a lot of money. A money-management firm, for example, can conduct its business via the telephone or in a face-to-face meeting, which doesn't cost a lot.

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