Morningstar Advisor - Fall 2007 - (Page 51)

Now, conventional money management, between the spring of 2000 and the spring of 2003, got hurt to the tune of 30% to 40%, because the markets went down as much. 30000 And even though conventional money 25000 management has recovered a bit over the past 20000 four or five years, because markets have 15000 been up, I think, over time, it will be squeezed between the Vanguard-style index funds, on 10000 the one hand, and the absolute return investors 5000 on the other. MW: Agreed. But I think a big point is, that is really irrelevant to us. We buy and hold long term. Markets go down, we take advantage. We sort of operate under the implicit assumption that if we don’t know more about the situation than the market, we wouldn’t be there. They operate under the assumption that the market is sending me messages; the market knows more than any individual. It’s just the opposite. JME: That’s right. I think it’s Seth Klarman Famed value manager of the Baupost Group of hedge funds. Klarman’s 1991 out-of-print classic about 20000 value investing, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, is 15000 selling at growth prices—more than $1,000—on eBay and Amazon.com. 10000 for the information that the others don’t have. And as you said, we have the same information, which is readily available. We try to use it better than the others. It’s in the interpretation, in a sense, and the reading of the available information. MW: Absolutely. For conventional people, there is a primacy of the income account. The view that corporate wealth is only created by flows, such as having positive earnings and cash flows over a period of time. Whitman sees this as a concern of short-term speculators, not buy-and-hold investors such as himself. See Third Avenue’s “Letters to Our Shareholders” (July 31, 2006) for a good discussion by Whitman on the topic. Third Avenue Value TAVFX $30K 20 S&P 500 03 04 05 06 07 Category Mid-Cap Blend Morningstar Rating QQQQQ Minimum Investment $10,000 Expense Ratio (%) 1.08 10-Yr Anl Total Rtn (%) 11.68 10-Yr Anl Investor Rtn (%)* 11.74 Investor Rtn Rank Category 16 Stewardship Grade — In what we do, there is no primacy of the income account. If there is a primacy of anything, it’s the quality of the financial position. That governs what we do. I think it governs what you do. It’s a matter of weight to information. If somebody else is going to emphasize earnings per share, and we’re going to emphasize quality of the balance sheet, we’re going to weigh the information very differently. As a matter of fact, on this primacy of the income account, I know from what you did in Bank for International Settlements A Swiss-based organization owned by central banks that Eveillard bought in the mid-1990s. It had half its assets in bullion. Eveillard argued at the time that the stock provided an opportunity to buy gold at a discount. *Dollar-weighted return that measures how the typical investor in the fund fared. Data as of Sept. 30, 2007. First Eagle U.S. Value A FEVAX $20K Jan-03 15 Jan-04 Jan-05 S&P 500 Jan-06 Jan-07 who said, “The biggest edge that value 5000 investors have is their long-term orientation,” which I think jives as well with Ben Graham saying, “Short term, the market’s a voting machine; long term, it’s a weighing machine.” MW: We like to say at Third Avenue that we do rather well, but when it comes to information, we’re always the last to know. [laughs] But it’s just not important. It’s not that we get superior information, but rather, that we use the available information in a superior manner. JME: That’s right. MW: That’s where we come from, you and I. JME: So many investors are always looking 03 04 05 06 07 Feb-03 Jul-03 Feb-04 Jul-04 Feb-05 Jul-05 Feb-06 Jul-06 Dec-06May-07 Mar-03Aug-03 Mar-04Aug-04 Mar-05Aug-05 Mar-06Aug-06 Feb-07 Jul-07 Apr-03Sep-03 May-04Oct-04 Apr-05Sep-05 Apr-06Sep-06 Mar-07Aug-07 May-03Oct-03 Jun-04Nov-04 May-05Oct-05 May-06Oct-06 Apr-07 Jun-03Nov-03 Sep-04 Jun-05Nov-05 Jun-06Nov-06 Jun-07 Category Mid-Cap Value 5-Yr Anl Total Rtn (%) 14.94 Sep-07 Dec-03 Apr-04 Dec-04 Dec-05 5-Yr Anl Total Rtn (%)* 14.66 Investor Rtn Rank Category — Stewardship Grade X that our basic emphasis is on wealth creation, not earnings from operations, knowing that earnings from operations and cash flow from operations is just one method of creating wealth. And usually, it’s the least desirable method of creating wealth. We have alternatives. JME: That’s right. And you have done so much with real estate-related securities. Of course, that’s a case where the earnings per share simply do not… Morningstar Rating QQ Minimum Investment $2,500 Expense Ratio (%) 1.25 *Dollar-weighted return that measures how the typical investor in the fund fared. Data as of Sept. 30, 2007. MorningstarAdvisor.com Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 51 http://www.ebay.com http://Amazon.com http://MorningstarAdvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Fall 2007

Morningstar Advisor Fall 2007 Features Departments Letter from the Editor Inbox 10 Years After: Developing Markets Make Progress Research Briefs Investors Should Adjust Their Home Bias Few Mutual Funds Exhibit Serial Correlation Valuating ETFs, the Equity Analyst's Way It’s All About Location See the World (Differently) The Return of the Global Flexible Investor Map of International Value Sound as a Loonie? Fair Exchange In Their Own Worlds A Good Read Putting Their Heads Together Buying Protection Scoping Out Easy-to-Use Funds Finding Good Stewards Consumer Firms Go Global Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities New at Morningstar The Whole Wide World

Morningstar Advisor - Fall 2007

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