Morningstar Advisor - Fall 2007 - 53

You and I were talking at lunch about how the current credit crisis is particularly acute for companies who need relatively regular access to capital markets. Of course, what’s happened in July and August is a lot of market access has been shut off. Isn’t it nice to have a portfolio of companies which don’t need access to capital markets? Capital markets are very capricious. From time to time, credit will be easily available, or it won’t be available at all. On the equity end, from time to time, there will be IPO booms, or there will be times when you cannot raise new equity for love or money, either from the public or in a merger-and-acquisition context. It’s a very capricious market. JME: You certainly don’t want to be the shareholder of a company that needs to access capital markets at precisely the wrong time. MW: Yeah, and for some of these people, of course, we would provide the capital—at the right price. [laughter] Scarcity of Value Investors We’re not talking about a sprint, we’re talking about a marathon. Over 40 years, he did extraordinary work. Both you and I are willing to put up with the slight irritation associated with the fact that we may lag our peers. I mean, it was not so slight in the late 1990s, because we lagged for a few years, and as a result, we suffered from considerable redemptions. But I think the long-term investor, or the value investor, has to be willing to put up with short-term pain to achieve long-term gains. MW: I’m reminded by my daughter, who is a Broadway producer, that 95% of the people in show business are extraordinarily talented, but only 5% make a living. But you go into finance, 5% may be talented and 95% don’t know which end is up, but they all make a very comfortable living. Finance is a much better vocation in general than show business. [laughter] But I like to try to understand why other people do what they do. And let us say, Jean-Marie, that you and I were younger fellows, employed in a research department in a brokerage firm. I think we would be a lot more market conscious, because we might get fired, and we might not get promoted if we don’t have near-term performance. So we are insulated from what most other analysts face. I have a down year, big deal. It isn’t going to bother me. JME: But we did lose clients in the late 1990s, and it was… MW: A great experience, because we found out it was manageable. JME: That’s true. MW: You know, it was funny. Going into that redemption period, I was extremely worried, because many of the securities we own are called roach motels. You know, thin markets: Easy to check in, but you can’t check out. When we get massive redemptions, we’re not going to have stuff in the portfolio to sell. But we managed it. That’s very comforting. JME: Because we had enough cash. We had enough big stocks that were rather easy to sell. With the benefit of hindsight, it’s never helpful to have too much money coming out too fast, or too much money coming in too fast. MW: So much of our portfolios are takeover candidates. So we exit to the takeover market, and not to the public market. Again, ‘98 and ‘99 proved not to be a problem. JME: That’s right. But apropos of being taken out, sometimes I think it does not work, except in an immediate sense, to our advantage. Because maybe the business would have continued to create value for another five or 10 years. Incidentally, the financial planners I run into today, they all tell me, “We never left you.” I wonder, who did then? [laughter] But some in the late 1990s came to me and said, “Look, we understand what you are trying to do. We are all for it, but the client rushes into my office, bangs the table, and says, ‘Throw the bums out!’—the bums being us, of course. “What can I do?” says the financial planner. MW: Well, you know, for many of them, the long-term outlook changes day to day as the stock prices fluctuate. Finding Growth at Value Prices JME: We’ve been talking about the virtues of value investing. I think the late Bill Ruane, of the Sequoia Fund, estimated years ago that only 5% of professional money managers were value investors. How come there are so few value investors? I mean I’m happy there are so few, because if there were more, the field would be more competitive. I think the answer is psychological. To be a long-term investor means that you have to accept the fact that you’re not trying to keep up with the benchmark and with your peers on a short-term basis. So by definition, every now and then, you will lag. The Berkshire Hathaway annual report shows a record of Buffett over 40 years. It’s extraordinary. But you can spot very quickly three or four years where he did worse, sometimes much worse, than the S&P 500, which is his benchmark. But it doesn’t matter. JME: One thing you say that I’ve always liked, Martin, is, “Hey, we’re value investors, but we have nothing against growth.” What we don’t want is what you call “generally recognized growth.” In a sense, I suppose what you are saying is, “We’re all for growth, but we don’t want to pay for it.” MW: The second largest holding in the Third Avenue Value Fund is Toyota Industries, which is the founder of Toyota Motor TM and MorningstarAdvisor.com 53

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Morningstar Advisor - Fall 2007

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