Morningstar Advisor - Fall 2007 - 54

Morningstar Conversation JME: Exactly. And also, the other angle— which neither you nor I care about—is that Toyota Motor, the stock, is in the big index. Toyota Industries, which is the holding company for Toyota Motor, is not in the big index. So people who pay a great deal of attention to index weightings will sacrifice the 30% discount, which they could get if they bought Toyota Industries as opposed to Toyota Motor, just because Toyota Motor is in the big index. Buying into ‘Safe and Cheap’ JME: Martin, you once wrote that, in essence, all of you on the investment side, portfolio managers as well as analysts, are analysts— which is exactly what we think. MW: We have a mantra, “safe and cheap.” I hope my 21 analysts have signed off on safe and cheap. At the moment, I think 19 of 21 have. [laughter] To my taste, one or two of them in the managed account are a little bit too market conscious, and don’t put enough emphasis on the quality of the financial position. If I’ve done anything right, I’ve done a terrific job in having our analysts sign off on safe and cheap. My designated successor, a terrific analyst, Ian Lapey, was at First Boston before Whitman has given no date when he’ll step down. Lapey manages the Canadian-offered AIC Global Focused Fund. Third Avenue is the subadvisor to this offering. I have been an analyst for over 50 years, and I’m still waiting to lose my first night’s sleep worrying about the market. Marty Whitman still a 5% or 6% shareholder of Toyota Motor. Under Japanese accounting, on the balance sheet, Toyota Motor and other portfolio companies have to be carried at market. Toyota Industries’ common is selling out at 30% discount from net asset value. However, under Japanese and U.S. accounting, all Toyota Industries picks up in earnings from Toyota Motor is dividends paid by Toyota Motor, not the retained earnings of Toyota Motor. If you look at GAAP, Toyota Industries is selling around 21 times earnings. However, if you adjust the earnings to pick up Toyota Industries’ equity in the undistributed earnings of Toyota Motor, it’s selling around 6 or 7 times earnings. We, over many years, thought Toyota was a growth stock, and we thought we were buying it under 10 times earnings. And I think, essentially, we’re right. But that’s how I think. You and I, Jean-Marie, both try to buy growth and try not to pay for it. JME: But also what you did, Martin, by buying Toyota Industries as opposed to Toyota Motor, is to look at Toyota Industries in an unconventional way. Looking at just the multiple of earnings is the wrong way. There is a number of securities where you have to be careful how you look at them, and where you may not want to look at them in the conventional manner. We’ve been a shareholder in Rayonier RYN, which basically owns timberlands, for more than a decade. Timberland is a bit like real estate. Price to earnings does not apply. MW: It’s wealth creation that applies. we hired him away six years ago. He came to us then and wrote up and recommended four, five, or six telecommunications equipment common stocks, using our criteria, where in each instance, cash alone was substantially in excess of all book liabilities. After he made the recommendations, the stocks proceeded to go down dramatically. Ian noted that we—I in particular—thought he had done a terrific job. He knew that if he had stayed at First Boston, he’d be fired. And boy, did he sign off. The other analysts 54 Morningstar Advisor Fall 2007

Morningstar Advisor - Fall 2007

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