Wednesday, January 17, 2007

Excerpt from Third Avenue Funds letter to shareholders

On October 6, ENS posted an excerpt from Third Avenue Funds quarterly report. I follow today with one from their latest quarterly report, again written by Martin Whitman, the 82 year old portfolio manager of the $9.3 billion Third Avenue Value Fund.

Whitman again discusses the emphasis in SEC and FASB disclosure requirements on short term earnings results as reported, with less emphasis on metrics that give investors, as opposed to traders, the information that they need. He writes, "The best hypothetical standard for disclosure, to my mind, ought to be what is required for making sound judgements by those who are long-term unsecured creditors, holding privately placed debt instruments; and not the average investor who thinks he, she, or it are vitally affected by day-to-day, or hour-to-hour, price fluctuations. This is because, at bottom, the average investor cannot be protected unless he, she, or it, protect themselves. The present emphasis on serving short-run interests seems to be ruining U.S. capital markets for publicly-traded equities."

He does go on to say, "It ought to be noted, however, that it is hard for TAVF management to complain about the disclosure system. Over the last 40 years the SEC has done a magnificent job in improving disclosure for buy-and-hold investors such as TAVF."

Later in his comments Whitman does express more concern, "Third Avenue is harmed by non-productive regulation as embodied both in GAAP, as currently constituted, and the Sarbanes-Oxley Act of 2002. Also, frivolous stockholder lawsuits are a problem, especially the class of lawsuits labeled 'fraud on the market'. As things exist now, no foreign issuer is likely to access U.S. capital markets unless they absolutely need U.S. capital. TAVF invests heavily in foreign securities. Further, many small companies, now publicly traded, are thinking about 'going dark', i.e., no longer being subject to regulation by the SEC. Needless to say this environment is not conducive to the well being of the U.S. economy, which for many years, at least since 1933, has benefitted from having the deepest, most efficient, best informed capital markets ever known to mankind."

And needless to say, I really enjoy Mr. Whitman's commentary.

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