Dear Fellow Shareholders:In the main body of this letter I discuss, after re-readingGraham and Dodd’s writings on Value Investing, how thevarious Third Avenue Fund managers are followers of Graham and Dodd, and how these managers are different.Before doing that, there is one macro point in which Ibelieve strongly, and of which you should be aware. Thereis no way that I can see that those countries involved withthe Euro can be made credit-worthy unless all EuropeanSovereign Debt is assumed, or guaranteed, by each membercountryincluding,especially,Germany. Such anamalgamation would make Euro Sovereign Debt morecomparable to U.S. Treasuries than is now the case. I donotknow how the forthcoming European upheavals will work out. But cash rich economies with a plethora of investablefunds ought to do okay, provided they are opportunistic. Itis comforting to know that so much of Third AvenueManagement’scommon stockinvestments are incompanies operating in Hong Kong, mainland China,South Korea, Canada, Brazil, Australia and Sweden.
GRAHAM AND DODDREVISED, UPDATED AND PLACED IN CONTEXT
Benjamin Graham and David Dodd (“G&D”) wereprolific writers, publishing volumes in 1934, 1940, 1951,1962 and by Ben Graham alone in 1971. A principalproblem with G&D is that almost everyone in financetalks about G&D but very few seem to have actually readG&D. Thisletteris based essentially on the 1962 edition,
Security Analysis Principles and Technique
by Graham,Dodd and Cottle; and the 1971 edition of
The Intelligent Investor
by Graham.Because so many have such a superficial understanding of G&D, their names have become synonymous with theterm “value investing”. This, in turn, has led to someconfusion about what it is that value investors do,particularly, the way that value investing in equities ispracticed at Third Avenue Management (“TAM”).Though we are influenced by G&D, our methods,developed over the life of the firm, are basically different.ValueInvesting is one area offundamentalfinance (“FF”).It involves investments in marketable securities by non-control outside passive minority investors (“OPMIs”). Theother areas of Fundamental Finance involve the following:•Distress Investing•Control Investing•Credit Analysis•FirstandSecondStage Venture Capital InvestmentsModernCapital Theory (“MCT”), like Value Investing,focuses on investments by OPMIs. Unlike Value Investors,MCT focuses strictly on near-term changes in marketprices. In a number of special cases the factors importantin MCT are also important in Value Investing. MCT isdiscussed briefly at the end of this paper.G&D made three great contributions to Value Investing:1)G&D distinguished between market price and intrinsicvalue (a concept that still seems alien to MCT).2)G&D pioneered the concept of investing with amargin of safety.3)G&D promulgated the belief that investmentdecisions ought to be based on ascertainable facts.(This was before the modern era –say after 1964, when for OPMIs the amount of factual material
Letter from the Chairman(Unaudited)