Martin J. Whitman
Encyclopedia
Martin J. Whitman is an American
investment advisor and a strong critic of the direction of recent changes in Generally Accepted Accounting Principles (GAAP) in the U.S. He is founder, Co-Chief Investment Officer, and Portfolio Manager of the Third Avenue Value Fund.
, which renamed its School of Management after Whitman, after a large gift from him in June 2003. He is an adjunct faculty member at Yale School of Management
.
s rather than the needs and desires of short-term stock market
speculators... [T]he amount of money invested in credit instruments of all types in our economy dwarfs the amount of funds invested in equities." Furthermore, "Most private companies, given a choice, seek to enhance [Net Asset Value] by
means other than having reported operating income, which is taxable at maximum rates."
He argues that "in GAAP... material facts [should] be disclosed in a conservative, consistent, and reliable manner", and that "Financial statements [should] be prepared under the assumption that the users of such financial statements are reasonably intelligent, reasonably diligent, and are people who understand not only the uses, but also the limitations, of GAAP... [T]he most GAAP can give... are objective benchmarks which the analyst then uses as a tool to determine his, or her, version of economic truth and economic reality."
As an example of the difference in these perspectives, he discusses the current controversy over whether stock options ought to be expensed using "fair value method" or "intrinsic value method
" and points out that the issue of stock dilution is "a stockholder problem, not a company problem". He points out that to a creditor there is "a world of difference in the credit-worthiness of an issuer who... pays out... $200 million per annum in cash for executive compensation... [and one who] issues stock options on a non-dividend-paying common stock with a "fair value" of $200 million" (the point being that the latter is of almost no concern to a creditor).
In particular, he cites as wrongheaded an advertisement in the Wall Street Journal of April 27, 2004, which argues that "financial statements exist to help investors make informed investment decisions". He responds, "That statement is just plain wrong from either a public policy point of view or a creditor's point of view. Financial statements exist to fulfill the needs and desires of many constituencies: managements, creditors, governments, customers, etc." (italics in original).
, Whitman is a critic of free market
s in the sense advocated by Milton Friedman
and Friedrich Hayek
. For example, in a discussion of John Maynard Keynes
, Friedman and Hayek, Whitman wrote that the three "…great economists… missed a lot of details that are part and parcel of every value investor
's daily life." While calling Hayek "100% right" in his critique of the pure command economy, he writes "However, in no way does it follow, as many Hayek disciples seem to believe, that government is per se bad and unproductive while the private sector is, per se good and productive. In well-run industrial economies, there is a marriage between government and the private sector, each benefiting from the other." As illustrations of this, he points at "Japan
after World War II
, Singapore
and the other Asian Tigers
, Sweden
and China
today… Government has a
necessary role in determining how control persons [management, boards of directors, etc.] are incentivized…
He argues, in particular, for the value of government-provided credit and of carefully crafted tax laws. Further, Whitman argues (explicitly against Hayek) that "a free market situation is probably also doomed to failure if there exist control persons who are not subject to external disciplines imposed by various forces over and above competition." The lack of these disciplines, says Whitman, lead to "1. Very exorbitant levels of executive compensation
… 2. Poorly financed businesses with strong prospects for money defaults on credit instruments… 3. Speculative bubbles… 4. Tendency for industry competition to evolve into monopolies
and oligopolies
… 5. Corruption." For all of these he provides recent examples from the U.S. economy, which he considers to be in some respects under-regulated, although in other respects over-regulated (he is generally opposed to Sarbanes-Oxley
).
He believes that an apparently "free" relationship—that between a corporation and its investors and creditors—is actually a blend of "voluntary exchanges" and "coercion". For example, there are "voluntary activities, where each individual makes his or her own decision whether to buy, sell, or hold" but there are also what he defines as "[c]oercive activities, where each individual security holder is forced to go along…provided that a requisite majority of other security holders so vote…" His examples of the latter include proxy voting
, most merger and acquisition transactions, certain cash tender offers, and reorganization or liquidation in bankruptcy
. Whitman also states that "Corporate America would not work at all unless many activities continued to be coercive."
"I am one with Professor Friedman that, other things being equal, it is far preferable to conduct economic activities through voluntary exchange relying on free markets rather than through coercion. But Corporate America would not work at all unless many activities continued to be coercive."
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
investment advisor and a strong critic of the direction of recent changes in Generally Accepted Accounting Principles (GAAP) in the U.S. He is founder, Co-Chief Investment Officer, and Portfolio Manager of the Third Avenue Value Fund.
Family relations
Whitman's wife, Lois Whitman, is the founder and director of the Children's Rights Division at the international rights monitoring organization Human Rights Watch. A social worker and attorney by training, she has led the division since 1994.Education
Whitman is a 1949 graduate of Syracuse UniversitySyracuse University
Syracuse University is a private research university located in Syracuse, New York, United States. Its roots can be traced back to Genesee Wesleyan Seminary, founded by the Methodist Episcopal Church in 1832, which also later founded Genesee College...
, which renamed its School of Management after Whitman, after a large gift from him in June 2003. He is an adjunct faculty member at Yale School of Management
Yale School of Management
The Yale School of Management is the graduate business school of Yale University and is located on Hillhouse Avenue in New Haven, Connecticut, United States. The School offers Master of Business Administration and Ph.D. degree programs. As of January 2011, 454 students were enrolled in its MBA...
.
Career in fund management
He has used the quarterly shareholder letters of his fund as a running critique of what he calls the "primacy of the income account" ("primacy of the income account" means that corporate wealth is created only by flows, i.e., having positive earnings, and/or cash flows for a period), which he argues serves only short-term speculators rather than long-term investors. For example, in his July 31, 2004 letter http://www.thirdavenuefunds.com/3Q04.pdf, he writes that recent developments in GAAP "...increasingly impose unneeded and counter-productive burdens on American corporations, American management and American capital markets. GAAP... ought to be geared toward meeting the needs and desires of creditorCreditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s rather than the needs and desires of short-term stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
speculators... [T]he amount of money invested in credit instruments of all types in our economy dwarfs the amount of funds invested in equities." Furthermore, "Most private companies, given a choice, seek to enhance [Net Asset Value] by
means other than having reported operating income, which is taxable at maximum rates."
He argues that "in GAAP... material facts [should] be disclosed in a conservative, consistent, and reliable manner", and that "Financial statements [should] be prepared under the assumption that the users of such financial statements are reasonably intelligent, reasonably diligent, and are people who understand not only the uses, but also the limitations, of GAAP... [T]he most GAAP can give... are objective benchmarks which the analyst then uses as a tool to determine his, or her, version of economic truth and economic reality."
As an example of the difference in these perspectives, he discusses the current controversy over whether stock options ought to be expensed using "fair value method" or "intrinsic value method
Intrinsic value (finance)
In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value...
" and points out that the issue of stock dilution is "a stockholder problem, not a company problem". He points out that to a creditor there is "a world of difference in the credit-worthiness of an issuer who... pays out... $200 million per annum in cash for executive compensation... [and one who] issues stock options on a non-dividend-paying common stock with a "fair value" of $200 million" (the point being that the latter is of almost no concern to a creditor).
In particular, he cites as wrongheaded an advertisement in the Wall Street Journal of April 27, 2004, which argues that "financial statements exist to help investors make informed investment decisions". He responds, "That statement is just plain wrong from either a public policy point of view or a creditor's point of view. Financial statements exist to fulfill the needs and desires of many constituencies: managements, creditors, governments, customers, etc." (italics in original).
Criticism of the "free market" concept
Although a strong advocate of capitalismCapitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
, Whitman is a critic of free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
s in the sense advocated by Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
and Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
. For example, in a discussion of John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
, Friedman and Hayek, Whitman wrote that the three "…great economists… missed a lot of details that are part and parcel of every value investor
Value investing
Value investing is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis...
's daily life." While calling Hayek "100% right" in his critique of the pure command economy, he writes "However, in no way does it follow, as many Hayek disciples seem to believe, that government is per se bad and unproductive while the private sector is, per se good and productive. In well-run industrial economies, there is a marriage between government and the private sector, each benefiting from the other." As illustrations of this, he points at "Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
after World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
and the other Asian Tigers
Asian Tigers
The Asian Tigers is a Pakistani militant group, first publicised when they claimed credit for the kidnapping of former Pakistani intelligence officers Khalid Khawaja, Colonel Imam, British journalist Asad Qureshi and Qureshi's driver Rustam Khan in March 2010. Khawaja was killed in April 2010....
, Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
and China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
today… Government has a
necessary role in determining how control persons [management, boards of directors, etc.] are incentivized…
He argues, in particular, for the value of government-provided credit and of carefully crafted tax laws. Further, Whitman argues (explicitly against Hayek) that "a free market situation is probably also doomed to failure if there exist control persons who are not subject to external disciplines imposed by various forces over and above competition." The lack of these disciplines, says Whitman, lead to "1. Very exorbitant levels of executive compensation
Executive compensation
Executive pay is financial compensation received by an officer of a firm, often as a mixture of salary, bonuses, shares of and/or call options on the company stock, etc. Over the past three decades, executive pay has risen dramatically beyond the rising levels of an average worker's wage...
… 2. Poorly financed businesses with strong prospects for money defaults on credit instruments… 3. Speculative bubbles… 4. Tendency for industry competition to evolve into monopolies
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
and oligopolies
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
… 5. Corruption." For all of these he provides recent examples from the U.S. economy, which he considers to be in some respects under-regulated, although in other respects over-regulated (he is generally opposed to Sarbanes-Oxley
Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
).
He believes that an apparently "free" relationship—that between a corporation and its investors and creditors—is actually a blend of "voluntary exchanges" and "coercion". For example, there are "voluntary activities, where each individual makes his or her own decision whether to buy, sell, or hold" but there are also what he defines as "[c]oercive activities, where each individual security holder is forced to go along…provided that a requisite majority of other security holders so vote…" His examples of the latter include proxy voting
Proxy voting
Proxy voting has two forms: delegable voting and delegated voting, which are procedures for the delegation to another member of a voting body of that member's power to vote in his absence, and/or for the selection of additional representatives, as in the case with transitive proxies...
, most merger and acquisition transactions, certain cash tender offers, and reorganization or liquidation in bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
. Whitman also states that "Corporate America would not work at all unless many activities continued to be coercive."
"I am one with Professor Friedman that, other things being equal, it is far preferable to conduct economic activities through voluntary exchange relying on free markets rather than through coercion. But Corporate America would not work at all unless many activities continued to be coercive."
Works
- Whitman, Martin J. (1999). Value Investing: A Balanced Approach. New York: John Wiley & Sons. ISBN 0-471-16292-2.
- Whitman, Martin J. & Shubik, MartinMartin ShubikMartin Shubik is an American economist, who is Professor Emeritus of Mathematical Institutional Economics at Yale University. He was educated at the University of Toronto and Princeton University...
(2005). The Aggressive Conservative Investor (2nd ed.). Hoboken, NJ: John Wiley & Sons. ISBN 0-471-76805-7. - Whitman, Martin J. & Diz, Fernando (2009). Distress Investing: Principles And Technique. Hoboken, NJ: John Wiley & Sons. ISBN 978-0-470-11767-5.