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Whitman's glass-half-full take on market

'There are great values out there now,' says octogenarian founder of Third Avenue Management

FUNDS REPORTER

TORONTO -- Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown.

"It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd.

"We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview.

The stock market crash of 1973-74, which affected all the major stock markets around the world, lasted 694 days before bottoming out.

"Everything went down every day, and if you bought, you hit a lot of 10-baggers," recalled Mr. Whitman. "I hope that we do it with a lot of what we are doing now."

Mr. Whitman, who buys stocks he considers to be "safe and cheap," still oversees the firm's flagship mutual fund, Third Avenue Value, in the United States.

The former Wall Street analyst with a background in distressed investments didn't start his fund company until 1990 at 65, an age when most people retire. As of Aug. 31, his global fund has posted an average annual return of 14.4 per cent since inception.

His colleague, Ian Lapey, who is in his early 40s and is the designated successor to Mr. Whitman, runs the similarly managed AIC Global Focused Fund sold in Canada.

With the U.S. government bailing out American International Group Inc., and Lehman Brothers Holdings Inc. filing for bankruptcy protection this week, Mr. Whitman described the unfolding events as "the most severe financial crisis" that he has seen.

It's worse than the U.S. savings and loans crisis in the 1980s, Asian currency crisis of 1997 and the collapse of hedge fund Long-Term Capital Management and the Russian default crisis in 1998, he said.

But, he said: "This too shall pass."

Mr. Whitman buys companies that are very well financed; whose stocks are priced at a substantial discount to net asset value (NAV), and where the businesses can grow their NAV by at least 10 per cent compounded a year over the next five to 10 years.

"If the value is compelling enough and the businesses have staying power, we just buy and don't worry about the market," Mr. Whitman said.

"Our turnover is about 10 to 15 per cent a year at most, and the majority of our exits are companies that get taken over rather than a sale."

Some financials he has been buying lately include Power Corp. of Canada, caught in the downdraft, and U.S. securities like bond insurer Ambac Financial Group Inc., Bank of New York Mellon, and MBIA Insurance Corp.'s 14-per-cent surplus notes.

"We are extremely big on Brookfield Asset Management," he added. "It's very well financed, brilliantly managed by Bruce Flatt and his team. We are also big on the oil sands. We like Suncor, EnCana and Nabors Industries, whose subsidiary Nabors Canada is the largest land drilling company in the world."

He has also been picking up more shares of Toyota Industries Corp., a long-time favourite. And he has been accumulating more stock in Hong Kong-based Henderson Land Development Corp. Ltd., Hang Lung Group Ltd. and Hutchison Whampoa Ltd.

"All of these [Hong Kong] companies have a huge presence in mainland China," he said. "If we are going to be wrong about these investments, it's going to be for political - not economic - reasons."

While legendary value investor John Templeton - who died in July at age 95 - retired from the mutual fund business by age 80, Mr. Whitman intends to keep working.

"If I can't be a tennis pro - and I can't - I might as well just keep doing this as long as I am able to," quipped Mr. Whitman, an avid tennis player. "Just show me the door when I really get too old. So far, there is no sign."

© 2007 The Globe and Mail. All rights reserved.

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