Marty Whitman of the Third Avenue Value Fund is one of my favorite investors. With any luck, he’ll be one of my wife’s, as well. My wife, like Marty, loves to buy things cheap. And she’s not afraid to haggle.

It’s not uncommon for me to sit on a mall bench with a book while she peruses store to store, negotiating a discount. “You’ll be so proud,” she says on a routine stop to my home base. “Neiman Marcus has a stunning Monique Lhuillier dress for half price, and I convinced the lady to take off another 10%.”

I, of course, say to myself (and let me stress “myself”) that 50% off at Neiman Marcus is still 50% more than at most places. But my thought more often than not remains, well, just a thought.

“What’s the intrinsic value?” I ask.

My wife tilts her head, raises those eyebrows and without hesitation assures me it’s more than the price. “And furthermore,” in a tone that assures me the discussion ends here, “it’s Saturday. Leave the finance downtown.”

I chuckle.

So goes the wonderful cadence of marriage.

My obsession with intrinsic value got her thinking. The other night, she opened up her brokerage statement. A few minutes later, she says, “Why does my broker have me in Apple? I thought you said Apple was too expensive.”

“Maybe he likes iPods,” I muse. She fails to find the humor.

“Seriously, Apple’s price-to-earnings ratio is well above 30. That’s expensive, right?”

“You should see the price-to-book,” I quip, trying to focus on the latest episode of The Wire. She grabs the remote and pushes pause.

We walk to the bookcase. Thirty minutes later, I find my wife 10 pages deep into Christopher Browne’s latest work, The Little Book of Value Investing.

It’s been three days now. Last night, she started reading an advance copy of Chris Mayer’s latest book, Invest Like a Dealmaker.

So the first thing this morning — and I mean first thing — she asks, “How do you compare EBITDAs around various industries?” Not your typical teeth-brushing conversation, but nonetheless, I’m very proud.

She has what it takes. She focuses on what she may lose well before she considers what she may gain. She sees the business, not the stock. Let me reiterate: I’m very proud.

So this morning, I sent her a recent letter from Third Avenue Management. I highlighted the following:

“Throughout Third Avenue’s more than two decades of existence, we have experienced several bear markets, yet the macro market environment has never influenced the process by which we select investments. To repeat, Third Avenue invests for the long term.

“Third Avenue has faced securities bear markets in the past and no doubt will face others in the future. Yet for long-term fundamental investors such as Third Avenue, the general market is relatively unimportant. In the long run, the performance of Third Avenue’s portfolios will be driven by the merits of the investments themselves, not by general market considerations. As such, we continue to focus on finding securities that meet our ‘safe and cheap’ investment criteria today, allowing for potential long-term growth in the future.”

We, like the better minds at Third Avenue, have no idea which way the market is heading. In the short run, we don’t really care what Mr. Market thinks. We know he’s been wrong before.

As investors, we’re looking to buy businesses that provide a margin of safety… Companies trading near or below their intrinsic value with established earning power. Leave the charts and quarterly earnings reports to traders. They’re playing a different game.

We’re looking to buy a business, not trade it. And as with any good purchase, we never want to pay too much.

Here’s why…

Let’s say you receive a windfall bonus of $10,000. You want to invest your newfound wealth in one of two options. Option A is a government bond yielding 5% annually. Option B is market’s latest highflying growth stock promising returns of 10% or more for the next 20 years.

You naturally assume 10% is better than 5%, so you pour your $10,000 into the highflier.

As it turns out, you bought your golden stock on a 52-week high. The first year is rough…the stock loses 50% of its value over the first 12 months. But you hang on, and sure enough, the stock starts taking off. It grows at a remarkable 10% annual pace.

But even at a growth rate double that of the government bond, it would still take you 17 years to overtake that bond’s return!

Now, I’m sure that tech stocks, swank hedge funds and their excessive fees and other “insider” investments make great stories. They make you feel good when you proudly tell your neighbor that your broker just slipped you into some exclusive nanotechnology company that promises to turn the Earth on its axis, reverse the spin and solve the world’s energy problems all at the same time.

Meanwhile, my wife, the budding value investor, plans to keep a good portion of her money in a first-class company that supplies the world with cement. She notes that shares of the business trade for a very reasonable price. She also notes a recent report suggesting that modernizing urban water, electricity and transportation systems over the next 25 years, according to Booz Allen Hamilton, would require $40 trillion — “a figure roughly equal to the 2006 market capitalization of all shares held in all stock markets in the world.” She’s convinced that’s going to require one massive amount of cement. I agree.

And she’ll make her investments just as everyone should make their investments…with a margin of safety.

Until next time,

Christopher Hancock
January 25, 2008

P.S.: You have probably heard of Chris Mayer a number of times. He is one of the leading experts in value investing. His new book, Invest Like a Dealmaker, will be released on March 3, 2008. Look for more details about it in future editions of Penny Sleuth.

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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