Marty Whitman

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Marty Whitman

Marty Whitman, who died in 2018, was a vulture of a value investor. Whitman could usually be found rummaging through the rubble of distressed stocks—those of beaten-down companies, some on the brink of insolvency. But most of Whitman’s depressed stock plays eventually turned around for the better. The key to Whitmanesque stock-picking: buy companies that are cheap (presumably because of some temporary issue) and hold on to them.

The metric that Whitman used

Whitman was a value investor after Benjamin Graham’s own heart. Like Graham, Whitman looked for stocks that were dirt cheap, but the two investors used different measuring sticks. Graham used a company’s price/book ratio to determine whether its stock was cheap. He generally wouldn’t buy a company unless its stock was trading for less than 1.2 times book value per share.

Whitman took a different approach. He focused on a company’s takeover value, or how much he thought a buyer would pay to buy the whole company. Whitman didn’t like to use book value because he said it overlooked too many intangibles. For instance, a money-management firm could use its reputation and relationships to gain additional business. Its reputation and relationships were assets, so to speak, but they didn’t appear as such on a company’s balance sheet. According to Whitman, takeover value accounted for such intangibles.

What is the company worth?

Whitman combed through a company’s financial statements to figure out what he thought the business was worth. He then checked to see whether the company’s balance sheet remained strong in spite of setbacks in the business. He would generally pay no more than 50% of what he thought a buyer would pay to acquire the whole firm.

It can take a long time to unlock the value of a beaten-up stock. As long as a company was safe and cheap, Whitman was willing to wait.