Book review: The Aggressive Conservative Investor (Whitman and Shubik)

When I first started reading Martin Whitman’s exhortations about the importance and neglect of assets as a tool of valuation I thought to myself, “But everyone knows that assets are an important tool. Is this really still relevant?”

Then I looked at the front page of Seeking Alpha and saw articles about earnings, about commodities (definitely commodities), and about currencies. Nothing about neglected assets and not a lot about security. It occurred to me that even though Whitman’s been pointing out the excessive primacy of the income statement for around three decades, some things never change. And really, that makes sense in light of Whitman’s own writing.

More than anything else, Whitman emphasizes perspective. As he points out, a lot of people are in the market for a lot of different reasons and investors have to appreciate this when they try to gauge the actions of the market and its participants. Activists have different guidelines for what constitutes a suitable investment than do purely passive investors and short-term traders have a lot more interest in volatility than long-term investors. That isn’t rocket science, but its a simple and powerful observation that a lot of people overlook when speaking of The Market and its irrationality. You see people characterize every transaction in the market as having a winner and a loser, but really the definition of winner and loser depends a great deal on perspective (Richard Bookstaber also sort of gets at this in A Demon of Our Own Design). For those with a long-term perspective – and he actually emphasizes that distinction, rather than denigrating those with other perspectives – Whitman has a lot to add.

Perspective also applies to financial statements. More so than most books on investment, The Aggressive Conservative Investor spends a fair amount of space digging into the subject of accounting and accounting presentation. Again, it’s not exactly news that there are gaps in GAAP, but few books devote as much effort to getting it its core assumptions, uses, and limitations. I think this is one of its most unique and appealing aspects.

I was also struck by the simplicity of his investment approach. The financial integrity approach (re-dubbed “safe and cheap” in his new introduction) has four guidelines:

1. Strong financial position
2. Honest management and control groups
3. Reasonable amount of information available
4. A price below estimated net asset value

Simple, but effective: Third Avenue had the best mutual fund record in its class over the past 20 years with a 12.84% annual return. Granted, Whitman seems to do a lot of his fishing overseas these days, but methods could probably be applied with a fair amount of success within the US market by investors who don’t have the same size constraints as a mutual fund the size of the Third Avenue Value Fund. I’ve heard the style he advocates here referred to as the “good enough” mentality and that’s fitting.

As an amusing side note, Whitman seems to enjoy emphasizing his disagreements with and improvements on the methods of Graham and Dodd. Interviews and online reviews of his other work suggest that’s a constant theme. He also has a love of inventing new acronyms that do little or nothing to clarify his meaning. These quirks, along with his occasionally long-winded writing, detract a bit from the book overall but they don’t invalidate or obscure his points.

This book makes it onto Seth Klarman’s recommended reading list (ironically, the writer at this site hasn’t read it) and with good reason. I’d definitely recommend it to anyone with an interest in value investing (and hey, didn’t you see the recommendation from one sentence ago?).

Full disclosure: I received a review copy of The Aggressive Conservative Investor from Wiley.

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