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A Dynamic Duo

Two remarkable value gurus provide free advice in their regular reports. Naturally, these reports should be on every investor's reading list.

The Berkshire Hathaway annual letter to shareholders has long been a must read. Aside from being one of the largest businesses in America, Berkshire Hathaway is best known for its majority owner and CEO, Warren Buffett. In the spring of each year Warren Buffett holds forth on a variety of interesting topics in his letter to shareholders.

A quick trip to Berkshire Hathaway's web site will reward the inquisitive with an archive of Buffett's letters since 1977. In the past, many investors would buy a share of Berkshire Hathaway's stock (BRK.A which closed at US$94,000 per share on March 8, 2004) just to get Buffett's letter to shareholders. Thankfully, the price of admission has been lowered to the cost of an Internet connection. If you're looking for a crash course in prudent investing then you would be well advised to read all of Buffett's letters.

In this year's letter, Buffett remains cautious on stocks: "We've found it hard to find significantly undervalued stocks, a difficulty greatly accentuated by the mushrooming of the funds we must deploy." So, what is Buffett doing with his spare change? "When we can't find anything exciting in which to invest, our 'default' position is U.S. treasuries, both bills and repos. No matter how low the yields on these instruments go, we never 'reach' for a little more income by dropping our credit standards or by extending maturities. Charlie and I detest taking even small risks unless we feel we are being adequately compensated for doing so." Buffett's continued caution has led to an expansion in Berkshire's cash hoard from about $10 billion last year to over $31 billion this year.

In other news, Buffett came out swinging against corporate America. First, he lambasted the upper crust on taxes: "If class warfare is being waged in America, my class is clearly winning. Today, many large corporations ... pay nothing close to the stated federal tax rate of 35%." Second, he went after management by saying, "in judging whether corporate America is serious about reforming itself, CEO pay remains the acid test. To date, the results aren't encouraging." The letter continues on to discuss many other subjects (including Buffett's concerns about the U.S. dollar) but I wouldn't want to spoil all the fun.

For Buffett fans, his letter is just a prelude to the Berkshire Hathaway annual meeting which inspires many to make an annual pilgrimage to Omaha. This year the Berkshire Hathaway annual meeting will be held at the Qwest Center in downtown Omaha on May 1. For those of us who are too frugal to make the trip, hedge fund manager Whitney Tilson takes copious notes at the annual meeting which can be found on his web site.

Savvy value investors shouldn't stop with Warren Buffett's letter. Another renowned value investor's reports are also well worth reading.

Martin Whitman provides his interesting take on value investing every three months in the Third Avenue Value Fund's (TAVF) quarterly report. Whitman founded the U.S.-based Third Avenue Value Fund and is the author of Value Investing: A Balanced Approach (ISBN: 0471398101), which is one of the more insightful books on value investing.

Martin Whitman's quarterly reports (from 1995 to 2004) can be found on the Third Avenue Fund's web site. Whitman is a deep value investor and often buys distressed debt at deep discounts. For instance, last quarter he started investing in scandal-plagued Parmalat. Whitman said, "Parmalat, a massive fraud, is an Italian-based worldwide company essentially selling dairy products. The fund established a toehold position based on the view that Parmalat seems reorganizable because it is likely that many of its businesses are well entrenched and profitable." If you think that such situations can't have a suitable margin of safety, or result in a profit, then you should take a look at the Third Avenue Value Fund's track record. According to, the Third Avenue Value Fund beat the S&P500 by over 2% annually during the last ten years and it did so with below-average risk. Mind you, Whitman would likely have more than a few things to say about's definition of risk.

Aside from a discussion of the fund's holdings, Whitman often takes on hot topics of the day. In this year's first quarter report, he bluntly reviewed the growing U.S. mutual fund scandals, "... rules and regulations have to aim for the lowest common denominator, i.e., the rules and regulations are designed to protect the public from incompetents, chiselers and crooks. The rules and regulations cannot be designed to make it easier for ethical, honest, money managers to function. Put simply, TAVF has to be subject to a lot of onerous, unneeded and superfluous rules and regulations because there are unethical, dishonest people in the industry."

I like Whitman's willingness to 'shoot from the hip' and address a variety of topics with his rare perspective as a veteran value investor.

So, when you have a spare moment, take a look at the letters from Buffett and Whitman. Both of these investors have posted volumes of material on the Internet at a cost that even Canadian MoneySaver members should appreciate.

First published in April 2004.

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