Martin J. Whitman - Career in Fund Management

Career in Fund Management

He has used the quarterly shareholder letters of his fund as a running critique of what he calls the "primacy of the income account" ("primacy of the income account" means that corporate wealth is created only by flows, i.e., having positive earnings, and/or cash flows for a period), which he argues serves only short-term speculators rather than long-term investors. For example, in his July 31, 2004 letter, he writes that recent developments in GAAP "...increasingly impose unneeded and counter-productive burdens on American corporations, American management and American capital markets. GAAP... ought to be geared toward meeting the needs and desires of creditors rather than the needs and desires of short-term stock market speculators... he amount of money invested in credit instruments of all types in our economy dwarfs the amount of funds invested in equities." Furthermore, "Most private companies, given a choice, seek to enhance by means other than having reported operating income, which is taxable at maximum rates."

He argues that "in GAAP... material facts be disclosed in a conservative, consistent, and reliable manner", and that "Financial statements be prepared under the assumption that the users of such financial statements are reasonably intelligent, reasonably diligent, and are people who understand not only the uses, but also the limitations, of GAAP... he most GAAP can give... are objective benchmarks which the analyst then uses as a tool to determine his, or her, version of economic truth and economic reality."

As an example of the difference in these perspectives, he discusses the current (as of 2004) controversy over whether stock options ought to be expensed using "fair value method" or "intrinsic value method" and points out that the issue of stock dilution is "a stockholder problem, not a company problem". He points out that to a creditor there is "a world of difference in the credit-worthiness of an issuer who... pays out... $200 million per annum in cash for executive compensation... issues stock options on a non-dividend-paying common stock with a "fair value" of $200 million" (the point being that the latter is of almost no concern to a creditor).

In particular, he cites as wrongheaded an advertisement in the Wall Street Journal of April 27, 2004, which argues that "financial statements exist to help investors make informed investment decisions". He responds, "That statement is just plain wrong from either a public policy point of view or a creditor's point of view. Financial statements exist to fulfill the needs and desires of many constituencies: managements, creditors, governments, customers, etc." (italics in original).