**Too much emphasis on growth stocks: **If a business CANNOT grow 25%+ CAGR over the next 2-3 years, you have no business keeping the stock in your portfolio, just because it might be a stable counter.
I think [may be I interpreted it wrongly or hold a different view] top objective in any investment activity is to have capital appreciation and I am neutral whether this appreciation comes from secular earnings growth of 25%+ or cyclical earnings growth with PE re-rating. We should not ignore potential of cyclicals to be multi-bagger over a period of 4-5 years, if RIGHT CANDIDATES are picked up at RIGHT TIME.
In one of his letters to shareholders Martin laid down his reasoning for Investment in Companies hit by housing crisis and in another letter for companies hit by semi-conductor crisis, I think we can apply the same principles to invest in other cyclical industry which is currently going through tough economic conditions. Let’s see what these principles are
Bad side of these investments:
1)The stock market pricing for these equity issues is chaotic. There is no way Fund management is able to pick a bottom for securities prices, or a near bottom. - this is quite evident from the stock prices wherein stock prices of most of these companies are down more than 80%.
2_) Fund management has no good idea of how deep the crisis will become, or how long it will last. Our best guess is two to four years._
Second, the good side of these investments:
1)_In each instance, TAVF is acquiring common stocks at meaningful discounts from readily ascertainable NAVs.__For each of these companies, a normalized Return on Equity (equity equals book value) (âROEâ) ranges from 8% to 14%. Assuming a 10% ROE sometime in the future, and no further dramatic deterioration in book value during the interim, probably a realistic assumption; and current pricing at 40% of book value, Third Avenue would be paying only four times future normalized earning_power.
2)**Each common stock acquired, is acquired in a company which enjoys a strong financial position.**While there can be no guarantees, the probabilities are that each of these companies will survive as solvent going concerns either without requiring major access to capital markets for new funding, or by obtaining new funding from others on terms that are only modestly dilutive for TAVF.
**1) **Each company seems very well managed.
**2) **The industry seems bound to experience explosive growth over the next 3 to 7 years.