Guess what one of the world's most famous living investors is buying (Hint: it's not stocks)
With the stock market down over 50%, one would think that one of the world's most famous value investors would be like as Warren Buffett once eloquently put it "Like an oversexed guy in a whorehouse."
The founder and co-chief investment officer of the famed Third Avenue Funds, Marty Whitman, is buying bonds and lots of them. He's buying so much that he had to request special permission from his company's Board of Directors to raise his funds' cap on debt from 10% to 35% of their total assets.
Here's the explanation that Whitman recently gave Forbes as to why he's buying debt right now:
"With stocks you have to worry about the market. With debt I just have to understand the contract. If my analysis is right, I'll make money."
In the interview Whitman went on to talk about why investing in stocks is so dangerous right now and why doing so has crushed even some of the smartest investors out there, like Legg Mason's famed Bill Miller, who has been destroyed by purchasing stock in things like Citigroup, Bear Stearns, and Lehman Brothers on the way down:
"Bill is a smart guy. But in this environment it is not enough that a stock is cheap. Creditworthiness is important."
Whitman's plan is to purchase high-yield debt aka junk bonds or near junk bonds cheaply in the hopes that he can collect double-digit yields while holding them to maturity. I have been doing the exact same thing in my personal account. Though I am not quite as brave as Whitman is in terms of buying messed up companies, mainly because the sheer size of his investments gives him more leverage than I have if a company actually filed for bankruptcy, I have been snapping up all sorts of corporate bonds with 8%, 9%, 10%+ yields over the past several months.
Don't get me wrong, there will come a time that I will consider purchasing solid dividend-paying common stock again. That time is just not right now.
Definitely make sure to check out the Forbes interview with Whitman on this subject. It's a great read:
Third Avenue's Distressed Debt Play