TWST: Could you begin by telling us about the Third Avenue Funds and your responsibilities there?

Mr. Whitman: I'm the CEO of the Third Avenue Management Company and also the money manager of the Third Avenue Value Fund. We have three other funds ' Third Avenue Small Cap Fund, Third Avenue Real Estate Fund and Third Avenue International Fund. All are value funds.

TWST: What are the characteristics that you look for when you're buying stocks?

Mr. Whitman: When we buy common stocks we look for four characteristics that result in making investments safe and cheap. The first thing we want is a very, very high quality financial position. We don't buy common stocks unless the company has a super strong financial position, as measured by either a relative absence of liabilities, the presence of high quality assets, or that rarity of rarities, free cash flow from operations. Two, we like companies that are reasonably well managed from a stockholder point of view. It's been very hard to find reasonable managements because of the inexorable trend of the last 50 years to have stockholder rights taken from stockholders and given to Boards of Directors. So you get an awful lot of management overreaching because almost all outside Directors tend to be rubber stamps complying with all management corporation proposals. Three, we only buy into businesses we understand. Understanding can mean a lot of things, but one of the things it always means is full documentary disclosures, including audited financial statements. Audited financials are useful, indeed essential, to us as objective benchmarks. We don't expect financial statements to tell us the truth. Nobody with an IQ over 50 should really expect that to be the case. Those three things ' strong finances, reasonable management, understandable businesses ' make a security safe. The factor in our view that makes a common stock cheap is its availability at a price of no more than 50% or so of what we think the common stock would be worth if the business were a private company or a takeover candidate. Those are the four things we look for in any common stock investment.

TWST: There are a lot of stocks now that are certainly cheap. How do you find out which are value traps and which are the ones that are going to have a catalyst?

Mr. Whitman: We don't worry about catalysts. The market is too efficient. I'm not going to get my pricing if there's a catalyst. If I'm looking for catalyst I'd be a risk arbitrageur and not have the strict pricing standards we do. We generally have two ways we find value. We buy into common stocks when they're available at substantial discounts from readily ascertainable net asset values. Most of our common stock investments, over 50%, are issues acquired at substantial discounts from readily ascertainable NAV. We also buy into earnings common stocks, which generally are in businesses that sell at well under 10 times peak earnings, where we think the next peak might be better than the last peak. Generally in those earnings stocks we don't pay as much as 2 times book, and very rarely pay as much as 1 times revenues. I must say, we have different standards, of course, if we're buying financial institution types of common stocks, high- tech common stocks, or if we're into real estate common stocks. It's not a question of one size fits all. It just doesn't work that way.

TWST: Tell us about management performance and credibility. Is that more important since the corporate governance problems of this past year?

Mr. Whitman: It depends. If we're into electric utilities like we're doing now, it's not a management-intensive business. On the other hand, if you're into high tech and certain real estate, you better believe that it's very, very management-intensive. Generally we like honest management. How capable they have to be depends on what they're doing. Unlike other people, we don't appraise managements merely as operators, but also as investors and financiers. By the way, in appraising managements there is no such thing as a nonrecurring charge. Whatever is in the financial statements is a reflection of management's performance either as operators, investors or financiers, and most of the write-offs you see demonstrate that specific managements have been really crappy investors.

TWST: How do you determine whether a stock is a good value at this time?

Mr. Whitman: I think for us the easiest thing is to go into those situations available at substantial discounts and readily ascertainable net asset value. Let's say that's an easy thing to do for financial institutions, an easy thing to do for income- producing real estate. Second, we also buy into earnings companies, and, as I said, we don't like to pay even 10 times what we think future average earnings will be.

TWST: How important are dividends?

Mr. Whitman: They're unimportant. They tend to be a negative. We would rather go into good companies that have better use for cash than paying it out to us. It's not always a negative. It tends to be a negative for our style of investing. If we want income, we'll be a creditor. We're never, never going to look to dividends to create income.

TWST: What is the role of economic and industry analysis in your investment process?

Mr. Whitman: Industry analysis somewhat, but we're basically not top-down. As to economic analysis, it's just a waste of time. People who worry about the business cycle, which I must say are most people in the market, worry about interest rates, worry about GDP, they're living in the 1930s, not the 21st century. The United States has gone since the end of World War II through periods when virtually every American industry has experienced depressions as bad as anything that existed during the 1930s. However, the change has been that there has been no domino effect. In the energy bust of the 1980s, the whole of Texas could have shut down and every bank in Texas gone bust, but that did not reflect greatly on the entire economy. I think that's the norm now, that you go industry by industry, and being worried about the general business cycle is what someone living in the 1930s, not the 21st century, should be interested in.

TWST: Do you invest primarily in certain industries?

Mr. Whitman: Our biggest investments are financial and real estate, then high tech, then Japan. That's where we are now. I would think that we'd do anything.

TWST: What size company do you generally invest in?

Mr. Whitman: Immaterial. We don't pay attention to that.

TWST: Tell us about the financial stocks that you invest in and the reasons why you're attracted to them.

Mr. Whitman: By the way, we have never paid as much as adjusted book value to get into any finance common stock. Probably within that group our biggest single category has been money management and regional broker-dealers with a money management presence. We go into very, very well capitalized community and regional banks when they're available at discounts. We have a big, big insurance stock portfolio, P&C, but that is pretty much restricted to companies that underwrite to zero loss, to wit, financial insurers, mortgage insurers, surety companies, except in the last year we invested in certain startup Bermuda reinsurers after September 11 at prices around book value. We will not buy plain vanilla P&C, because neither we nor anybody else has a clue as to the adequacy of reserves. I should mention also in the zero underwriting loss group, we have huge positions in the title insurance industry.

TWST: Can you give us some of your stock holdings in this area?

Mr. Whitman: Radian (RDN), Stewart (STC), First American (FAF), MBIA (MBI). Those are some of the insurers we're invested in. In banks we have recently done Woronoco Bancorp (WRO) and Brookline Bancorp (BRKL). In broker-dealer and money managers we're very large shareholders of Legg Mason (LM), Raymond James (RJF), John Nuveen (JNC), Jefferies (JEF). In real estate our biggest single investment is in Forest City Enterprises (FCE), the biggest blue chip no one ever heard of. And in terms of the company overall, our biggest single investment I think is Forest City. Our second biggest investment is Toyota Industries common, which is a way of buying into Toyota Motor (TM) at anywhere from a 35%-45% discount. Toyota Industries is the largest shareholder of Toyota Motor. We're making a bet that looks pretty good at the moment that Toyota Motor may turn out to be the Wal-Mart of the automobile industry.

TWST: Tell us more about Forest City and why it's not as well known as it should be.

Mr. Whitman: I don't know why. It's a huge company, national in scope, headquartered in Cleveland. It's probably the biggest investment builder in the country, with projects in New York, Cleveland, Denver, San Francisco, Nevada ' all over the country, multi-use projects, office buildings, high-rise, shopping centers.

TWST: Are they investment builders?

Mr. Whitman: They're investment builders, and then they own income-producing properties, and they're virtually without recourse debt. All their debt is nonrecourse mortgages on individual properties. They're best known around here as a developer of 42nd Street and MetroTech over in Brooklyn. They are also the developer of Stapleton Airport in Denver, as well as a huge shopping center in Nevada. They have lots of properties.

TWST: What impact will the likelihood of increased interest rates have on this sector?

Mr. Whitman: I don't have a clue. We're long-term buy and hold. We're not going to get our pricing and be able to do our things unless the near-term outlook sucks. To get this 50% discount in almost everything we go into, the near-term outlook is pretty terrible, and we pretty much ignore that. We're looking for underlying long-term values.

TWST: Tell us about some of the high-tech stocks. It's interesting that they're now considered value stocks. Which ones are you looking at?

Mr. Whitman: In the semiconductors, we've been increasing our position in Applied Materials (AMAT). By the way, we never bought a high-tech stock where cash alone did not exceed book liabilities. We're doing a lot of telecom equipment now at these prices ' Tellabs (TLAB), CIENA (CIEN), Comverse Technology (CMVT). We've been buyers of Internet and financial electronics. We have large positions (and have had for some years) in clinical research organizations ' Pharmaceutical Product Development (PPDI) and Kendle (KNDL). We looked at CROs as a value way to invest in biotech, and they've been terrific for us.

TWST: Do you follow the latest technologies in biotech?

Mr. Whitman: No, not like an analyst would. I wouldn't know a drug if I fell over it.

TWST: It's purely a financial consideration when you look at Kendle.

Mr. Whitman: Oh yes, we bought these things at under 10 times earnings ' Kendle, PAREXEL (PRXL), PPDI. Those are the three we own. But for us there is a much better way of playing drugs and biotech than paying the huge prices you have to pay to go directly into biotech.

TWST: How does the current volatility in the marketplace impact your investment?

Mr. Whitman: The only way it impacts it is we're more concerned about redemptions than would be the case in less volatile markets. Our big fund being no load, no redemption fee, we're subject to attracting a lot of hot money.

TWST: If you had to pick two or three stocks to buy today, what would they likely be?

Mr. Whitman: Quanta Services (PWR) and AVX (AVX) in high tech, we're very big in passive components. Instinet (INET) ' that's what we're buying.

TWST: Tell us about Quanta Services.

Mr. Whitman: They're just getting a capital infusion. They're the leading company in providing networking and management services to the electric utility industry, and we're paying about $2.50. The adjusted book is around $10, and in normal times it earns about $1.50 a share. It's the one I think can be a 10 bagger for us, now that they have their financial house in order. Basically over time I think there will be great growth in demand for electric power and gas. Quanta Services' normal earning power (not this year of course) is between $1 and $1.50. You can buy all the stock you want at $2.50.

TWST: You said you hold positions a long time. How long do you generally hold them?

Mr. Whitman: Our turnover is about 10%, 15%.

TWST: And what is your sell discipline?

Mr. Whitman: Most of our sales are forced because companies get taken over. Believe it or not, the analysis I gave you about safe and cheap is exactly the way most takeover people analyze. They don't get involved in Wall Street baloney. Most of our exits are in companies being taken over. Second, we will sell immediately when we find we've made a mistake, a mistake being measured by when we think there's been a permanent impairment of capital for the business. Third, we will sell when things look like they're grossly overpriced. Believe it or not, it doesn't happen to us that often. We were big sellers of high tech luckily in the first quarter of 2000, but normally we're in very conservatively managed companies and we don't get grossly overpriced. Fourth, during the periods when the Fund is hit by redemptions, the Fund has to sell.

TWST: Can you give us an example of what you mean by 'permanent impairment?'

Mr. Whitman: That's where a company dissipates a strong balance sheet or there are great competitive inroads and it looks like there's a permanent loss of earning power. The most common thing with that is a dissipation of a strong financial position not accompanied by a growth of earnings.

TWST: How diversified is the Third Avenue Value Fund? How many stocks do you have in it now?

Mr. Whitman: Maybe about 90. Most funds our size would have 300.

TWST: Are there any areas that you don't invest in?

Mr. Whitman: Yes. We certainly would never do tobacco, for example. We would not buy the common stocks of companies with an asbestos taint. We would not buy airline common stocks ever.

TWST: Why?

Mr. Whitman: If you want to be in airlines be a creditor, be a secured creditor, don't be a common stockholder. All except Southwest Air (LUV) are hopelessly bust. Let somebody else make the money.

TWST: The avoidance of tobacco and asbestos is for litigation reasons?

Mr. Whitman: Yes. If I were to be in tobacco, it would only be as a secured creditor, so that in bankruptcy my claims would come before those of people who win jury awards.

TWST: What are your competitive differences with other firms?

Mr. Whitman: I think there are a lot of good value investors. Our principal difference to them is our emphasis on the quality of the balance sheet. Let's say you read Graham and Dodd. All they ever talk about is the quantity of balance sheet, that is book value. We're bugs on quality. That would distinguish us from them. You have to be out of your mind to tell people to invest with market players, those stock market speculators that are most mutual funds. If you want to be in those types of securities, I think you ought be a promoter or an investment banker and not a member of the public.

TWST: You mentioned before about investing in Japanese blue chips and talked about Toyota Motor. Do you have any other Japanese firms that you invest in?

Mr. Whitman: We're big in Millea (MLEA), a non-life insurance company. Let me just tell you about Japan and a great lesson for us. Millea, Mitsui Sumitomo (MTSQY), these are non-life insurance companies, as is Sompo. We went into Japan in 1997 when the Nikkei was 20,000. It is now about 8700 and our portfolio is about even, which shows you that it's value investing on a long- term basis. We haven't done well, but we haven't lost any money. If you were in the general market, you went from 20,000 to 8700. That's a little bit of cheating, though, because we have such a large position in Toyota Industries. Toyota Industries is really an international company that happens to be headquartered in Japan, in terms of its operations. It tracks Toyota Motor, which is I think now selling more cars in North America than it is in Japan.

TWST: Do you work with distressed portfolios?

Mr. Whitman: Yes, that's about 15% of our assets.

TWST: Could you tell us something about that?

Mr. Whitman: It has been a decent portfolio. We are very, very large creditors of WorldCom, Qwest, Kmart and Home Products International. We bought into a fair number of utility first mortgages, where we're pretty sure you'll never miss an interest payment, UtiliCorp, now Aquila, and Illinois Power. We are the largest creditor of USG Corp. Warren Buffett owns the common and we're the largest creditor. I would rather be where we are than where he is, much rather. So USG is one of our big holdings.

TWST: Do you think value investing will work as well going forward as it has in the past?

Mr. Whitman: Yes. It just looked bad during the extreme speculative bubble from 1997 through 1999. How could you compete with that craziness?

TWST: Do you have any final message for investors and our readers at this time?

Mr. Whitman: My sum-up is that there are a lot of ways to make money, but life is lot more comfortable and easier doing it our way than speculating in the stock market. Our way of investing is really terrible if you're on margin and if you really don't know anything about the companies or the securities in which you're investing. Somebody once described our style of investing as how the rich get richer. I think that's sort of accurate. It's unsuitable for people who've got to make a killing next week.

TWST: Thank you. (PS)

Note: Opinions and recommendations are as of 10/31/02.

MARTIN J. WHITMAN Third Avenue Management LLC 767 Third Avenue 5th Floor New York, NY 10017 (212) 888-5222

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