Chapter 10 Finding Value in Junk

There’s the Whitman School of Management, named in his honor, at Syracuse University, where he received the bulk of his undergraduate education, graduating magna cum laude in 1949 and topping that off, nine years later, with a Masters in economics from the New School for Social Research in New York City.

There are the 30-plus years Whitman spent as Distinguished Management Fellow at the Yale School of Management, along with teaching stints at the Columbia University Graduate School of Business and at his eponymous Whitman School.

There are the books that have become classic texts and de rigueur reading for anyone interested in investing, security analysis, and how not to lose your shirt in the market—The Aggressive Conservative Investor and Value Investing: A Balanced Approach—along with numerous articles on a range of topics.

There are the lectures on securities and valuations at leading law schools and at forums and management conferences around the country.

Perhaps the commitment to education derives from Whitman’s being the only son of Jewish immigrants who came to the United States from Poland in 1920, just at the tail end of that great mass migration of a people legendary for cherishing learning.

Perhaps it is because he remains grateful, in his ninth decade, for the gift of education provided by the GI Bill in return for his four years of torpor in the Navy during World War II. After enlisting in 1942, Whitman served first at an ammunition depot in Nebraska, then on an LST, (Landing Ship, Tank) vessels used in World War II to carry large vehicles and cargo and to transport troops in the Pacific. It was a term of service without any battle action but not without the development of skills. A pharmacist’s mate and, he says, “a talented medic,” Whitman might have gone on to medical school had he not entered into a youthful and misguided marriage. The union kept him in Nebraska after the war where he enrolled in college to prepare for work in his father-in-law’s department store. He quickly exited both the marriage and Nebraska to return east—he is a New Yorker by birth and inclination—and found a place at Syracuse studying business administration, followed by a stint at Princeton for graduate study.

The profound influences of this early education are sharply recalled: a “fabulous course in Russian history” at Hastings College in Nebraska that imparted a greater understanding of the world as a whole than did all those years plying the Pacific; study at Syracuse with the great labor economist, Sidney Sufrin; “eye-opening” courses in demography at Princeton with Frank Notestein, who virtually invented the discipline, which, says Whitman, “helped me understand the way the world works”; and various courses in accounting, “the language of business.” Each course of study added to the foundation of his investment philosophy.

Yet that formal instruction in those centers of education was only the beginning of what became a lifetime habit of learning. Whitman’s conversation is peppered with recollections of the “great training” he received in a succession of jobs and of the “great lessons” he learned along the way. It is also peppered with critical self-assessments of his failures to understand: how he was “unbelievably stupid” when he acquired a closed-end fund named Equity Strategies in an attempt to diversify his holdings, or how he made “the wrong choice” when he joined William Blair & Co. in the late 1960s. Yet the conclusion is inescapable that, for all these self-described intellectual failures, Marty Whitman is, over a long and distinguished career, one of Wall Street’s smartest, most learned, and most successful investors. Maybe the success has come because, as he himself describes it, “I focus more on what I missed—to learn from it.”¹

Educational Value Added: On-the-Job Training

Unquestionably, Marty Whitman learned a lot and learned it well. When he left Princeton to take an entry-level job at Shearson Hamill, the much-merged brokerage house that died with Lehman Brothers, he did so because it offered “great training,” assigning him first to a month on the audit desk, then one month in each back office function as background to becoming an analyst.

Analysis, the process of breaking a thing down into its constituent parts so you can see both the essential nature of the thing and how the parts relate, is something for which Whitman clearly has a knack. While working on an analysis of the timber industry, he came upon a company called M&M Woodworking and noted that it held enormous stands of timber that, in Whitman’s finding, were “creating all this value while not creating any earnings.” It was, he says, an “epiphany” that taught him “There are a lot more ways to create value than earnings per share.” And so he became enamored with balance sheets, with understanding the true value of a company rather than just looking at what the market was according the entity in terms of valuation relative to its projected growth rate. A price-to-earnings multiple does not take into account non-income producing assets, even though they may add to growth in the future or possess more current value than what the market believes the company is worth based on some other metric.

Whitman’s penchant for analysis and his obvious skill at it, bolstered by all that education, had little room to maneuver at Shearson, a classic wire-house brokerage that simply did not deal in independent research. Even when Whitman went to the underwriting side of the shop because it was a “chance to do more in-depth analysis,” he was disappointed in the level of research he could do. Much of the due diligence, he recalls, “was mostly a fake. A hot issue sold itself, the ‘analysis’ essentially just confirming that it was hot.” So Whitman moved to the family office of the celebrated investor and philanthropist, William Rosenwald, where, under the mentorship of senior analysts, he got a chance to hone his skills and to learn firsthand about control investing, risk management, and the kind of analysis both require. It was simple, says Whitman. Rosenwald and the principals “cared about what they were buying because it was their money.” They were therefore very careful to learn all that could be learned before buying anything.

He then moved to Ladenburg Thalmann Financial Services Inc., which was a smaller firm that also invested its partners’ money, as well as that of a few clients. Whitman was Head of Research and “followed everything”—every sector and every industry where profitable investments might be found. He remembers doing an analysis of R.J. Reynolds Tobacco and coming upon “some kind of Surgeon General’s report”—the year was 1958 or 1959—and Whitman, a heavy smoker since his Navy days, immediately quit his smoking habit “cold turkey.” He was not just ahead of his time; he was and is a man who researches deeply and pays attention to what he finds—the lifetime learning habit in action.

A colleague at Ladenburg persuaded Whitman to move to Philadelphia to join a firm called Gerstley Sunstein as a partner in charge of research. The Whitmans—he had married again by this time, and the couple had three young children—stayed in Philadelphia until 1967 before the siren song of New York summoned them home, and it was then that Whitman made “the wrong choice” and joined the New York office of William Blair & Co.

It was the wrong choice because at that point in its history, the venerable Chicago-based firm, in Whitman’s words, “ran a really terrible operation. . . . The retail business was awful, and they failed to participate in the IPO boom in the late 1960s, when they should have become managing underwriters.” Whitman “stood it” for a few years, but in 1970 he decided to go out on his own.

Solo

He “really liked corporate finance” and was “firmly committed to value investing up to this point,” asserts Whitman. “Value investing is just passive investing.” But he was learning that there are “related fields,” as he puts it, in which “the same variables were at work”: control investing, distressed investing, credit analysis, and first and second stage venture capital. Since Whitman sees himself as “basically an analyst, not a manager,” he claims no interest in the last of these related fields, but has an abiding interest in the others. By 1972, he had begun teaching about them at Yale.

At the same time, he began to be retained in an advisory capacity in Chapter 10-type bankruptcy cases by trustees or creditors, and he found himself increasingly in demand as an expert witness in bankruptcy litigation—first for plaintiffs, then eventually for defendant corporations. Thanks to his background, says Whitman—especially to his time in a wire house—“I knew where the earnings maturity came from; I could understand what people were doing.”

He incorporated the business in 1975 as M. J. Whitman & Co. a fairly optimistic title for a business consisting, at the time, of Whitman and his secretary, Marilyn Haynsworth. A couple of salesmen came on board, but the brokerage was really a small part of the business, concentrating on bankruptcy and stockholder litigation which were “two great training areas,” as Whitman labels them. He built up “a pretty good practice,” claiming as one of his clients the U.S. government when he became the principal financial advisor to the Department of Justice’s antitrust division. In that role he did “a lot of the work-outs for pension and benefit guarantee corporations.” This experience would prove to be invaluable.

Toward the end of the 1970s, however, Whitman decided to “concentrate more on being an investor.” After all, he had the education, and now he had all that great training. His first big score came when he was approached by some mortgage bondholders in the Penn Central bankruptcy (see the section “Bringing the Carcass Back to Life,” further on)—at that time, the biggest bankruptcy in U.S. history. Whitman’s investment in retained asset bonds “did very well in the reorganization” and became only the first of his many successful investments in distressed businesses.

Since distress “is a confrontational business,” in Whitman’s term—he distinguishes it from Mergers & Acquisitions, which he calls “a lover’s business”—he decided to diversify and seek control of a closed-end investment company.² In 1984, he bought up the common stock of a small closed-end fund called Equity Strategies Fund Inc., and he entered the asset management business.

It seemed a smart move. After all, Whitman wanted control, and he got it. And he pursued what was becoming his trademark investing thesis—safe and cheap—with a record that markedly outperformed the market over the long term. Yet Whitman calls himself “unbelievably stupid” in taking over Equity Strategies—not because it was not a good thing to do, but because he had not seen the real value in control. “The real wealth,” he says, was not in buying at a discount but rather “in inheriting the management contract.”

“Having a management company is better than running the tolls on the George Washington Bridge,” says Marty Whitman in his famously gritty voice, still inflected with the sounds of the Bronx boy he once was. “It’s all cash. You’re the overhead. There’s no inventory. No credit risk.” Whitman took over Equity Strategies, open-ended it, and used it to get control of other companies, mostly through bankruptcy reorganizations. The bankruptcy consulting morphed into the investment banking firm Whitman, Heffernan, Rhein and Co. It was the start of the activist control investing for which he is so famous, and the watchword of Whitman’s kind of investing became “safe, cheap, and with a seat at the table.”

There was a succession of big wins: Mission Insurance Company, Covanta Energy, K-Mart, Brookfield Asset Management. Along with his Princeton classmate Eugene Isenberg, Whitman did the second prepackaged bankruptcy reorganization³ ever for a company called Anglo Energy. The reorganized company took the name Nabors Industries, into which Equity Strategies’s assets were eventually merged—an enormous win for Equity Strategies shareholders. Nabors has become a very well respected company in the energy services sector with a market capitalization in excess of $5 billion. Whitman is Director Emeritus while Eisenberg retains his title as Chairman of the Board of Directors.

By this time, says Whitman, he had decided to put down stakes in the mutual fund business—in his words, he “figured out that mutual funds are a license to steal”—so in 1990, he launched the Third Avenue Value Fund, starting “with a few million.” By 1997, Third Avenue had more than a billion dollars in assets under management. How did it happen? Says Whitman, perhaps too modestly: “I really don’t know. I don’t know how we built assets and got clients. But I do know that in growing these businesses, performance is nowhere nearly as important as trust and good services.”

The More You Know …

“The best thing that ever happened to the mutual fund industry,” says Marty Whitman, “is the Participant Disclosure Regulation.”⁴ The reason? “So the public knows we don’t cheat them.” It is why Whitman has made “the highest degree of integrity” the hallmark of Third Avenue Value Fund. Think about it: Integrity is the corollary of the Whitman commitment to education. The more you know, the better off you will be.

The firm is famous for its simple and singular approach, what its website refers to as the “one proven value philosophy” that guides the firm’s investing—namely, “safe companies that are cheaply priced.” Whitman lays down four criteria for choosing equities in which to invest. The business must:

The balance sheet is the key focus of bottom-up analysis to determine if a company meets these criteria, with a focus on the quality and quantity of existing resources rather than on future projections. But current financial strengths are not the only measure looked at in Third Avenue’s search for bargains, especially since “safe” counts for more than “cheap”; note that safety comprises three of Whitman’s four criteria. He stays safe by being price-conscious—buying growth and asset but not paying full value; by looking at long-term investment risk, not market risk; and by learning everything it is possible to learn about a company before investing in it—and continuing to stay on top of the fundamentals once it has joined the ranks of his holdings. No one indicator can tell it all; comprehensive, rigorous analysis is required.

Retail investors make mistakes, says Whitman, when they “don’t understand the business or the securities or are short-term conscious. But you can only make out as a retail investor by trying to guard against investment risk, not against market risk,” and that means becoming a student of what you are investing in. Only that kind of study, Whitman argues, can illumine for the investor the choices that are both safe and “real cheap.” It is a discipline his funds have “never consciously violated,” and while he is certain the discipline has been unintentionally violated, he is also certain that such violations have always been a mistake.

To be sure, there are not that many stocks that meet the Whitman criteria, and for those that do, it often takes a considerable period of time to unlock the value. So patience and the long view are qualities Whitman has perfected. His quarterly letters to shareholders reflect both and are as charmingly blunt as the man himself is in person. Still holding the title of Chairman, Whitman remains a formidable presence at Third Avenue Fund’s headquarters, although it is probably fair to say he spends less time at work than he used to. He has other interests. His wife, Lois, founded the children’s rights division of Human Rights Watch and remains its Director. Whitman has philanthropic pursuits as well—most notably to his alma mater, Syracuse University, and to affirmative action programs for Arab students in Israeli schools. The commitment to education—and seeing to it that others get the same shot he was given—persist.

Bringing the Carcass Back to Life

Whitman is a man of values who made his career seeking value in companies that were given up for dead by others. His first real foray into vulture investing, that is, buying the “distressed” bonds of companies that are in financial straits, often in bankruptcy, was the fabled but poorly managed Penn Central Transportation Company. In 1968, the Pennsylvania Railroad and the New York Central Railroad merged, hoping to eliminate redundancies in their coal hauling businesses that operated in Ohio, West Virginia, the long eastern seaboard route, and New York. On paper, it wasn’t a bad idea, but a weakening economy, inept management, and stubborn union leadership unwittingly joined together to drive the company into bankruptcy, creating the first major event for what would be a new class of investors.

As with most areas of the law, bankruptcy is one that requires a special expertise. The written law and the case law are just two of the many different facets of this intricate transaction. Add the fact that railroads are a highly regulated industry, and the inscrutability grows substantially, as one would expect any time the government is involved. In this particular case, the government had an even more acute interest in the transaction because transportation is so critical to the country’s economic health and security. This increased complexity would work to Whitman’s benefit; he not only knew his way around the bankruptcy courts and statutes, having already been a consultant and expert witness for a number of years, he also had experience in litigation matters involving the government. The bottom line: If anyone could navigate the ins and outs of this bankruptcy, it was Marty Whitman. That group of creditors—mortgage bondholders—certainly thought so; they found Whitman’s resume so attractive that they hired him as their representative in the Penn Central bankruptcy proceedings.

Vulture investing was just becoming an investment class when Penn Central went belly-up. Most bankruptcy situations up to that time were significantly smaller in terms of publicly traded debt, but the profit potential inherent in the sheer size of this, the largest bankruptcy anyone had ever seen, attracted a number of new players. Where they saw profit potential, and why creditors looked to Whitman to get it for them, requires a bit of explanation.

Start with the fact that bondholders tend to be more risk-averse than owners of stock in a corporation. They prefer to take their yield in the form of steady interest payments rather than seeking significant appreciation in the price of the investment. However, while bond prices do fluctuate, the fluctuation usually hovers within a significantly tighter range than with stocks; the terminal upside at maturity of a bond is limited to par, while a stock can theoretically trade to infinity. But what can go up, can go down, and in the case of equity, the downside in a bankruptcy is almost always zero. Bondholders, however, have a claim against the assets of a company and most often receive partial payment; the value of the bonds during a bankruptcy proceeding is diminished in value since the interest, or coupon, is no longer paid and because the ultimate recovery is uncertain. This being the case, the traditional fixed income investor, a conservative sort to begin with, looks for an out since it is often beyond their purview to hold a distressed instrument; they often lack the expertise or mandate to perform an analysis that will show that these troubled bonds may ultimately be worth more in a bankruptcy work-out than under fire sale terms. Thus, their only real option is to sell and this is where Marty Whitman entered the picture with Penn Central.⁵

A company going through bankruptcy proceedings, guided by its lawyers, must present a plan for either winding down its business or reorganizing and exiting the process as a viable ongoing concern. Nowadays, by the time this plan is presented, distressed investors have usually acquired all the bonds, having hired their own team of attorneys and analysts to assess how much meat is left on the carcass. But since vulture investing was still a relatively new phenomenon in the case of Penn Central, the due diligence process was not as sophisticated. That did not stop Marty Whitman. On the contrary, he believed, rightly, that it favored him; it provided the advantage of a less efficient market and provided the opportunity for bigger profits. On behalf of the creditors who retained him, he waded into the mess and liked what he saw.

While others were scared into selling their bonds, the words “wiped out” looming large in their thoughts, Whitman pored over the plan of reorganization. He saw tremendous value in the documents filed by the company with their lists of real estate and business interests that had been pledged as collateral for the bonds and that were unencumbered by the railroad’s problems. No one really wants the government involved in their business, but the government’s insinuation into this process—in 1973, Congress had voted to nationalize the bankrupt railroad—would turn out to be the best thing to happen to Whitman and the other vulture investors. The takeover left all non-transportation assets, including the real estate, in the parent company. This real estate was what attracted Whitman to Penn Central because the property was used as collateral for the mortgage bonds he would own. Whitman bought $100,000 worth of the seemingly near-worthless securities, a rather large investment at the time and under the circumstances. It took about a year for the court to approve the reorganization plan, but with a profit of five times his investment, Whitman was paid well to wait.

The Takeaway

Marty Whitman did not invent vulture investing, or as it has more recently been termed—and with greater social acceptability—distressed investing. Nor did he invent value investing, which operates along the same principles but with practical applicability to many more types of securities. But he did pioneer the strategy of distressed investing and brought fresh thinking to the way value investing was approached. In essence, what Whitman defined, refined, and taught through his lectures at Yale and his three books⁶ was the process of value investing, however strong the vital signs of the prospective investment. And that is no simple matter. Too often reduced to the simplistic notion of finding a stock that appears cheap or on sale, value investing in Whitman’s view, and as his career evidences, is serious business, one requiring—not surprisingly for Whitman—serious study. And it can be a minefield.

Some investments that are bought on price dislocation alone wind up being “value traps.” Value traps are best defined as securities that appear cheap but actually are not; in other words, the price reflects the value of the current fundamentals rather than a discount to its value as a business. For example, during the dot-com bubble, many Internet stocks declined significantly in price, providing an opportunity along the way for price-conscious investors to snap up shares. Yahoo! provides a perfect illustration. The stock price peaked on a split-adjusted basis at $125 per share in March 2000. Over the course of the next year, the price declined, ultimately bottoming at below $5.00 a share. I am quite sure that investors all along the way looked at the price and said something to the effect of “Wow! Yahoo! is trading at $100, 20 percent off its high. That’s cheap!” Fast forward, but not too fast because if you do, you will miss the point in time when another buyer exclaimed: “Wow! I can buy Yahoo! for $60 a share, less than half of what it cost six months ago. Now that is cheap!” And so it went. But here is the question: Despite the stock price, was it ever really cheap? I would say not until it hit the bottom. As the price declined, the fundamentals worsened and the valuation umbrella—that is, the overall Price to Earnings ratio of the market (and other quantitative measures) failed to support the price. AOL became a stronger competitor—at least for a time; Ask.com sprang up; and ultimately Google slammed Yahoo!’s competitive position and business model to smithereens. The following illustration makes this point: A company, whose equity is trading at $100, has provided earnings guidance of ten dollars a share equating to a P/E multiple of 10X. A month later the management revises guidance to five dollars and the stock trades down on this news to $75, a decline of 25 percent. Despite the steep decline in price, the stock has actually become more expensive since the P/E multiple is now 15X.

The point is that if someone had bought shares entirely based on the supposition that they appeared cheap during the decline relative to where the stock price had peaked, that individual may become snared in a good old value trap in which the securities were not as inexpensive as they seemed. Marty Whitman would not have fallen into such a trap. What looks cheap may actually prove expensive once you educate yourself about the other factors that form part of any value proposition. The other factors clearly at play in the Yahoo! situation went to the heart of the company’s ability to compete, its business model, and its expected growth in revenues and earnings. Safety as well as price: the Marty Whitman mantra.

So how should you assess value and not get caught in a less than valuable situation or in a situation where the company is insolvent, thus erasing any possible recovery in bankruptcy? The first step, but only the first step, is to look at the valuation based upon where the stock is presently trading rather than at where it was trading. Use multiple valuation measures for that industry—not as an arbitrage against the market but rather as an insight into the company as a business.

That is what value investors and Marty Whitman do. They ignore the stock market, and they ignore interest rate and GDP forecasts. Rather, value analysis focuses purely on a particular company’s business prospects, deployment of and return on capital, industry positioning, balance sheet, management—well, you get the picture. Value investors are the first responders to troubled situations, more willing than others to dig deep and assess the intrinsic value of a company before it attracts others. There are art dealers who can find the genuine folk primitive painting in a flea market full of tacky junk, mechanics who can see the potential in damaged machinery, and investors who can discern value in companies that have taken a wrong turn or suffered a misstep. And because those investors come to that judgment early, they have to be patient while the company works through its issues. As the business improves, so does the appeal to other investors, and this is when the payoff begins.

So how can the average investor participate in distressed investing, one of the more esoteric areas of capital markets? It is not easy. Ideally, the most basic requirement for successful distressed investing is a very strong analytical background steeped in corporate capital structure; a legal background or access to such resources would also be very helpful. You will need that if you are going to sort through the myriad documents that lay out the seniority of each security and what each class of investor would be entitled to in any recovery in bankruptcy or corporate reorganization. While bonds are senior to equities, there are different levels of seniority within the debt structure, including those that are collateralized by property—such as the mortgage bonds in the Penn Central bankruptcy. Obviously, that’s a tall order. Owning all the skills and knowledge that enable an investor to sufficiently analyze distressed debt situations is probably beyond the capabilities and resources of most individual investors. But there are other options—namely, participating in distressed investing through a mutual fund or a hedge fund. Of course, as with any investment, check the performance of the fund and make sure the risk parameters fit with your particular goals and means. For more on how Marty Whitman chooses stocks, see Table 10.1.

The Corporate Capital Structure: Bonds and Equities

Why do people invest in corporate bonds versus stocks? First let’s define our terms.

The corporate bond universe is composed of two categories of bonds: investment-grade and non-investment grade. The latter are also called high-yield bonds or junk bonds, a term that is not as pejorative to bond traders as it seems to be to the layman. Bonds that are rated below BBB by Standard & Poor’s and below Baa by Moody’s are considered non-investment grade. The companies that issue these bonds pay investors a higher interest rate—thus the term “high-yield”—as an inducement, compensation to the bond buyer for assuming a greater risk of default. As with investment-grade bonds, not all high-yield paper carries the same rating; some issuances are riskier than others. There is no similar rating system for equities.

A typical investor in stocks, particularly a momentum or growth stock investor, is usually less concerned about a company’s balance sheet than an investor in the credit of a company although both should have the same concerns. Ultimately, all the credit investor really cares about is whether the interest on the debt will be paid. But the bondholder also wants to know that in the event there is not enough cash flow to pay the interest on the debt, the company’s assets have as value that exceeds the price they paid for the bonds.

High-yield bonds are a different animal and require more balance sheet and cash flow analysis than investment-grade bonds. This is because, by definition, their financial situation and business prospects are more tenuous. It is these companies that are significantly more likely to fall into bankruptcy.

Value investors use balance sheet and cash flow analysis in a manner more or less consistent with that of high-yield bond investors because they are both dealing with impaired entities. Junk bonds are balance sheet impaired; value stocks may have strong balance sheets, but their business model has likely taken a hit. In the case of an equity, the investor generally wants assurance that the company will remain a going concern and that the parts are worth more than the whole; that is, the investor seeks assurance that were the company to be sold as a single entity or its assets sold off individually, the sale would fetch more than the current stock price. Bond investors, on the other hand, don’t care about the stock price; they only care about the proceeds of a sale being sufficient to redeem the bonds at the price they paid for them, which may or may not be the face value.

In the Penn Central example, bondholders like Marty Whitman were paid face value, while equity holders were basically wiped out. Once the bonds were redeemed, no assets remained.

1. Whitman is not alone in deliberating over his mistakes, using them as a valuable learning experience for his future investment activities. This is the premise of The Billion Dollar Mistake, my first book.

2. A closed-end investment company issues a finite number of shares, which are listed on a stock exchange. The size of the fund rises and falls with the value of its underlying investments as does the stock price. This differs from an open-end investment company that continually issues and redeems its shares. As more money comes into the fund, more shares are issued and it grows larger. Conversely, as shares are redeemed the fund becomes smaller.

3. Prepackaged bankruptcy reorganization: a plan for the financial reorganization of a company that is prepared and voted on by shareholders before the bankruptcy petition is filed. This plan is negotiated with creditors of the company and becomes effective once the company is officially in bankruptcy. Because the plan is already negotiated with creditors and approved by shareholders, the process for emerging from bankruptcy protection is less expensive and shorter.

4. The Participant Disclosure Regulation is also called the Participant Fee Disclosure Regulation. It requires that fees paid by or to various organizations such as investment advisors, plan sponsors, and mutual funds must be disclosed to plan participants and mutual fund investors. These regulations have been continually revised and their application broadened since first enacted.

5. As junk bond investing increased in popularity, it grew into its own asset class. Relative to the entire fixed income industry, very few funds actually invest in both investment grade and non-investment grade, or junk, bonds.

6. Martin J. Whitman and Martin Shubik, The Aggressive Conservative Investor (Hoboken, NJ: John Wiley & Sons, 2005); Martin J. Whitman and Fernando Diaz, Distress Investing: Principles and Technique (Hoboken, NJ: John Wiley & Sons, 2009); Martin J. Whitman, Value Investing: A Value Approach (New York: John Wiley & Sons, 2000).

7. An investor in the credit of a company is an investor in the company’s bonds. Bondholders are creditors since they have effectively loaned the company money. Bondholders are, of course, first in line for recovery in the event of the liquidation of a company since all debts must be repaid before an equity shareholder receives anything. While equity investors should be more concerned with a company’s debt structure, they often are not, particularly growth stock investors, since high growth companies usually do not have significant amounts of outstanding debt.