This philosophy dates back to the founding of Third Avenue by Marty Whitman. "He has believed in investing in that fulcrum security as a way to gain control of the business," Barse adds.

Whitman's strategy is to "use his control, and a reorganization process, to exchange that security for the stock of a newly created and equity capitalized business so he would only own company stock in a debt free business that was newly reorganized," Barse says.

The firm originally began its life as a brokerage in 1972 called MJ Whitman & Co. It later evolved into Third Avenue Management. Whitman has stated that he looks for distressed securities because he believes many people misunderstand them.
"The amount of money invested in credit instruments of all types," Whitman writes, "dwarfs the amount of funds invested in equities."

Third Avenue funds buy not only based on a company's numbers, but also on the quality of its leadership. It wants management that "has a good track record as both owners and operators and shares a common interest with outside, passive minority investors," according to a statement of principles at the company's Web site.

Recent history has shown, however, no investment strategy is without downside risk. Last year, for example, Third Avenue Value lost 45.6%, trailing its index by 2.2% and getting beat by about 75% of the funds in its category, according to Morningstar, which puts the fund in the world stock/large cap category.

Third Avenue, which has large foreign real estate holdings, was brought down in 2008 along with almost everyone else due to the world subprime loan crisis. It was also hurt by the fact that it had 35% of the portfolio in just three securities, and a 58% weighting in the financials sector.

"Since this is a highly concentrated portfolio, the portfolio can have problems from time to time," Morningstar's Hughes explains. "So these are really funds for the long-term investor, for someone who has a lot of faith in Marty Whitman. But he has had a lot of success."

The 2008 numbers were also a jolt because of Third Avenue's exemplary performance over the past decade. Even with the losses of 2008, the flagship fund's 10-year annualized return stood at 7.25% as of August 5, which beat its index by five percentage points and put it in the top 9% of its category.

Nevertheless, garbage-picking can be risky business, particularly when it comes to assessing a corporate management team.
In a newsletter earlier this year, Whitman conceded that evaluating management is an area in which the company "screws up more than any other." For instance, there is Third Avenue's legal battle with MBIA, which has huge municipal insurance and structured finance operations.

MBIA was once one of Whitman's favorites, but it is now being sued by Third Avenue, among others. Third Avenue had been a holder of MBIA stock for a decade. Last year, it also participated in the firm's capital-raising process by buying the notes of an MBIA subsidiary.