Not many people would appreciate being compared to a big bird that circles around near-dead animals. But 76-year-old Martin Whitman, who has built a 40-year career around squeezing value from out-of-favor companies, including those going through reorganization or bankruptcy proceedings, welcomes the analogy.

"Please feel free to call me a vulture investor," he says. "I'd rather be called that than an academic, an asset allocator, a market timer or a growth-stock investor. I'm more successful than any of them, and I sleep better at night."

Whitman's apparent peace of mind notwithstanding, shareholders of his $1.3 billion Third Avenue Value Fund (TAVFX) may have needed at least a few glasses of sleep-inducing warm milk in the late 1990s, as investors flocked to growth stocks and abandoned his deep value strategy in droves. During those years, his fund lagged many of its more growth-oriented, price-be-damned competitors in the small- and mid-cap arena.

But times have changed, and the resurgence of value stocks in 2000 made the fund's total return of 20.8% for the year look positively buoyant compared with the punishing double-digit losses suffered by many growth funds.

With investors still shell-shocked from those losses, the fact that Third Avenue Value has posted a negative total return in only one calendar year since its 1990 inception takes on an added appeal. Even in that year, 1994, the loss amounted to just 1.5%. And despite the fact that Third Avenue Value underperformed many growth funds in the late 1990s, its below-average volatility helped take out some of the sting.

Blood In The Streets

When asked if he feels vindicated by the resurgence in value stocks and the fund's comparatively strong performance last year, Whitman laughs. "You'd have to feel guilty to feel vindicated, and I never felt guilty about sticking to what I believed in," he says. "The market's love affair with anything that offered a whiff of growth potential represented a flight to garbage marked by the grossest speculative excesses in the history of mankind."

He recalls a meeting with a venture capitalist friend in 1999, in which he had an epiphany about just how crazy things had become.

"This individual had consulted with me in 1993 about taking public a startup venture that needed to raise perhaps $8 million," he says. "He asked me to choose between two so-called 'schlock' underwriters. When I spoke with him in 1999 about a promising venture he was involved with, I recommended he go to the 'bulge bracket' firms, like Goldman Sachs or Morgan Stanley, and that he should look at raising $100 million to $200 million. It dawned on me that it had become respectable to market new issues of common stock at fantastic prices with top-tier firms, even where the companies have no prospects of generating profits from operations for the foreseeable future."

He sees the rotation from growth to value as the beginning of a longer trend, predicting that "over the next few years, price-unconscious growth investors will see blood in the streets."

Whether or not the road to growth stocks will be spattered with blood, as he predicts, it is almost certain that Whitman will stick to the deep value strategy that has become his trademark. Like other value managers, he likes companies whose stocks are selling at prices that he considers inexpensive. Most important, he must believe that the stock is selling at a substantial discount to what the issuer would be worth as a private company or a takeover candidate, and that it has a strong balance sheet and financial position. For that reason, many of the companies he invests in are those that he pinpoints as attractive candidates for leveraged buyouts or management buyouts.

But Whitman often goes beyond cheap to the nitty-gritty bargain basement of the stock market. Many of the stocks he buys sell at less than 10 times estimated earnings, and at discounts of 30% or more of the value of the company's net assets. He often buys into depressed industries when they are out of favor, and it can take years for his investments to reveal their inner strength with rising stock prices.

An Active Voice

Even more unusual-and controversial-is his practice of taking a sizable equity stake in smaller companies. By doing so, he buys a significant voice in corporate-management decisions-a process he calls "control investing," but one that others might label less benevolently.

In these control situations, Whitman often doesn't buy the stock outright. Instead, he will enter the picture by acquiring significant positions in senior debt issues of distressed companies going through a restructuring or reorganization. He'll buy up enough of that debt to become an important influence on the reorganization process.

Because Whitman usually buys the bonds at a steep discount, their current yields can be 16% or more. If the company goes through a reorganization or restructuring, the fund will receive at least a portion of the compensation as a creditor in the form of company stock, provided Whitman believes that it will be reasonably well-capitalized and well-managed.

If the whole process sounds a little mercenary, that's not always how the managers of the companies involved see it. Michael Heffernan, president and CEO of Innovative Clinical Solutions in Providence, R.I., recalls when Whitman began investing in his health-care services company in 1999. The company, which was going through a reorganization and had just changed management, was trying to shore up its balance sheet by converting some of its $100 million in outstanding convertible bonds into equity.

Enter Whitman, who bought a sizable number of bonds, then converted them to stock. Today, Third Avenue Value Fund owns about 40% of the company's stock and has one of its analysts sitting on the board of directors.

"A lot of investors in Marty's position would try to come in and seize control," says Heffernan. "But he didn't do that." Instead, according to the CEO, Whitman talked to other bondholders about the conversion and guided due-diligence efforts to make sure that was a good move. He also helped the company obtain a line of credit.

"I have a lot of admiration for Marty," says Heffernan. "He's been very supportive of our management team and really works in the best interest of shareholders. I think the term "vulture" is unfair because he really comes in and tries to build a company up, not tear it down."

Russell Weinstock, CFO of San Jose-based Silicon Valley Group, a manufacturer of equipment for the semiconductor industry, says Whitman doesn't always take such a hands-on approach. The fund, which now owns 12% of the company's equity, began buying shares in 1997, when the sector was depressed and the stock cheap.

"Marty has talked to us to understand the business, but he's never had any real governance role," says Weinstock. "He just bought a company with a strong balance sheet that he considered undervalued. And he's a long-term investor, which is pretty rare these days."

The Road To Value

Whitman began learning the ropes of value investing in the 1950s, when he was hired to manage the estate for the heirs of the Sears Roebuck fortune. The family firmly believed in value investing, which was unusual in the post-World War II era of go-go growth stock infatuation.

Whitman, who had been a growth-stock analyst at an investment bank, eventually became a convert. He founded his own firm, which specialized in restructuring troubled companies, in the early 1970s. In 1984, he became involved in the hostile takeover of Equity Strategies, a closed-end fund that was selling at a significant discount to net asset value.

Today, with hostile takeovers less common in the corporate world, Whitman uses more sedate measures, like debt conversion, to move in. Or, more often, he may simply buy stock in a company he considers undervalued.

He's been doing that with some Japanese stocks, which make up nearly 15% of the portfolio. Fund holding Toyoda Loom Works, an affiliate of Toyota that produces automotive parts, industrial equipment and electronics, is "a way to buy into Toyota at a significant discount." The fund is now the largest non-Japanese holder of Toyoda stock and, according to a recent shareholder report, is "trying to use whatever powers of persuasion it can muster to cause a reorganization."

But Japan's reorganization laws are very different from those in this country, and it remains to be seen whether the long arm of Whitman will extend from New York, across the United States and over the Pacific to impact corporate affairs in a country in which companies vigilantly shield themselves from outsider influence.

Regardless of the eventual outcome of the fund's foray into Japan, Whitman will no doubt remain a formidable force in value investing in the United States and continue to pass his knowledge and philosophy on to a new generation. After 28 years of commuting from his home in Manhattan to Connecticut to teach a weekly business class at Yale University, he's decided to take his talents to New York's Columbia University to eliminate the commute.

Even with the allure of growth stocks fading, can Whitman convince a generation of investors weaned on a growth-at-any-cost mentality that price matters, too? "Of course I can," he says. "And those who don't believe it are free to drop the course."

Marla Brill publishes Brill's Mutual Funds Interactive (