Q. I had high hopes for my shares of Wachovia Corporation and have been disappointed. What does the future hold? — F.C., via the Internet

A. You can't underestimate the power and potential of Wachovia, which is the nation's fourth-largest bank in assets and fifth-largest in market value.

The simple act of approaching Wachovia about a possible merger without informing the Merrill Lynch & Co. board accelerated the recent ouster of Merrill chairman and chief executive Stan O'Neal.

But it is easy to see why O'Neal sought out Wachovia, an aggressive acquirer of financial companies.

Wachovia recently completed a $6.8 billion acquisition of the A.G. Edwards brokerage firm. Combined with its own Wachovia Securities, it is the second-largest US retail brokerage, behind Merrill. The concern is whether, after cutting about 4,000 jobs at the two firms, it can maintain the A.G. Edwards reputation for individualised service.

In addition, the bank paid $24 billion to buy Golden West Financial last year. That was an inopportune time because Golden West was quickly slammed by the troubles of the mortgage industry and the California market in particular. The best that can be said of the deal is that it may be possible to expand market share during the downturn.

Shares of Wachovia are down 26 percent this year following last year's eight percent gain. Wachovia's net income fell 10 percent in its third quarter because of $1.3 billion in losses and write-downs tied to the troubled credit markets. It is cutting expenses in its weak-performing investment bank.

It remains a profitable powerhouse in retail banking, operating in 21 states, with dominant positions in the Southeast and Mid-Atlantic. It is becoming aggressive in California, thanks both to the Golden West purchase and opening of new branches. It recently eliminated its automated-teller-machine fees at other banks' machines in California.

The consensus analyst recommendation on shares of Wachovia is "buy," according to Thomson Financial. That consists of six "strong buys," five "buys," nine "holds" and one "underperform."

Wachovia is well-capitalised, with a solid commitment to dividends and share repurchases. Its diverse line of financial products also bodes well for cross-selling to clients.

Earnings are expected to be down five percent this year, compared with a three percent decline in the money-centre banking industry. Next year's earnings increase is projected to be nine percent, compared with 11 percent for its peers. The predicted five-year annualised growth rate of nine percent is in line with the industry.

Q. I hear so many good things about Third Avenue Value Fund. Would you recommend it? — R.M., via the Internet

A. It requires a hefty $10,000 minimum initial purchase, but you'll be buying into an investment legend in portfolio manager Marty Whitman.

He finds safe and cheap securities, paying close attention to valuations and how a company is financed. His strong results, understanding of bankruptcies and informative shareholder reports are all commendable.

The $12 billion Third Avenue Value Fund (TAVFX) is up 15 percent over the past 12 months to rank in the upper half of mid-cap growth and value funds. Its three-year annualised return of 17 percent places it in the top 15 percent of its peers.

"We really like the fund and recommend it, though keep in mind that Whitman is getting up there in age and is now in his 80s," said Karen Dolan, analyst with Morningstar in Chicago. "It seems as though he'll do this as long as he can, however, and an eventual transition should go smoothly because of the fine team he's built."

Whitman has managed the fund since its 1990 inception. The fund will go wherever he aims it, with distressed debt, stock, bonds and cash included in its portfolio. He's made many smart calls over the years that have paid off handsomely for the fund's investors.

A firm's balance sheet is a major consideration for him, as he carefully studies the assets and cash on its books. He likes to buy at a discount of at least 20 percent to net asset value. Because Whitman is patient and never pays too much, the fund's downside is always limited. He is willing to hold a long time, keeping tax efficiency in mind.

Sixty-three percent of Third Avenue Value assets are in financial services, and Whitman recently increased the international holdings in his portfolio. Largest stock holdings are Cheung Kong Holdings, Toyota Industries, Henderson Land Development, Brookfield Asset Management, Posco, St. Joe Corp., Forest City Enterprises, Nabors Industries and MBIA.

This "no-load" (no sales charge) fund has a 1.08 percent annual expense ratio.

Q. Is there a formula for how much debt is acceptable based on your salary? I'm talking about both long-term and credit card debt. My husband and I disagree on how much is prudent. — R.F., via the Internet

A. Your debt-to-income ratio gives both you and lenders an idea of whether you can meet your payments. But you must examine your comfort level, spending habits and financial goals rather than rely solely on a ratio.

Your monthly payments on unsecured debt such as credit card payments should not be more than 20 percent of your net take-home pay, said Catherine Williams, vice president with Money Management International, a non-profit counselling service in Houston.

She also believes that unsecured debt should not exceed your ability to pay it off in three years, since you'll wind up paying for items you've already consumed.

"Next there's the old rule of thumb, which has really come home to roost in this difficult mortgage market, that you should never allow your mortgage payments to represent more than 30 percent of your net take-home pay," Williams said.

Your combined unsecured debt and mortgage payments therefore should not exceed 50 percent of take-home pay, Williams said.

(Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, Ariz. 85287-4702, or by e-mail at andrewinv(at)aol.com.)

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