Marty Whitman, the illustrious Third Avenue Funds founder, tells Steve Forbes that he is seeing great opportunities in distressed debt and the equity markets, and is particularly bullish on Hong Kong blue chips.

“From the top down, from the macro view, things could not suck more than they do suck,” Whitman said. “[But] from a bottom-up point of view, there have never been, in my lifetime, as attractive securities as are available today at the price as you can get them. … Any money I have I’m spending on either distressed or common stocks, with some emphasis on common stocks. I must say, our biggest commitments now are in Hong Kong blue chips, all of whom have huge presences in mainland China.”

Among the firms he’s targeting: ChungHong Holdings, Henderson Land, Hang Lung Properties, Jardine Matheson. “I think [it’s] a great growth area,” he says of Hong Kong/Chinese stocks. “And you get in most of these things at 60 percent discounts from readily ascertainable net asset value.”

Whitman says his firm avoided many of the stocks that became huge problems because of its emphasis on credit worthiness in addition to cheapness — something that many investors failed to do. “I think two things happened to value investors,” he said. “One, a lot of people were in cheap stocks and suffered permanent impairments. And they ought to be distinguished from people like us that, by and large, in our portfolio, we never suffered permanent impairments. We never had Bear Stearns. We never had Fannie Mae. We never had Countrywide. … You know, we probably missed a lot of good things. And we probably will continue to miss a lot of good things. But the insistence on credit worthiness, we avoided permanent impairments. People who avoided permanent impairments, you know, I hope will come back. The portfolios stuffed with value stocks, cheap versus book value, low P/E ratios, but where they suffered permanent impairments, obviously, they’re toast.”

It is critical for individual investors to understand credit worthiness, Whitman says. “In value investment today, cheapness is not a sufficient condition,” he said. “You better combine it with credit worthiness.”

How can you assess credit worthiness when examining a stock? Whitman says to look at three key credit-related issues:

• A relative absence of liabilities, whether on the balance sheet, in the footnotes of reports, or elsewhere
• The presence of high quality assets, which means things that are convertible to cash, or near-cash
• Good cash flow from operations available for stockholders