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Emotional Arbitrage- Wally Weitz Continues to Outperform

Despite more than 25 years of averaging more than 12% annually, Wally Weitz will always be known as that other guy from Omaha. He doesn’t have any problems be called that though, and credits Warren Buffett for much of his success. He’s owned Berkshire Hathaway continuously since buying the A shares in 1976 for $3,000/share.

Weitz manages his firm’s Hickory Fund (which is a great name for a fund, by the way) and Partners III Opportunity Fund. He also co-manages the Value Fund and Partners Value Fund. Like a lot of value investors, he had a rough 2008, but the Hickory Fund is up more than 23% so far in 2010.

So, what’s Wally Weitz looking at these days? Of course he continues to own Berkshire Hathaway (BRK-B), but he’s also done very well with Coinstar (CSTR) and Liberty Global (LBTYK) in 2010. In addition to those three names, here are four other large current holdings:

  1. Liberty Media (LINTA): This is the QVC portion of the Liberty Media Corporation conglomerate, as well as some related websites.
  2. Omnicare (OCR): A pharmaceuticals servicing company. This looks like a bet on computerized medical record keeping.
  3. Sandridge Energy (SD): An independent oil and natural gas driller.
  4. Redwood Trust (RWT): A REIT focusing on residential and commercial real estate loans.
Weitz is also focused. A typical mutual fund owns more than 140 stocks. That’s certainly not diversification, and I don’t care who you are, no portfolio manager can know 140 stocks well. Would you want your fund manager putting your money in his 123rd best idea? At the end of Q3 the Hickory Fund owned 41 stocks, and Partners III Opportunity Fund owned 37, with a lot of overlap between the two funds. Turnover for both was less than 40%.

He sums up his advantage as well as any value investor I’ve heard: He’s done well because of emotional arbitrage. Value investors are natural contrarians, but we don’t want to dismiss the crowd out of spite or some misplaced ego trip. Our advantage is our willingness to buy into certain securities when the negativity has temporarily driven down the price, and be able to manage our emotions and see the stock price through to normality. Weitz does it much better than most.

Disclosure: Long BRK-B

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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