Wally Weitz manages more than $5 billion in client money in much the same vein as a more well-known investor who operates out of Omaha, Nebraska: find good businesses that trade for less than their worth and bet big on them.
Since hanging his own shingle in 1983, Weitz has grown assets under management from just over $11 million to more than $5 billion. His flagship Weitz Value fund returned 32% in 2013, just a shade less than the S&P 500 in a year when many stockpickers found it impossible to keep up.
Over a recent lunch in New York, Weitz and I discussed his investing philosophy, how he managed to match a raging bull market in 2013 and why he doesn’t try to be a hero by betting big on turnarounds.
Forbes: Wally, it’s been a great year for the market by almost any measure and many managers are having a hard time beating their benchmarks. Yet most of your funds are keeping pace or even beating the market.
Wally Weitz: And we’ve got 30% in cash. I don’t know how we did it! That’s not true, but it has been very challenging.
We come up with a business value for each company and we do a weighted average price to value of the whole portfolio. At times like the bottom in 2009 our average price to value was around 40 cents on the dollar. We were down to like 4% cash – 10% is neutral for us — we were way overinvested, but just couldn’t resist.
Today it’s 89-90 cents, so we’ve been trimming things as they get to a place we couldn’t bear to hold them. We still have some at 100 cents on the dollar, but I don’t want to get to much over 30% cash because making a really extreme bet puts you in that little category where you might be out of business if it lasts too long.
So there are a lot fewer things to buy now, given that we haven’t had any kind of broad correction.
Right. It’s been hard to find things. Individual things dipped and we were able to buy some more. Found a few new things. And it is kind of miraculous that we’re keeping up. We’ve had a few things that were really good. If the market’s up another 30% in 2014 there’s no way we can keep up, but I’m not too worried about that.
Give me an example of some new positions, where you were able to find opportunities?
WorldFuel Services is a distributor of jet and marine fuel. Not really exciting, kind of a roll-up of distributors. They happened to own oil coming from the Bakken that was on a train that derailed. It wasn’t their train, but there was a cloud over it that made it a little cheap.
Oracle ORCL -0.35% is also newer for us. The Cisco’s and Microsoft's MSFT +1.1%and Dell's and HP’s are getting killed by the world changing on ‘em, and Oracle is cheap because people think it’s in that category, facing competition from newer things like Workday WDAY -1.59% that may be a little better version of parts of what they do. Our thesis is that at 11 times earnings they’ve got the maintenance contracts – people are already locked in – to keep them going for a long time even if they slow down. I’ve heard that changing away from an Oracle database is like having an organ transplant.
The conventional wisdom is that value means low-priced, or statistically cheap. Our take is that it’s the business value that counts, and buying at a discount. A company that’s going to grow — and we believe Google will grow profits 12-15% a year for a long time — is worth a huge multiple.
Something like TransDigm would be another example, pushing 20 times earnings. It’s relatively new for us and makes replacement parts for aircraft. It has almost a private equity mindset. They buy things and squeeze the costs down like crazy, but then they keep the business, they don’t kick it out again. I always worry about that kind of thing going too far. With a real cost-cutting mentality there is the risk you can cut too much.
At a certain point you need growth from the top-line, not just squeezing out more profit by cutting.
We own Valeant Pharmaceuticals, it’s our biggest position right now. It’s about tripled since we bought it a year and a half ago, but that’s another case where cost-cutting is the name of the game. The CEO was a McKinsey consultant to the healthcare industry so he says he’s seen all the dumb things done over the years.