With the financial markets dropping more than 10% between July and August, it was appropriate that Wallace Weitz, who embodies calmness and discipline, lecture my Texas Lutheran University students. It was homecoming weekend and amid the excitement, we were fortunate to have the man known as “the other Oracle of Omaha” fly down for a two hour question-and-answer session.
Ă‚
To be called the other Oracle of Omaha is a direct reference to the skill, intellect and accomplishment of Omaha native Warren Buffett (Trades, Portfolio) –Â quite a compliment, indeed. How, exactly, does one share such rare comparison to, arguably, the greatest investor of all time? It is much more than just Midwestern geography. However, the fact that both men call Omaha home makes one wonder if there is something special in the water.
During college Weitz abandoned a variety of different trading strategies after reading Ben Graham’s book "The Intelligent Investor." Graham is considered the “father of value investing.” Not only was he a great investor and author, but he also became Warren Buffett (Trades, Portfolio)’s mentor and employer.
Buffett has similar praise for the 1949 book.
"The Intelligent Investor" conveys simple to understand, but difficult to implement, ideas for investors to remain grounded and successful. It proved to be the foundation for decades of market-beating performance for both Buffett and Weitz.
The first idea is that of “Mr. Market.” Mr. Market is this guy you know who comes to you every day offering to buy or sell stock market assets to or from you. However, Mr. Market has this odd personality quirk –Â he is often manically happy or sad. You never know which will show up but must remain prepared for all.
Recognizing this behavior, the intelligent investor must know how to use Mr. Market’s irrationality against him. In doing so, you must know the financial markets offer liquidity –Â but not fair values. Sometimes Mr. Market is highly depressed or overly optimistic. This creates valuation opportunities and you must be disciplined to recognize this behavior and take the opposite position.
Secondly, "The Intelligent Investor" explained that the value of any business is represented by the amount of cash the business will produce over its lifetime, discounted back to today’s value. Using a discounted cash-flow analysis, one can make a variety of assumptions about what a business should produce and, if you owned the whole business, what it would be worth to you in today’s dollars.
Thirdly, "The Intelligent Investor" provided the “margin of safety” concept. Simply, this meant a smart investor would wait for Mr. Market to sell a business for a very low percentage of its full value as would be assigned by the discounted cash flow analysis. This margin of safety allows an investor to be more patient even if some assumptions prove to be incorrect or if the recognition of value is not recognized for a lengthy period of time.
As stated above, value-investing concepts are pretty straightforward. And yet, Buffett’s legendary 50-year performance has been rare. But Buffett is not the only one operating in this elite atmosphere. Weitz has outperformed the market by 2½ percentage points per year over the last 30-plus years using similar strategies.
So why are these concepts widely available, yet so elusive? Further exacerbating matters, over these long time frames the stock market has averaged about 10% returns per year. However, the average investor has only earned about 3% per year.
Weitz clarified saying that value investing works –Â but not on a fixed time table. As such, one must realize there is frequently a disconnect between your anticipated time frame and what happens in reality. Occasionally, things happen very quickly. However, you must also be willing to wait very long periods to see your thesis come to fruition.
Great investors don’t outperform every year. Despite Weitz’s strong performance over decades, he acknowledged his firm has underperformed about every third year. You can’t lose faith in the process.
Furthermore, too many investors allow emotion to take hold as they chase recent hot performance. In the process, they are destined to buy high and sell low.
As such, to have truly long-term high performance great investors must ignore emotion, embrace logic and only buy when offered a significant margin of safety. You must think for yourself, ignore your neighbor and think in terms of where you want to be decades from now.
After discussing Ben Graham’s book "The Intelligent Investor" and his value investing foundation, Weitz expanded upon his 40-year career with my Texas Lutheran University students.
In doing so, Weitz acknowledged he is a total introvert. It was a refreshing revelation as he is the antithesis of the stereotypes on Wall Street screaming “boo-yah.”
Instead, the soft-spoken Omaha resident has mastered the lost art of sitting quietly amid chaos while patiently observing, listening and absorbing information.
Weitz loves to read, recognizing that accomplishing investment success requires an insatiable desire for knowledge. “It is a never-ending treasure hunt you never totally figure out. The more you read and connect the pieces, the better you see the overall picture. All news and world events are interrelated, and filters back to the investment question for me.”
In assessing differences to his firm’s success versus others, Weitz said most investors are very short term in their outlook. The financial markets are too random over short time frames to allow for successful decisions. He added that “Investing is not like a video game where you can just drop in and out when you want and expect to have success.”
Furthermore, he said fear and greed cause people to engage in unforced, emotional mistakes. Weitz’s goal is the opposite, which protects his clients in the process. This discussion recognized the importance of behavioral psychology upon finance decisions and the folly of emotional decisions. You must analyze data and have the conviction to take the opposite perspective to the prevailing sound-bite of the moment.
This contrarian bias is ever present as value investors often buy out-of-favor companies from disappointed growth-oriented traders whose overly pessimistic assessments have caused a bargain. This is frequently accompanied by tremendous noise from Wall Street. Weitz acknowledged that, even though this is a logical approach, it is not without some pain.
When asked what he stays away from, Weitz avoids companies in which you can’t trust the ethics of management saying, “Do you want to be partners with someone you really don’t trust?”
He further counseled that organizational culture matters significantly. If management pressures employees to “make their numbers at all costs” bad things eventually happen. He referenced the recent Volkswagen scandal as an example.
The investment veteran also offered a well-known Warren Buffett (Trades, Portfolio) quote: “Don’t do anything you wouldn’t want on the front page of the newspaper.” Weitz said the things that embarrass you in the newspaper are the ones that typically make for a dangerous investment. As such, the wise investor must know where the lines of ethical conduct are and not get close to them.
Weitz Investments doesn’t cover everything. Rather, the firm’s founder said, “We try to know what we don’t know.” He added that a good investor doesn’t have to know everything, but what you do know should be deep and detailed. As such, you must stay within your circle of competency.
After four decades, Weitz acknowledges many scars from mistakes. Given this, the firm continues to be more creative as to what can go wrong, always testing assumptions along the way.
The seasoned investor shared an insightful perspective on goals and envy. He said quite often, greed or the actions of a neighbor, causes an investor to lose sight of what they should do. Weitz said, in the 1980s, the 30-Year U.S. Treasury Bond was yielding 14%, but institutional endowment and pension managers didn’t load up on the risk-free asset –Â even though their required rate of return was often only 8%. Instead, they chased returns becoming obsessed with what someone else was doing. Be true to your goals. Avoid envy.
Additionally, Weitz said he wants to conduct his affairs in a manner that doesn’t cause him to wake up at 4 a.m. and worry. He is sensitive to listening to his own answers as he discusses decisions. If his answers cause him to pause, he will take a step back, forcing himself to think harder and deeper.
At this point, Weitz doesn’t need to work. He loves the intellectual challenge.
When asked how he’d like to be remembered, Weitz replied, “We did it better than others, we did it right, we helped clients better understand their money; the quality of our clients’ lives are better because of investments we made and those investments allowed us to give more to charity.”
It was an education one will never find in a textbook.
Also check out:
