"In 1973, we moved to Omaha and I did research and managed accounts for a regional brokerage firm. There I got the message that I should pay attention to Warren Buffett (Trades, Portfolio). That was the most important bit of advice I’ve ever received." -Wallace Weitz (Trades, Portfolio) in a 2016 interview with GuruFocus
Inspired by Buffett, Benjamin Graham and David Dodd, Wallace Weitz (Trades, Portfolio) is a value investor who started his own firm in 1983 with just $11 million. Today, he manages assets that exceed $4 billion.
He runs a firm that offers nine mutual funds as well as a number of private accounts.
Weitz attributes his success to his investment philosophy; at the center of that philosophy is the belief stock market prices fluctuate around the true value of a company. Developing and sticking with processes that find high-quality stocks when they have fluctuated down allow implementation of that belief.
Who is Weitz?
In a 2016 interview with GuruFocus, Weitz explained that at age 12 he had tagged along to a meeting in a broker’s office and came away intrigued. On the way home, he bought a book called “How to Buy Stocks” by Louis Engel. A few weeks later, he bought his first shares (the company would later become Verizon Communications Inc. (VZ, Financial)). He sold those stocks three years later, at a profit. In college, he discovered "Security Analysis" by Benjamin Graham and David Dodd, a foundational book for value investors.
After graduating from Carleton College in 1970 with a Bachelor of Arts in economics, he worked as a security analyst in New York for three years. After that, he moved to his wife's hometown of Omaha, Nebraska, where he worked as an analyst and portfolio manager for 10 years (and discovered Buffett). In 1983, he started Wallace R. Weitz & Co. in Omaha.
Weitz continues to be the primary owner of the firm, according to the Form ADV Part 2A filed earlier this year.
Weitz has had a nearly lifelong love affair with investing and value investing. He has had his own shop for the last 34 years, allowing him to pursue his vision of how investing should be done.
What is Weitz & Co.?
Now known as Weitz Investment Management Inc., the Omaha-based company declares itself, in its most recent Form ADV, to be a large investment advisory firm. It has 40 employees, including 12 who act in an investment advisory role.
As of March 24, the firm had $4,361,048,784 in assets under management. It managed 40 accounts, the largest of which, based on asset values, were high net worth individuals, pension and profit sharing plans, charitable organizations and corporations.
According to its website, it offers nine mutual funds, most available in an investor class and an institutional class (symbols below are for investor class):
- Value Fund (WVALX): net assets $620.6 million.
- Partners Value Fund (WPVLX): net assets $406.9 million.
- Weitz Partners III Opportunity Fund (WPOIX): net assets $27.1 million.
- Hickory Fund (WEHIX): net assets $276.9 million.
- Balanced Fund (WBALX): net assets $119.6 million.
- Core Plus Income Fund (WCPNX): net assets $7.1 million.
- Short Duration Income Fund (WSHNX): net assets $103.4 million.
- Ultra Short Government Fund (SAFEX): net assets $98.5 million.
- Nebraska Tax-Free Income Fund (WNTFX): net assets $62.3 million.
The Weitz firm is big enough, with more than $4 billion of assets under management, to be a major player in the industry. To take care of that volume, the firm has a range of mutual funds for its clients and external investors.
Investment philosophy
In the Form ADV, Part 2A, Weitz says the investment strategy centers on the core belief stock prices fluctuate around the true value of a company.
Of all the companies available, they are interested in only a few. To sort the wheat from the chaff, they try to identify the securities of growing, well-managed businesses. They consider all sizes, or market caps, and they also look at securities issued by non-American companies.
They are prepared to concentrate their investments in relatively few companies. Those companies that make the initial cut also must have honest, competent management.
With their short list prepared, Weitz and team estimate the prices an informed, rational buyer would pay to buy the whole company (private market value). He says the heart of the process is development of an estimate of today’s value, as made up by all the cash the company will throw off to its owners in coming years.
Valuation depends on single or multiple measures, including asset values, earnings power and the intangible value of the company’s moat or “franchise.”
Once the company’s value has been established, they then try to buy shares at a "significant discount" to the private market value. The fund buys for the long term on the assumption the stock price will go up as the value of the business grows and the valuation discount narrows. Once in the stable, stocks are held until they approach or exceed the estimate of private market value.
Weitz adds they do not try to time the market. And if they cannot find suitable securities, then they will invest in high-quality cash vehicles such as U.S. Government securities or government money market funds.
In the GuruFocus interview, he adds additional details. For example, he notes if they are even roughly correct about the valuation and that value grows over time, then they expect the stock price to eventually reflect that value, either by market valuation or when the company is bought. That long-term focus requires lots of patience, he adds.
Weitz says he has come to put greater emphasis on the quality of management over the years. He notes it is critical to be able to do several things: (a) be careful with debt, (b) focus on growing the per-share business value, (c) avoid serious risks and (3) "be bold when a great opportunity arises."
He provides a checklist of sorts to describe the attributes they value in companies:
- Honest management, with integrity and capital allocation skills.
- A wide moat that provides pricing power and a sustainable competitive advantage.
- Predictability: Being able to estimate how the company will compare with its industry in the next five or 10 years.
- The ability to generate discretionary cash flow, and to have reinvestment opportunities in which to use that cash.
- A management team that concentrates on long-term increases in per-share business value.
- A balance sheet that is strong, and careful use of debt.
At the core of Weitz's strategy is the belief stock prices fluctuate around the true value of a company. To implement that idea, they search for good companies currently out of favor and trading below private market value. On the other side, they sell those stocks when they fluctuate above private market value. Getting from one side to the other requires patience and willingness to wait for up to 10 years.
Current holdings
The portfolio is dominated by consumer discretionary stocks, as shown in this graphic from the Partners Value Fund fact sheet:
The fact sheet also provides this list of top 10 holdings, along with the proportion of the portfolio each stock represents:
It is a high-conviction portfolio made up of just 25 stocks. On the fact sheet, they note, “At Weitz, we don’t focus on broad diversification or predetermined asset allocations. Instead, we use a common-sense, fundamental, bottom-up, one security at a time, value-based investing approach.” Annual turnover, as of the end of the first quarter, was 16%.
Looking at the sectors and the companies in the top 10, it seems Weitz is prepared for a collapse in stock prices. While he and his team do not attempt broad diversification, the portfolio as a whole has a number of stocks that should maintain their value even if share prices dip. Also note the turnover ratio: for such a high-conviction portfolio, turning over almost one in every five stocks within a year seems to be a high rate.
Weitz’s performance
The Partners Value fund delivered an average return of 5.18% over the past 10 years, but as this Morningstar chart shows, that was not enough to stay ahead of the S&P 500 or the Large Blend category average:
For the firm as a whole, the nine funds collectively have been running behind their category averages since 2013, according to Morningstar:
Looking again at the fund’s performance, we can see it fell behind the S&P 500 and the Large Blend category average in the fourth quarter of 2015, and has struggled to keep up since then. The table with the company-wide results shows the fund family began lagging the various category averages in 2013.
Conclusion
Like everyone else who has spent any time in the market, Weitz recognizes stocks go up and stocks go down. But, more than most of us, he knows how to profit from those ups and downs.
By finding outstanding companies with good management, earnings power and a wide moat, he and his team can distinguish between stocks that are temporarily out of favor and stocks that are down because they have issues of some kind.
Buying good stocks that have the potential to overcome temporary problems and giving them time to grow sharply increases the odds the stocks will deliver solid returns in the years ahead. And the word “years” is apropos; the fund’s recent performance would not attract any investors looking for immediate gains.
Disclosure: I do not own shares in any of the companies listed here, and do not expect to buy any in the next 72 hours.
