At the halfway mark in 2019, the U.S. stock market is sailing ahead happily, and our stock funds are fully participating. Our four stock funds’ gains range from 22.43% (Partners Value) to 25.51% (Hickory) vs. 18.54% for the S&P 500. Each equity fund stands comfortably ahead of its benchmark. The Balanced Fund, with just under half of its assets allocated to stocks, is up 12.92%. The Short Duration and Core Plus bond funds are also showing good results with gains of 2.89% and 5.33%, respectively. These fixed income returns reflect some capital appreciation, in addition to coupon interest, as the bond market has responded to Fed encouragement.
Performance data for various periods are shown in the table on the previous page. In spite of the fact that recent short-term results are unusually good, we would direct shareholders’ attention to the longer periods as a more meaningful reflection of the efficacy of our investment process. Portfolio managers for each of the funds provide more detailed information in their commentaries about what worked and what didn’t during the quarter. We also recommend “Fixed Income Insights,” in which Tom Carney and Nolan Anderson discuss goings-on in the bond market.
Investment Outlook
Clients who have been reading these letters over the past 36 years are probably amused by and/or numb to our dour warnings that investors are underestimating risks and overpaying for stocks and bonds. It probably seems that we are genuinely enthusiastic about our portfolio holdings only in times of market crisis, like 1987, 2000 or 2008-09. (I’ll admit it, those are the times that get our juices flowing, and they have proved to be great times to invest.)
Today’s litany of woes would focus on the factors that have historically foreshadowed a troublesome rise in the inflation rate. The Fed has increased the money supply and suppressed interest rates for ten years and seems recently to have resolved to continue its stimulative policies. Deficit spending to spur recovery from the Great Recession continued unabated for eight years, and then we doubled down with a tax cut that pushed budget deficits well over a trillion dollars a year. Budget discipline, even in a period of economic growth and record-low unemployment, seems to be of no concern to either political party. Modern Monetary Theory (MMT) appears to be a new version of “deficits don’t matter.” So far, the only serious inflation we have seen in a long time has been in stock and bond prices (and those are welcome). But, given current policies, it seems reasonable to expect upticks in the general level of inflation.
Our warnings have proved correct from time to time, and there are plenty of reasons to be wary today—inflation and higher interest rates would not be good for stocks or bonds—but trying to sidestep trouble (i.e., market timing) has not been particularly productive for investors. Our game plan, generally, has been to invest in companies that can not only withstand adversity, but take advantage of it. We have written regularly about ways that bear markets and periods of financial crisis have been wonderful for strong, opportunistic companies such as Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) and Liberty Media. Companies with strong competitive advantages (“moats”) generally have reasonable pricing power that helps them neutralize the impact of inflation. Payments companies, such as Visa (V, Financial) and Mastercard (MA, Financial), collect fees based on (rising) transaction values. Innovative companies that can apply new technologies to evolving their businesses have more control over their own destinies than cyclical, commodity-based, economically sensitive businesses. Finally, some companies would actually benefit from higher interest rates—e.g., banks, which could earn higher net interest margins on their deposits.
There is an old joke that “in a bear market, all correlations go to one.” In a sharp correction like the fourth quarter of 2018 or a bear market like 2008- 09, all stocks tend to collapse together. But the good ones do not stay down. We have experienced all sorts of market trauma over the past 36 years. Yet, the two funds that have their roots in our original partnerships that started in 1983 (Partners Value and Partners III) have cumulative gains of 5,130.71% and 6,326.35%, respectively, compared to the S&P 500’s 4,232.26%.* Nothing is certain, but we would assert that patient, sensible, informed value investing works. We feel very good about our companies and the likelihood that they will provide more good returns over the years.
Thanks again to shareholders for entrusting your capital to us. We are in this together, and we appreciate your confidence.
Sincerely,
Wally Weitz Brad Hinton
[email protected] [email protected]
Performance data represents past performance, which does not guarantee future results. The investment return and the principal value of an investment in the Funds will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end may be obtained at weitzinvestments.com.
