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Robert Abbott
Robert Abbott
Articles (594)  | Author's Website |

Strategic Value Investing: Weitz and Brandes

Two leading value investors, and their relationships with Benjamin Graham and Warren Buffett

September 10, 2019

Wallace Weitz (TradesPortfolio) and Charles Brandes (Trades, Portfolio) are among distinguished company; they are two of nine value investors considered leaders in their field by the authors of "Strategic Value Investing: Practical Techniques of Leading Value Investors." They were included because of their long-term investing success, as viewed by authors Stephen Horan, Robert R. Johnson and Thomas Robinson.

The “Other Oracle of Omaha”

Weitz received that appellation because he is the other prominent investor in Omaha, Nebraska. Like Warren Buffett (Trades, Portfolio), Weitz likes buying into businesses for the long haul. The authors cited him as saying, “The idea that I picked up from him [Buffett] 30 plus years ago is that you are really buying little pieces of a real business. So, as other people either misperceive what the business is about or act on much shorter term considerations… the price of the stock can get way above or way below that business valuation.”

Between 1983, when Wallace R. Weitz & Co., was founded and the time “Strategic Value Investing” was written (it was published in 2014), the firm generated a return of 12.3%, compounded annually, while the S&P 500 returned 10.3%

The authors noted that Weitz’s value investing philosophy had evolved, and now “It combines Graham’s price sensitivity and insistence on a 'margin of safety' with a conviction that qualitative factors that allow companies to have some control over their own destinies can be more important than statistical measurements, such as historical book value or reported earnings.”

More specifically, Weitz was said to be looking for companies that generate more cash than they need to maintain their business, in industries he understands. Given these criteria, he runs a concentrated portfolio. At the time “Strategic Value Investing” was written, he held fewer than 50 stocks in each of his three mutual funds.

He was also cited in the book as saying, “Stock prices are a combination of the value of the business and the valuation that people put on that business. As cash leaves chasing some other, more interesting investment opportunity, the valuation part shrinks [and the stock becomes attractive.]”

How attractive should a stock be? According to the authors, he wants deep discounts, at least 40% less than his estimated value.

Regarding other key principles, Weitz is prepared to keep cash in hand if it doesn’t find stocks that meet his criteria. In August 2012, that amounted to 20% in the Weitz Value Fund.

He will invest in all capitalization sizes, will short sell stocks and use some leverage. In a Bloomberg article cited by the authors, Weitz explained he liked to buy what he called “defensive shorts.” These are stocks or a sector that appears to be fully valued or overvalued; he shorts those stocks, which allows him to buy more stocks on the long side.

Follow up: This Morningstar chart shows the Weitz Value Investor fund (blue line) has disappointed in the last few years, falling behind both the index and its peer group:

Strategic Value Investing GuruFocus Weitz Value Fund

Brandes

Brandes Investment Partners, a California-based money management firm, managed nearly $30 billion worth of assets in mid-2012. And its former principal, Brandes, who retired in 2018, enjoys a respected place in the pantheon of value managers, according to the authors of “Strategic Value Investing.”

That may be due, in part, to his connection with Benjamin Graham, who moved to La Jolla, California when he retired in the early 1970s. It also reflects his success investing in small caps and in global markets.

There’s also a Buffett connection: Brandes, too, invests for the long term. As the authors pointed out, he believes any holding period of less than a three- to five-year business cycle is speculation. Similarly, he believes that anyone buying stocks based on what they think the market will do in the future is also a speculator.

Brandes calls himself a deep-value specialist and focuses on margin of safety. He also uses margin of safety to estimate the bullishness or bearishness of the market. For example, the margins were getting low in 2006 and 2007, down to about 20%. By 2009, he was seeing discounts of 50% to 80% from intrinsic values when the market bottomed.

Because one of his areas of expertise is small-cap stocks, Brandes, by necessity, runs a diversified portfolio. When stocks have limited capitalization, any significant buying or selling is likely to attract the attention of the rest of the market. By spreading his capital among many different stocks, he can offset this effect to some extent.

As we’ve noted, he thinks any transaction based on a forecast is speculation, so he obviously avoids top-down analysis. Instead, he thinks in terms of buying part ownership in an ongoing business that he will hold for a long time.

Read more here:

In common with Buffett, he does not look upon gold as a good investment. He believes gold may be a store of wealth, but it cannot create wealth, especially when governments are printing money.

Follow up: There are several international funds in the Brandes stable; its International Equity fund, which started in 1997, has generally lagged its index and peers for the past decade:

Strategic Value Investing GuruFocus Brandes International Equity

Conclusion

Weitz and Brandes justifiably earned respect among value investors for their individual philosophies and investing success. The authors of "Strategic Value Investing: Practical Techniques of Leading Value Investors" have made it clear that success was linked back to those philosophies.

Weitz believed in buying stock in good companies, or “little pieces of a real business” with an adequate margin of safety, for the long term. In these preferences, we see he is closer to the mature Buffett than Graham.

Brandes calls himself a deep-value investor, someone who wants a strong margin of safety. He also focuses on small-cap and international stocks, and is a doggedly long-term investor. Anything less than a three- to five-year business cycle is speculation, as is any stock purchase based on expectations for the future.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution." In his book, "Big Macs & Our Pensions: Who Gets McDonald's Profits?" he looks at the ownership of McDonald’s and what it means for middle-class retirement income.

Visit Robert Abbott's Website


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