Wally Weitz on Value Investing in the Post-Crisis Era
As the president and founder of Weitz Funds, Wally Weitz has spent nearly three decades putting his instinct for opportunity to work for shareholders. Influenced by the value-investing model of Benjamin Graham and Warren Buffett, Wally manages the Partners III Opportunity Fund and co-manages Value Fund, Partners Value Fund and Hickory Fund. Over the last five years, the Partners III Opportunity Fund (WPOPX) has had an annual return of 10.85%, versus 6.23% for the S&P 500 total-return index, placing it in the top 1% of its peer group, according to Morningstar.
I spoke with Wally on January 17.
Berkshire Hathaway is one of your top 10 holdings. How do you go about valuing the company, and what is its intrinsic value by your calculation?
I have been following Berkshire since the 1970’s and have used a variety of valuation methods. What really matters is to understand the value of the insurance float and the business values of the wholly-owned companies. The public securities have published market values. Our analyst makes estimates of the value of the float and the future cash flows that will be generated by both the controlled and passive investments and comes up with a little over $180,000. This seems like a reasonable number to me, but as Warren says, “It’s better to be approximately right, than precisely wrong.”
Warren has consistently said that stated book value (currently about $112,000) significantly understates the value of the company. He has recently announced that he will repurchase shares and may pay up to 120% of stated book (a number that will rise over time). This does not put a “floor” under the stock, but it is a strong statement, coming from the master of business valuation.
Your literature indicates that you tend to stick with industries with in your circle of competence. What industries fall outside that circle, and why?
Over the years, we have added analysts to our team who have added several circles of competence that we did not have 10 and 20 years ago. Nevertheless, it is really important to know what you don’t, or can’t, know. Our valuation methodology is based on valuing the free cash flow that a business will generate over a long period of time, so companies whose products or competitive position evolve rapidly (like some tech or healthcare companies) or companies whose profitability depends on commodity prices or other macro factors are generally in the “too hard” pile. The same goes for companies subject to dramatic changes in the regulatory climate.