Warren Buffett at Wietz annual meeting

When Warren Buffett showed up at the annual meeting of Wally Weitz’s mutual funds company in 2003, he wore a plaid shirt, a Weitz trademark. With Buffett and Weitz is Buffett’s daughter, Susan.

There was a buying frenzy midmonth at Omaha’s Weitz Investment Management, operator of highly rated mutual funds.

Six new stocks in the previous 10 days, as the benchmark Standard & Poor’s 500 fell 7 percent from mid-September to mid-October, bringing dozens of new stocks into the undervalued realm prized by the buy-cheap-and-hold-forever fund managers such as Wally Weitz, founder and chief of the company that bears his name.

“Six stocks in 10 days, that is usually a year and a half supply for us,” Weitz, with a laugh, said of his new purchases, stocks he has coveted for years but were too expensive for his tastes until the recent downturn.

Weitz is what is known on Wall Street as a value investor, one who looks for gems in the bargain bin. For these investors, times like these are prime time. The Standard & Poor’s 500 is down about 6 percent since reaching a 2014 peak on Sept. 18, meaning some very strong companies are on sale. Citing industry disclosure rules, Weitz declined to name his recent buys until the filing of the next investor update.

Anyone specializing in value investing, particularly in Omaha, shares the stage with some big names, none bigger than Warren Buffett. The Oracle of Omaha is chairman and chief executive of Berkshire Hathaway, whose annual returns to investors are a value-minded dream: 19.7 percent compounded annually since 1965, doubling the Standard & Poor’s 500’s 9.8 percent.

But Weitz has quietly and over many years carved out his own niche in the world of value investing, and says part of his success has come from applying lessons learned by observing Buffett and his methods.

“I consider him a mentor,” said Weitz, who at age 65 is 19 years younger than Buffett, “but while we see each other from time to time, I have learned mainly from watching what he does with Berkshire and reading his letters.”

* * *

There is one thread that stitches together all advocates of value investing. It is a 1934 book called “Security Analysis” by Columbia University professors Benjamin Graham and David Dodd. The book laid the groundwork for professional stock picking, concentrating on what are now considered the bedrocks of value investing — finding stocks that are cheap compared with their earnings prospects, buying at a price that offers a margin of safety in case something goes wrong, estimating a business’s worth by projecting the present value of expected future cash flows.

“Investing is most intelligent when it is most business-like,” Graham wrote in the book, in nine words exposing buying on the rumor, selling on the news and a host of other techniques based on market momentum and trend direction for what they really are: gambling.

Buffett studied at Columbia under Graham, eventually applying the lessons learned there at his first investing ventures, then Berkshire Hathaway, where a $56.5 billion stock portfolio includes a flood of blue-chips bought when they were at least somewhat out of favor: Coca-Cola, Wells Fargo, Walmart.

Weitz, born and reared in New Orleans, came to the value mindset after reading Graham and Dodd at Carleton College in Minnesota. He worked for a bit as a securities analyst in New York before catching on at Omaha’s Chiles, Heider & Co. in the 1970s.

It was a good place for a future money manager to land. Firm principal Charlie Heider was a confidante of the budding Buffett and helped broker the National Indemnity Co. deal in 1967 that brought Berkshire Hathaway into its cash-cow insurance business.

Now, Weitz’s own investment company has $5.6 billion under management between mutual funds and managed accounts. Of that, $1 billion is Omaha money, people who originally signed up in 1983 or who have since come on board.

Weitz says among value investing’s main tenets is an assumption that basic human nature is not subject to major change, that even amid cascades of doom, people will want peace and security for their families and the benefits of a growing economy.

Central to monetizing that worldview is capitalizing on the reaction other investors have to bad news — causing them to sell perfectly good shares because of distant and unrelated events.

“It has been a few years since I have been this excited about the possibilities,” Weitz said, amazed that disease, war and recession — events that repeat themselves every few years — still cause people to essentially sell him their shares in great companies at a large discount.

* * *

It was a conference held by mutual fund research and ranking firm Morningstar 10 to 15 years ago, the best anyone can remember, including Weitz. He found himself at the head table in front of a room full of contemporaries and investors, participating in a question-and-answer session with luminaries such as Mario Gabelli, the voluble head of famed value investment company GAMCO and Institutional Investor magazine’s 2010 Money Manager of the Year.

Gabelli is central to the story. A Wall Street legend, he has had more good years than can be concisely related; it is like trying to pick Aretha Franklin’s finest vocal performance. For Gabelli, it might have been 1997, when 10 of his equity funds averaged a return of 31.7 percent, besting all other U.S. mutual fund groups and winning him Morningstar’s Domestic Equity Fund Manager of the Year.

In any case, Gabelli finds himself at a head table with Weitz some years later when an audience member asked a question. Who, he wanted to know, besides Gabelli himself and other obvious choices such as Buffett, ranked among the most successful value investors?

Gabelli pondered the query for a few moments before looking down the table for assistance from Weitz.

“Wally?” he said, tossing the question.

Without a blink of hesitation, the famously quiet-natured Weitz pretended that Gabelli meant that he, Wally Weitz, was the answer.

“Well, thank you, Mario,” he intoned modestly.

While Weitz meant it only as an opportunistic joke, it is company to which he probably can stake a rightful claim. The Weitz Partners Value Fund has returned 12.7 percent since inception in 1983, compared with 11 percent for the S&P 500 as a whole.

For the past 10 years, the fund has underperformed the S&P 500, 7.1 percent versus 8.1 percent. Over the past five years, the fund has outperformed the S&P slightly, at 15.9 percent to 15.7 percent. Over a three-year period, the fund has generated 21 percent for investors, versus 23 percent in the S&P 500. In the year ended Sept. 30, the fund generated investor return of 10.8 percent, versus 19.7 percent for the S&P 500, while keeping large cash reserves undeployed in anticipation of exactly what has happened to stocks this month.

The numbers are similar for the Weitz Partners III Opportunity Fund. It returned 7.2 percent for the year ended Sept. 30, 18.9 percent over three years, 16.6 percent in five, 8.3 percent over the 10-year span and 13.3 percent since inception in 1983. Both funds rate four stars out of a possible five by Morningstar.

It’s all done from offices near 103rd and Pacific Streets, from where 37 employees manage Weitz’s 10 mutual funds and separately managed accounts. The minimum investment for a mutual fund is $2,500. A team of 11 comes up with the investment ideas. They include Wally’s son, Drew Weitz, 34.

“We are all generalists,” Drew Weitz said, when asked if anyone specializes in particular industries. “There is an astonishing division of opinion we wind up having on any given stock.”

Drew Weitz looks to be an eventual leader of the company, but nothing gets awarded there that isn’t thoroughly earned.

“I trust this group with the business,” is all Wally Weitz says of a management succession plan.

He also acknowledged that, like Buffett, he will probably work forever.

* * *

Weitz was dining in the grill room of a golf club not far from his office after showing visitors around and explaining the basics of value investing. Seated at the next table was an earnest and well-dressed young man toting an attaché case emblazoned with the name of a famous investment advisory firm. Across from him was an equally earnest and well-dressed older man who was fielding the pitches.

“Commodities are a great investment right now,” the salesman said. “Currencies too. We have a variety of products that can get you exposure to those asset classes.”

The older fellow did not appear impressed.

A laundry list of investments was proposed over the next few minutes, from index options to precious metals. The conversation was dominated by talk of how much money could be made, but nothing about if the underlying assets were expensive or cheap, or how risky it all would be.

It wasn’t so much the hard sell that clashed with Weitz’s just completed value seminar, but rather its lack of sophistication, as if investing required no more insight than choosing from the right column at a Chinese restaurant. In other words, far from business-like.

Weitz casually overheard some of the pitch session, whispering quietly to his guests: “And that is the other way of doing business in our line of work.”

Contact the writer: 402-444-3133, russell.hubbard@owh.com

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