Wallace Weitz: What it's like to be a value investor in a growth market

Long/short fund up 10% with big short position

Aug 8, 2017 @ 12:31 pm

By John Waggoner

What's it like being a value investor these days? Wallace Weitz, head of the Weitz Funds, is one of the nation's best-known value investors, thanks in large part to the performance of his funds in the 1980s and 1990s. His standout fund, however, is Weitz Partners III Opportunities (WPOPX), a long/short fund that has gained 7.47% annually the past decade, versus 3.17% for the average long-short fund. And it's up 10.05% this year, despite having more than 30% of its portfolio betting that stocks will fall. InvestmentNews talked with Mr. Weitz about what it's like to be a value investor in the hottest growth market since 1999.

(More: 8 funds that have outperformed over the past 50 years)

InvestmentNews: So, how does it feel to be a value investor in this market?

Wallace Weitz: It all depends on whether you've convinced yourself that Amazon (AMZN) is a value stock. (Laughs) There are just not a lot of bargains. Even Berkshire Hathaway (BRK) is selling for more than 140% of book value. I'm totally comfortable holding it for the next five to 10 years, but it's not at a price you have to buy today.

We've had stretches like this before, but usually it's been six months or a year. Now it seems like it's been two or three years when everything has been going up together, especially a handful of tech stocks. They have been doing fabulously from a business point of view, but at the expense of other companies. But even back in the 1990s we could buy bank stocks at six to eight times earnings or property REITs yielding 6% to 8%.

IN: It must be painful to be short the S&P 500 in this market.

WW: Being short the Nasdaq has been the worst. Our shorts have taken about four percentage points from our performance. This year, a small handful of stocks have really helped. The biggest have been Liberty Global PLC and Liberty Broadband Corp., which are basically plays on Charter Communications. But Berkshire Hathaway has also added a point to our performance, and Visa and MasterCard have added about half a point.

We were short the Nasdaq in the late 1990s, and it took a while for that to work out, but 2000 was one of our best years. We're 31% short, and our net long position is 58%. Really, they are index shorts — we don't have much in the way of individual company shorts. In the early years, and in the early 1990s, we tended to short individual stocks that had crazy valuations, but they kept going up. Stocks that looked like they had a tragic flaw were very crowded trades. Our shorts are basically an anti-index thing: Liberty and Berkshire Hathaway against the market. Assuming we ever get a correction, we'll get some help from the shorts. The long bets will be down too, but just temporarily.

IN: As you talk to companies, what are they saying about the economy?

WW: It really depends. Visa and MasterCard keep sailing along. And Berkshire always has various things going in each direction. They are positioned to take advantage of trouble. They have $100 billion in cash, and they need to do something with it.

(More: 8 reasons to worry about the stock market)

IN: Why are so many companies hanging on to so much cash?

WW: You have to be careful when looking at some of those cash holdings. A company might have $10 billion in cash and is waiting for a tax holiday on repatriating that. And they may also have borrowed $5 billion or $6 billion for their spending. So whatever that apparent cash holding is, it might represent a gross number, not net. People bemoan the fact that companies are not giving raises or increasing capital spending. It's not because they have a shortage of money, and even if they did, they could borrow for next to nothing. It's a dearth of apparent opportunities. And it's not awful to have cash because it doesn't go down. There are a lot worse things than zero returns.


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