One of our favorite investors at The Acquirer’s Multiple – Stock Screener is Wallace (Wally) Weitz.
Weitz is founder and co-chief investment officer of Weitz Investments. Weitz has spent over three decades putting his instinct for opportunity to work for shareholders. Influenced by the value investing model of Benjamin Graham and Warren Buffett, steadily produced outstanding results on the funds that he’s managed. He manages Partners III Opportunity Fund and co-manages Partners Value Fund and Hickory Fund.
As of December 2016 the Weitz Value Fund had $683 Million in assets under management (AUM).
Weitz Investment Management recently released its Q1 2017 shareholder letter in which Weitz says, “Business value “reality” exerts a “gravitational pull” on its stock price”. It’s an important concept for value investors to understand.
Here’s an excerpt from that letter:
Dear Fellow Investor:
News in the first quarter of 2017 was dominated by the initial activities of the new administration. Since the election in November, investors have been anticipating tax cuts, repatriation of stranded corporate profits, the announcement of massive infrastructure spending projects, and the dismantling of troublesome and expensive environmental and financial service regulations. The “Trump Bump” has propelled stocks higher, and our portfolios have participated.
As the quarter ended, however, a heated showdown between the newcomers and the DC establishment ended with a failure to “repeal and replace” Obamacare. Confidence was further shaken by foreign policy miscues and a widening investigation of Russian meddling in the U.S. election. Parts of the president’s agenda will undoubtedly be enacted, but for now, confusion reigns.
Nevertheless, it was a good quarter for our funds. The five stock funds performed well. Our fixed income funds earned positive returns in a turbulent bond market. Core Plus is approaching its third anniversary and maintains its strong performance. Balanced Fund also turned in a strong quarter and continues to be a good alternative for individuals and institutions who want to delegate the stock/bond allocation decision.
Valuation—the Gravitational Force
In our last letter, we showed a graph of aggregate U.S. stock market value as a percentage of GDP. This ratio offers a very rough proxy for stock valuation levels. At year end, the ratio was near the high end of its historical range, and after a strong first quarter, it is even higher. This does not mean that stock prices must go down tomorrow—as we said, this indicator is a very blunt instrument for making market timing decisions.
Nevertheless, knowing that stocks are expensive on a historical basis gives us some perspective on the attractiveness of available opportunities.
Our investment philosophy is based on the idea that a company’s business value “reality” is measurable and evolves gradually (hopefully upward) over time, while its stock price may fluctuate widely based on investors’ hopes and fears about the future. We believe that in recent years, money creation by the Fed and extremely low interest rates have fostered excess investor enthusiasm. Hence the relatively high level of stock prices.
We like to buy stocks at 60-70% of our estimate of business value, but in today’s market, our portfolios are closer to full value in the mid-80% range. We believe that a company’s business value exerts a “gravitational pull” on its stock price, so when stocks are expensive, we tend to invest more defensively and hold cash reserves.
Our investment team of ten analysts and portfolio managers continues to read, travel and “kick tires” in search of new investment ideas. Even in a generally expensive market, there are always individual companies undergoing business and/or price changes that offer us opportunity. In the meantime, we will be patient and disciplined about deploying your (along with our) capital.
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