Weitz Value Matters: 'Avoid Crazy' and Stay Focused

What a difference a year makes! 2022 was a rough year for both stock and bond investors. The Fed began to raise interest rates, and stock investors, fearing the worst, dumped their holdings. Major stock market averages plunged over 20%. Bond prices dropped sharply as interest rates rose at a rapid clip. By year's end, we were glad to turn the page on the calendar.

We closed our year-end 2022 letter, though, with the observation that “Bear markets tend to end when least expected.” Sure enough, 2023 turned out to be a terrific year for stocks and a good one for bonds.

Our star performer was the Large Cap Equity Fund. (This fund was known as the “Weitz Value Fund” for 36 years. New SEC rules on mutual fund naming conventions led us to change the name.) Our funds with exposure to a broader range of market caps, Multi Cap Equity (formerly known as Partners Value) and Partners III Opportunity, earned solid absolute returns for the year. As did the Conservative Allocation Fund (formerly Balanced), which currently holds 45% stocks and 55% bonds.

The portfolio managers' commentaries (available on our website) offer a full picture of fund performance along with details on portfolio contributors and detractors (winners and losers). The commentaries also discuss the longer-term evolution of the business values behind the stocks. We believe we own a collection of unusually strong, high-quality businesses that will continue to deliver healthy investment returns for years to come.

Charlie Munger

Charlie died in November, just short of his 100th birthday. He was an amazing person. The financial media was already in high gear, preparing for Charlie's January 1 celebration, and his death brought another wave of support, praise, and reminiscences. Charlie might have labeled the phenomenon a lollapalooza.

For many investors and followers of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Charlie may be known as Warren Buffett (Trades, Portfolio)'s “straight man” at the annual meetings. Berkshire was a major part of his life, and his contribution to Berkshire's success was enormous. Warren regularly gives credit to Charlie for prodding him to abandon his “poor business at a bargain price” philosophy in favor of buying “great businesses at fair prices.”

In the 2022 annual report, Warren devotes a section to Charlie captioned: Nothing Beats Having a Great Partner. He praises Charlie's ability to analyze complex problems and quotes a number of his favorite “Mungerisms,” such as:

• "Early on, write your desired obituary—and then behave accordingly."
• "You can learn a lot from dead people. Read of the deceased you admire and detest."
• "Don't bail away in a sinking boat if you can swim to one that is seaworthy."
• "You have to keep learning if you want to become a great investor. When the world changes, you must change."
• And as Buffett quotes Charlie's "decision-clincher," "Warren, think more about it. You're smart and I'm right."

But there was a lot more to Charlie than his role at Berkshire. He believed in studying as many different academic subjects as possible and approaching problems with a broadly interdisciplinary approach. He was a living, breathing advertisement for a liberal arts education. The term renaissance man is overused, but he was straight out of central casting for that role.

Much has been written (and podcasted) about Charlie. A web search will turn up endless sources. One of our favorites is Peter Kaufman's Poor Charlie's Almanack (an homage to Charlie's hero, Ben Franklin). The original version was published in 2005, but an updated version was created late last year. The physical version sold out quickly, and a second printing is expected soon. However, e-book and audiobook versions are available now.

The new edition of Poor Charlie's begins with biography and reminiscences from Charlie's kids. The third chapter covers his approach to life, learning and decision-making. The sections on business analysis and his investment principles checklist are terrific. Then there are “Eleven Talks” given over a period of years on a variety of subjects. Hearing Charlie's “wit and wisdom” in his own words is a treat.

Game Plan for 2024

The stock market was terrible in 2022 and great in 2023, but changes in the value of businesses to their owners were much less dramatic. Investor fears dominated in 2022 and hope gradually took precedence in 2023. By year's end, lower inflation readings and a more dovish tone to Fed rhetoric super-charged an already strong market recovery. Emotions drive stock prices in the short run, often over-shooting in both directions.

The core of our investment philosophy is that over long periods of time, stock prices are driven by the values of their underlying businesses, and business value is a function of the cash flows, or “owners' earnings,” that will be generated over (many) future years. Warren Buffett (Trades, Portfolio) made this point (again) in the 2022 Berkshire Annual Report: “Charlie and I are not stock-pickers; we are business-pickers.”

Charlie (and Warren) were/are all about studying businesses as organisms that grow and evolve over periods of years. We have done our best to learn from them and emulate their focus and discipline. So, our “game plan” is to continue to invest patiently in stocks that we believe offer the best combination of business quality and reasonable valuation.

We would expect 2024 to be another volatile year. Investor hopes and fears about the Fed, wars in Ukraine and the Middle East, contentious trade and political relationships with China, and a high-stakes U.S. election are likely to periodically unsettle markets. Shifting expectations always drive stock prices further in both directions than justified by fundamentals. In this kind of potentially chaotic environment, we believe companies with financial strength, strong competitive positions and excellent management will see us through and keep our portfolios positioned for long-term growth. In short, we will try to follow Charlie's advice to “avoid crazy” and to stay focused on the distant investment horizon.