With the financial markets dropping more than 10% between July and August, it was appropriate that Wally Weitz, who embodies calmness and discipline, lecture my Texas Lutheran University students. It was homecoming weekend and amidst the excitement, we were fortunate to have the man known as “the other Oracle of Omaha” fly down for a two hour question and answer session. Â
To be called the other Oracle of Omaha is direct reference to the skill, intellect and accomplishment of Omaha native Warren Buffett—quite a compliment, indeed. How, exactly, does one share such rare comparison to, arguably, the greatest investor of all time? It is much more than just Midwestern geography. However, the fact that both men call Omaha home makes one wonder if there is something special in the water.
During college Weitz abandoned a variety of different trading strategies after reading Ben Graham’s book The Intelligent Investor. Graham is considered the “father of value investing.” Not only was he a great investor and author, but he also became Warren Buffett’s mentor and employer.
Buffett has similar praise for the 1949 book.Â
The Intelligent Investor conveys simple to understand, but difficult to implement ideas, for investors to remain grounded and successful. It proved to be the foundation for decades of market beating performance for both Buffett and Weitz.
The first idea is that of “Mr. Market.” Mr. Market is this guy you know who comes to you every day offering to buy or sell stock market assets to or from you. However, Mr. Market has this odd personality quirk—he is often manically happy or sad. You never know which will show up, but must remain prepared for all.
Recognizing this behavior, the intelligent investor must know how to use Mr. Market’s irrationality against him. In doing so, you must know the financial markets offer liquidity—but not fair values. Sometimes Mr. Market is highly depressed or overly optimistic. This creates valuation opportunities and you must be disciplined to recognize this behavior and take the opposite position.
Secondly, The Intelligent Investor explained that the value of any business is represented by the amount of cash the business will produce over its lifetime, discounted back to today’s value. Using a discounted cash flow analysis, one can make a variety of assumptions about what a business should produce and, if you owned the whole business, what it would be worth to you in today’s dollars.
Thirdly, The Intelligent Investor provided the “Margin of Safety” concept. Simply, this meant a smart investor would wait for Mr. Market to sell a business for a very low percentage of its full value as would be assigned by the discounted cash flow analysis. This margin of safety allows an investor to be more patient even if some assumptions prove to be incorrect or if the recognition of value is not recognized for a lengthy period of time.
As stated above, value-investing concepts are pretty straightforward. And yet, Buffett’s legendary 50-year performance has been rare. But Buffett is not the only one operating in this elite atmosphere. Weitz has outperformed the market by 2 ½ percentage points per year over the last 30-plus years using similar strategies.
So why are these concepts widely available, yet so elusive? Further exacerbating matters, over these long time frames the stock market has averaged about 10% returns per year. However, the average investor has only earned about 3% per year.
Weitz clarified saying that value investing works—but not on a fixed time table. As such, one must realize there is frequently a disconnect between your anticipated time frame and what happens in reality. Occasionally, things happen very quickly. However, you must also be willing to wait very long periods to see your thesis come to fruition.
Great investors don’t outperform every year. Despite Weitz’s strong performance over decades, he acknowledged his firm has underperformed about every third year. You can’t lose faith in the process.
Furthermore, too many investors allow emotion to take hold as they chase recent hot performance. In the process, they are destined to buy high and sell low.
As such, to have truly long-term high performance great investors must ignore emotion, embrace logic and only buy when offered a significant margin of safety. You must think for yourself, ignore your neighbor and think in terms of where you want to be decades from now.Â
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.