Wallace Weitz, a follower of Warren Buffett's investment strategy, spent about $200 million on shares of Wal-Mart Stores and Tyco International...

Share story

Wallace Weitz, a follower of Warren Buffett’s investment strategy, spent about $200 million on shares of Wal-Mart Stores and Tyco International in the second quarter as he tried to revive his Weitz Value Fund.

The $4 billion fund, one of its category’s best performers for much of the 1990s and during the three-year bear market that ended in 2002, is down 7 percent this year, as of Oct. 5.Weitz Value ranks 95th in its class of 96 funds tracked by Bloomberg, beating only the $471.8 million Kinetics Paradigm Fund.

Struggling through periods of decline is “the price of being a long-term contrarian,” favoring beaten-down stocks, Weitz said in an interview from his office in Omaha, Neb., also home to Buffett. “That’s the way investing works.”

Weitz bought shares of Wal-Mart, the world’s largest retailer, and Tyco, the world’s biggest producer of electrical connectors and the No. 2 maker of medical supplies, as he reduced holdings in hotel companies such as Host Marriott and Hilton Hotels after they reached his price limits.

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks

Weitz has managed the fund since 1986 and sticks to the value-investing philosophy developed by the late Benjamin Graham and adopted by Buffett, the world’s second-richest man according to Forbes magazine’s annual survey. He buys shares of companies he views as inexpensive that have products or services he understands, excess cash and limited competition.

During the past 10 years, Weitz Value has risen at an average annual pace of 12 percent, placing in the top third of its category. The Muhlenkamp Fund, headed by Ronald Muhlenkamp, was first with an average gain of 16 percent.

The Standard & Poor’s 500 Index has returned an average 9.5 percent a year. Weitz’s fund owns stocks for four to five years on average, reflecting his buy-and-hold approach. The 10 largest holdings — all down this year — accounted for 44 percent of assets as of June 30. Media, including newspapers, radio and cable television, comprised 19 percent.

Buffett’s Berkshire Hathaway was his biggest holding as of June 30, at 6.8 percent of assets. Weitz said he first bought shares of the insurance and investment company in the mid-1970s at $300 each. They now trade for $82,500.

Investors must be patient, Weitz said, adding that bets on financial-services companies in 1999 and cable-TV operators in 1996 — both out of favor at the time — paid off. These picks helped his fund weather the market drop in 2000 to 2002 and outperform the S&P 500.

“Don’t invest in this fund unless you’re thinking of the long term, which in this case means 10 years or more, and be prepared for the ups and downs,” said Christopher Traulsen, an analyst at Chicago-based Morningstar.

One reason for the fund’s sagging performance this year is a tendency to invest in larger companies, as smaller ones have done better, Traulsen said. Another is the lack of a significant stake in energy companies, this year’s leaders in the S&P 500.

“After avoiding dozens of false alarms, we failed to respond to a real one,” Weitz said, referring to the rally in oil and gas stocks. “But it would have been out of character for us to speculate.”

Losses in two media companies, Washington Post and IAC/InterActiveCorp, and two mortgage lenders, Fannie Mae and Countrywide Financial, also hurt returns. “The fact that some of these stocks are currently lagging the market is annoying, but perfectly normal,” Weitz wrote in a July letter to shareholders. “We are often out of step with the popular crowd.”