Weitz Investment Management

An Interview with Wallace “Wally” Weitz, Founder and President, Weitz Investment Management
By Phil McDonnell, Creighton University MBA student

Wallace Weitz, or “Wally‟ as he prefers, has built a top rated investment fund company based upon the security analysis disciplines of Benjamin Graham and the ethical disciplines taught by his mother and taught by his “mentor by observation,” Warren Buffett. Raised by his social worker mother in New Orleans, he was held to a high moral standard at a very young age, which instilled many valuable principles to his character. He found a passion for studying businesses and took his interests to New York. Later, he and his wife, Barbara Weitz, decided to move to Omaha, NE to start a family where he began working with Charlie Heider who made sure he paid attention to Warren. After ten years of apprenticeship with Charlie, Wally founded Weitz Funds in 1983 to pursue value investment strategies for his clients. Since founding the firm, his company has grown to $4 Billion in assets in 8 mutual funds. Weitz Funds employs 32 people, including 9 investment professionals in the Omaha community.

What do you like most about your work? Least?

The best part is the treasure hunt for new investment ideas. It involves a lot of reading, conferences, talking with friends in the business, etc... One of the advantages of doing it (investment management) for 40 years is when the old ideas come back around and become the best ideas. Something changes, the situation improves or the price comes down. That is the most fun. People management and the marketing side of the business are probably my least favorite. Thankfully, we have a good group of people who do the hard parts, but occasionally there is bad news to deliver or the occasional personnel issue that I need to be involved with. I don’t enjoy that. In the marketing arena, we often deal with consultants that seem to focus on the wrong parts of the investment process. That can be really tiresome.

Very generally, when you think of “ethics” what does it mean to you?

The idea of understanding the difference between right and wrong is the biggest part. Doing what is right when it comes to personal decisions and having a sense of the greater good. It is important to keep the wider community or universe affected by the situation under consideration and paying close attention to that as well.

Describe an easy or difficult ethical situation in business you have faced – who was involved, what did you do, why?

Actually, I can’t think of many hard ones. The right answer may be unpleasant to hear, do or carry out, but I don’t often have a real quandary over what should be done. I have been lucky at the brokerage firms I have worked at. I’ve always been in a pretty independent position without a lot of pressure to produce commissions or recommend investments I didn’t like – some of the more conflicting things that can happen in the business world. Generally, I think many scandals start with pressure from the top to produce profits or to “make the numbers.”

The pressure from the top to “make the numbers” that you see as a potential starting line for unethical behavior, seems to align with a few of the Business Ethics Alliance core value challenges - most notably Financial Vitality. Can you talk more about that?

Maybe I haven’t faced a lot of ethical dilemmas because I have always tried to put myself in a place where they don’t come up often. Chiles, Heider was a pretty low key environment. You kept a percentage of what your commissions were and as long as that was over some reasonable hurdle, your job was safe. I know that there is a lot more pressure in other settings. I had very low turnover and very low trading activity in my accounts, so in that regard, I was on the low end of the dollar amounts of commissions. But to Charlie’s credit, building a long term relationship with the clients was more important. There will always be salespeople who approached life differently, and whose recommendations are influenced by the commissions involved. I believe that very few people are consciously evil, but people kid themselves about whose interests are really being served.

Another core value to the Business Ethics Alliance is Moral Courage. Do you feel that your decision to transition from a commission-based business to more of an independent fiduciary manager took Moral Courage? Why?

I don’t know if it was that courageous. A lot of people think, oh, how scary, but I had clients who agreed to invest $10-$11 MM in my new business. I pooled their accounts into funds and charged a 1% management fee plus expenses up to 1⁄2%. This seemed fairer to the clients and provided a scalable business. I assumed this level of assets would provide enough income for me and my one employee and that if we did a good job, the assets would grow. I was not opposed to having the business grow and become valuable, but that wasn’t the primary objective. It really helps to love what you do.

One of your investment philosophies is to look at opportunities through the lens an investor would be willing to pay for the entire business, rather than just the stock price on a given day. If we could take that philosophy a step further, have there been any circumstances where an ethical dilemma made even that target price not good enough?

When you think about investing in a company and look at how they make their profits, the ethical issues are very important but you are dealing with incomplete information. I’ve often said it is really hard to fill a whole portfolio with companies that you are proud to be associated with. If management is clearly cutting corners or cheating, you just don’t want to be associated with them. Companies that press too hard to “make the numbers” can also make troublesome investments. An example that comes to mind is Countrywide Financial. We owned the stock and made lots of profits over the course of about 10 years leading up to the time of the mortgage meltdown. I had met Angelo Mozilo (former CEO Countrywide Financial), and bought his story of the self-made executive – son of a butcher, chip on his shoulder, someone driven to prove that he could play with the big dogs, etc... – And, I believed it to be true up to some point. But, I think the pressure to keep growing and to keep taking market share and to keep profitability up was a lot to handle. As I said, I don’t believe people are inherently evil, but they can be susceptible to temptation and pressure. As an investment manager, the assumption was that they (Countrywide Financial) were acting with integrity and that their accounting was valid. Eventually, it dawned on me that I might have been kidding myself and we sold the stock. We gave back a large portion of our long-term profits, but it would have been worse to hold on until it was acquired at a distress price. Being honest with one’s self and having colleagues willing to challenge each others‟ assumptions is very important. There is a history of bigger than life CEOs that leave a situation that is hard for the successor to succeed in. This might be said of Jack Welch (former CEO of GE). All too often, we are seeing CEOs getting out at the top and leaving the cupboard bare, so to speak. It may just be that no one is as good as they are, but it also may be that they drove people to pay a higher and higher price to make the numbers and essentially set up the successor to fail.

How do you lead the culture at Weitz Funds to insure your team acts ethically?

It all starts with hiring right. Almost everyone in our firm was a known quantity before hiring. I don’t think you can „teach‟ ethics, so it is critical to hire people who you know to be ethical. You can always give people training to help them recognize circumstances in which they may kid themselves, but fundamentally, they have to have the right internal code of ethics. On an ongoing basis, we are careful to discuss why we do things the way we do and to take advantage of “teachable moments” to reinforce a culture of integrity.

I’m proud of the fact that our people really do focus on our clients‟ wellbeing first. As an example, we recently instituted a new, slightly more expensive share class to be available on investment platforms that are very expensive for us to deal with. There was considerable pushback internally until it was clear to all that we were being fair to the shareholders using the new class.

Beyond hiring right, I do think the culture starts at the top, so it is particularly important that the firm’s leaders model good behavior. Fortunately, that tends to happen naturally.

On a personal level, asking oneself the hard questions and being clear about what the issues are is important. Rationalizing and hanging onto a set of facts that turn out to be wrong are very dangerous. Sometimes the truth becomes clear by thinking through an issue alone. Sometimes I find that I get the right answer when I’m trying to convince someone else and what I hear myself saying doesn’t ring true. That happened when I was explaining to the dean why I wanted to transfer to a different college (I stayed) and it happened again when I didn’t like the explanation I gave to a client as to why we owned Countrywide. Sometimes the inner voice can be drowned out for a while, but it’s important to listen for it.

Have you had an ethics mentor? If so, who and why?

My mother would be the first. She was a social worker, and besides our normal discussions about my own behavior, she would explain what was happening with, and to, her clients. Later, she taught at a medical school, as she put it, “Teaching the new doctors to be human.”

She wouldn’t have thought of it this way, but I first learned about the power of compounding from her. We’d see TV ads for small personal loans charging „only 18%’ and she would challenge me to understand how much that was and how financially hurtful it was to the people who needed to take those deals. So in a backwards kind of way, she started teaching finance and ethics to me at the same time.

Warren Buffett was the other significant “ethics mentor” for me. I’m not talking about a personal or direct business relationship, but over the past 35+ years, I’ve learned a huge amount about ethical behavior as well as investing, by reading his reports and listening to his interviews and Q&A sessions.

There are clearly a lot of ethical challenges in business and otherwise facing professionals today. What advice do you have for tomorrow’s leaders to better prepare them?

If you start with a good moral compass, then the only trick is to not let pressures to the contrary take you off course. Delayed gratification and patience stand out as key factors in maintaining one’s integrity. If being financially successful is part of the goal, and hopefully not the only goal, then not allowing the internal pressures to perform, conform or expedite will be most important. There are many forms of pressure in business to do the wrong thing, but if you are honest with yourself and recognize that something is not right, you just don’t do it. Thank you for sharing Wally.