Wally Weitz On Discretionary Cash Flow, Good Management  

Wally Weitz On Discretionary Cash Flow, Good Management   

Wally Weitz started Weitz Asset Management in 1983 with $11 million in assets under management (AUM). The fund currently has almost $6 billion in AUM with a team of 11 people since its establishment more than three decades ago.

During a recent interview with Columbia Business School’s Graham & Doddsville, Mr. Weitz said his investment style was influenced by the value investing philosophy of Benjamin Graham and Warren Buffett.

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According to Mr. Weitz, he has been paying close attention to Mr. Buffett for 40 years. He said, “I have attention to Warren over the years. A lot of what I try to do has roots in what I’ve learned from him.”

Mr. Weitz said his investment team is a little unconventional because they are willing to hold cash and they manage concentrated portfolios. He added that Weitz Asset Management does not manage to any particular benchmarks. According to him, everyone on his team has “virtually all of their investable funds and all their retirement assets are invested” in the funds of Weitz Asset Management.

Weitz focuses on discretionary cash flow

When asked about the investing style of his firm, Mr. Weitz explained that his team thinks like business owns. He said they believed that that the value of a business is the present value of the cash a business would generate in the future.

Mr. Weitz emphasized that his team focus on discretionary cash flow—money that could be taken out of the business, but which the owner might reinvest voluntarily in the company.

He explained that is team estimates future cash flows by making judgments on the on the sustainability of the company’s business model and its competitive moat.

“We try to have a general sense of the economic environment, but we do not want to depend on making correct macro-economic predictions.” According to him, if the price of a stock is lower than the amount an intelligent investor would pay for the entire business, there is a strong possibility that something positive will happen on the stock.

Mr. Weitz said his team uses a 12% discount rate in determining discounted cash flow models. He emphasized that they always want a 50% discount, but in recent years, Weitz Asset Management have been paying 60% or 70%. Mr. Weitz said valuations have increased, and it is possible that their valuation methods have been too conservative.

Mr. Weitz became more comfortable paying for higher multiples for higher quality business, which was notable. He mentioned Munger’s principle that “a great business is worth paying up for.”

“Learning where to draw the line between paying up for quality and accepting a flaw because because of a cheap price is part of the fun of investing,” said Mr. Weitz.

Management is a major consideration

Mr. Weitz pointed out that management is a major consideration when it comes to investing. He noted a statement from Buffett that it is good to buy a company that any idiot can run because sooner or later, an idiot will be in-charge.

He said, “if we’re buying companies that can generate excess cash, it’s terrific if we can trust management to do something smart—accretive to per share business value—with that cash.”

Mr. Weitz pointed out that “management makes a huge difference in all kinds of businesses, and it is critical when dealing with leverage.” According to him, he like Liberty Global plc (NASDAQ:LBTYA) (NASDAQ:LBTYB) (NASDAQ:LBTYK) because Mike Fries is a good operator and John Malone is making sure that they are managing the company’s balance sheet. He emphasized that Malone is just like Buffett, who has done wonders with discretionary cash over the years.

“We like to invest with managers we trust to treat us fairly—to treat us as partners rather than necessary evils,” said Mr. Weitz.

He added that his team wants to know if a company’s management has a good, long-term business plan and if it has a sense of executing its plan well. Furthermore, his team wants to trust a management with capital allocation—investing in the business when there are good opportunities to compound value and return capital to shareholders.

See the full interview here

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