• 07 Jun 2013 at 5:49 PM

How Much Is Adorable Worth To You? Is It 116bps A Year?

Among the best established facts in finance are that (1) the average fund manager underperforms his index, net of fees, and (2) the above-average fund manager is above average due to random fluctuations and will probably be below average next year. I mean, not your fund manager, obviously, but all the other ones will have a harder time selling their services as more people find those things out. And they’re not exactly secret. Nassim Taleb writes books about them. Whole books!

The financial industry as a whole is working on various ways to solve that problem, like selling hedge funds to retail investors, but if you’re a traditional long-only mutual fund manager that can be a hard racket to get into. So alternatives are sorely needed, and a pretty amazing one appeared on the front page of the Journal this morning. It’s, basically, re-brand as Ye Olde Artisanal Stock Pickery & Son:

Wally Weitz may be only the second-best-known investor in Omaha. But like Warren Buffett, he has long churned out gains by sticking to a basic formula: Buy strong companies whose shares are down and wait patiently for a rebound. …

Just 31% of Weitz Value’s investments turned over in the past year, versus a 78% average for actively managed stock funds. … When he really likes a company, he holds on. Mr. Weitz has held shares of Mr. Buffett’s Berkshire Hathaway Inc. for three decades. … “Stock picking will always have value,” he says. “Whether people will pay us to be stock pickers—that’s a separate question.” …

“I’m not a thrill seeker,” Mr. Weitz says. “No heli-skiing for me.” Investing is both his work and his hobby. … In high school, he joined a stock-picking club and haunted a branch of Merrill Lynch & Co., reading its research reports. … After a stint at a brokerage house in Omaha, where his wife is from, Mr. Weitz launched his own firm in 1983 backed by a few local investors. …

Mr. Weitz’s son, Drew, recalls how his father would discuss world events at the family dinner table, informed partly by his studies of businesses he followed. The conversations inspired Drew, now 33, to join the family business, where he is a research analyst and portfolio manager.

I sort of bolded randomly there, but … I mean. This business is family run, multi-generational, community owned, and handmade by local artisans from local ingredients. It’s slow-food, minimally processed, humanely sourced. Probably seasonal, too. He really ought to move this thing to Brooklyn, or at least Portland.1 Maybe change the font on his web page though, no, actually, this is pretty good.

Like all locavore artisanal businesses, this one isn’t cheap:

Weitz Value charges investors 1.2% of their money, and another Weitz fund charges 1.85%. The cost at stock index funds and ETFs can go as low as 0.04%.

But the premium pricing is easier to take when there are little old-fashioned grace notes like this:

The stock [AMZN], though far off its tech-bubble high, rose to about 7¾ from 7½ on the day they [Weitz and Jeff Bezos] met, recalls Mr. Weitz, who still sometimes cites prices in fractions. He passed. Amazon now trades for nearly $268.

AHHH THE FRACTIONS CAN YOU EVEN? Invest with Weitz Value fund and they will soothingly quote your stocks to you in fractions. When the hectic pace of the modern world, with its stocks quoted in decimals, gets to be too much for you, the Weitz Funds is a haven of things quoted in eighths. Wally, call me, we can make this happen.

Oh also I guess he’s pretty good at picking stocks:

Over three years, his Weitz Value mutual fund has outperformed the Standard & Poor’s 500-stock index by an average of about one percentage point a year and beat about 90% of similar stock funds.

Now, sure, certain pointy-headed finance academics will argue that, um, 10% of actively managed stock funds are in the top 10% over any period, and that being in the top 10% over one three-year period makes it more likely you’ll be in the bottom half in the next three-year period.2 (Weitz Value outperformed the S&P for the last five years, underperformed for the last 10.) But those people are just, like, looking at math. They’re automating the whole process. Don’t you want your stock picking done by a real person, with roots in the community and a name like, I’m gonna say, Wally?

Sure you do. Equity investing is a luxury good, after all. And quirky, personal, hand-crafted goods are the epitome of modern luxury. Even in mutual funds apparently.

An Old-School Stock Picker Struggles With Index Craze [WSJ]

1. From that picture I thought I saw some facial hair but I think it’s just the lighting. Oh well. Some tattoos wouldn’t hurt either.

2. To be clear: I made up that specific result for simplicity and rhetorical effect, I suspect it’s not quite true. But that paper I linked is sort of mesmerizing; it uses Morningstar ratings (based on “excess returns,” with top 10% five stars, next 22.5% four stars, next 35% three stars, next 22.5% two stars, bottom 10% one star). Here are transition matrices:

One month! The two year is basically 100% mean reverted:

36 comments (hidden to protect delicate sensibilities)
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Comments (36)

  1. Posted by Clear as Mud | June 7, 2013 at 7:12 PM

    Vegan stock aside, this guy's own two year transition chart says that a 5-star fund has a 75% likelihood of being 3-5-star, and 22% of being 1-2 star next period. Same numbers for a 1-star fund? 61% 3-5 star and 33% 1-2 star.

    I'm no French PhD, but that's a pretty big f-ing difference.

    These dudes kill me. Look, we all want a fund that rings the bell every year. That's rare. What's achievable is a fund that does very well in some years, average in some years and has relatively few big draw-downs. If you can accomplish that then you can do well over a long period of time.

    But, you know, common sense doesn't lend itself well to a markov chain.

  2. Posted by meeami | June 7, 2013 at 7:18 PM

    The close up of the vintage bull book-end was a nice touch by the article's photographer. He probably didn't have much to work with…

  3. Posted by guest | June 7, 2013 at 7:27 PM

    Index/passive funds have certainly outperformed active management in the past. It's the right investment style, and it's very popular– look at flows.

    Every style has its day. Indexing works until everyone indexes.

  4. Posted by Wells Fargo Must Die | June 8, 2013 at 1:39 PM

    It's a fluff piece on a mutual fund. No reason for them to be rude. Interesting that he thinks people should watch the History Channel. Does he like the Pawn Shop shows or Ice Road Truckers. Guess he's likes the reality TV.

  5. Posted by robert | June 9, 2013 at 2:53 PM

    If I remember right he has $1.1 billion under management–at 1.2% that's 13 million a year–let's say 8 million goes to expenses, that still a 5 million a year payday. No wonder he's smiling.

  6. Posted by Super Trooper | June 10, 2013 at 12:14 PM

    "Mary exemplifies customer service in every way. Our client services department wouldn't be the same without her. In fact, Wally Weitz himself has said ***this company couldn't do what it does without her.***"


  7. Posted by cynic | June 10, 2013 at 12:56 PM

    He beats the index by 1% on average. He charges 1.2%. Hmm..

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    Amazing that nobody calls Bogle on the fact that indexation is not a universalizable strategy, and that indexers are "information parasites."

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    "I mean, not your fund manager, obviously, but all the other ones will have a harder time selling their services as more people find those things out." Ha! Clever.