Forbes.com has a fascinating interview with Wally Weitz, the other legendary based in Omaha. I got to know Wally when I was on the sell-side, and I must say he was one of my favorite clients. He is smart, informed, and inquisitive-and also happens to be one of the nicest, most humble people you can imagine. Wally’s also one of the great value investors of the age. Reading the interview, I particularly liked Wally’s thoughts on running a concentrated portfolio. (“Concentration is part of the strategy. The theory is you oughta be able to distinguish between your best idea and your 50th and your 100th.”) That’s basically our approach, too. He also talks about one of the basic dilemmas of investing in financials:
Well, as it turns out, when a vanilla thrift is earning 18% return on equity it’s because they’re using too much leverage, making bad credit decisions and it’s really a lousy business that’s over-earning. But they kept getting away with it because housing prices kept going up; they would foreclose, sell at a profit and the earnings held up. That stopped in 2007.Turned out house prices can fall. And it’s not just thrifts and housing! The fact is that investors can almost never know for sure the true profitability of almost any financial product-a life insurance policy, car lease, you name it–until long after that product has been written. People die early. Used car prices collapse without warning. It’s a complicated world. Unfortunately (and this is a key reason why credit crackups happen so regularly), individual bankers of course tend to get paid based on the presumed profitability of the business they’ve written over the prior year-even though those loans/policies/whatever will often be around much longer than a year and may be doomed to blow up long after the banker has cashed his bonus check. (Angelo Mozilo was an industry visionary for decades, remember?) That doesn’t make bankers the monsters the media loves to make them out to be; it’s the way the system works. A far better approach, obviously, would be to match the timing of bankers’ comp to the duration of the products they write, complete with clawbacks when things go wrong. That would concentrate some minds. It might prevent the next systemic catastrophe,as well.
In all, the interview isgreat. You should read the whole thing.
What do you think? Let me know!