The Other Oracle of Omaha: Wally Weitz

This article is part of a series on learning from the greatest investment managers. Start off at the beginning.

I have lots of respect for Wally Weitz, captain of the Weitz Funds group.

First off, he was kind enough to take a day to talk to me when I asked for an interview. I look back at that day now and realize how little I knew about investing! Furthermore, you have to admire a guy who gives a great reason for not wanting the chief investment officer job at Berkshire Hathaway: too much pressure from having Warren Buffett staring over your shoulder.

Besides, Weitz has been doing just fine on his own. He's been beating the market for a long time. His Value Fund and Partners Value Fund -- among six others in the stable -- have averaged 14% and 14.1% returns per year, respectively, versus 8.2% for the S&P 500. So why leave a good thing behind?

If you don't know much about Weitz's style, know that he runs a pretty concentrated portfolio, and that he's more than willing to hold on to good investments for long periods of time. Sure, he has to comply with mutual fund rules, but he still allocates big money to his best ideas. Speaking of ideas, let's see what we can learn from the changes at Weitz Funds. Here's a peek at what Weitz has been buying -- courtesy of his recent 13-F filings with the SEC -- with the number of shares in thousands.

Omaha high-low
Countrywide Financial is the second-largest holding in both of the aforementioned funds -- it makes up more than 6% of each one and is a staple of each. So it comes as no surprise that Weitz would be willing to add to this holding as prices started falling. The only thing I wonder is whether next quarter, we'll find that Weitz continued adding as the subprime blowup kept prices down for a few more months.

Weitz continued to trim back his position in cable provider Comcast. According to Capital IQ, he bought a big chunk between Jan. 1 and March 31, 2006. But he has been steadily cutting since then. If he sold a bunch in January, he got out at a pretty sweet price.

Weitz has been a fan of cable for a long time, so I wonder what happened to get him to sell. My first thought is that something caused him to change his mind about the economics of the business. Was it the huge capital expenditures needed to maintain the business and keep it competitive against satellite-TV providers? Or does he think the company doesn't have much future pricing power, again given the threat of satellite TV? Either of those two things could cause future returns on invested capital to fall.

Weitz also reduced his stake in online travel company Expedia. The stock was turbulent over the past year before finally gaining altitude. Performance does seem to be improving, at least when you look at operating margins. But cash flow has dipped, and returns, when goodwill and intangibles are included, are low. This one's a bit of a surprise to me, and I admit I haven't figured it out. Maybe the answer is as simple as that Weitz thinks it's overvalued.

What do Inside Value lead analyst Philip Durell and Weitz have in common? Both think pharmaceutical-services provider Omnicare is a good investment. Weitz nearly doubled his stake in the company during the period we're examining, and I would not be surprised if Weitz continued to add more shares, as prices continued to fall following April's earnings report. Omnicare serves an important segment in health care, and it should experience healthy growth over time.

Two new stocks entered the portfolio: American Express and USG. American Express is a great company, and I'll fully admit that I don't know anything about USG except that that other big-time investor from Omaha owns a fair bit of it. Come to think of it, he owns a fair bit of AmEx, too. My comment on AmEx is simply simple that it's a great company  selling at a fair price relative to its moat.

Last, and certainly not least, Weitz cut way back on his News Corp. holding. Given that Rupert Murdoch is a proven value creator, Weitz's move surprised me. Then again, the shares have run up recently, and he already has exposure to the company via his Liberty Media investments. So maybe he thought American Express, USG, and Omnicare were better places to put his shareholders' money.

The Foolish bottom line
Since learning about his concentrated style and his value-based philosophy, I've kept track of what Wally Weitz says and does, because there's always something to learn from him. This quarter was no exception.

Up next, the man who looks for "compounding machines," Charles Akre.

The Motley Fool's Inside Value newsletter looks for the best companies at the best prices. To see how lead analyst Philip Durell is outperforming the market, sign up today for your free 30-day trial.

Berkshire Hathaway is an Inside Value recommendation and a Stock Advisor selection. USG is also an Inside Value pick.

Retail editor and Inside Value team member David Meier owned shares of Berkshire for two weeks before realizing he owned them for the wrong reasons. He does not own shares of any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.