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Weitz: Raw Material for Correction Has Been There All Along

Jeremy Glaser

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. With the volatility in the market over the last few days, we’ve checked in with several fund managers. I spoke to Wally Weitz and he shared with us how he sees the Fed-induced complacency starting to evaporate over the last few days.

Wally, what do you think has been driving this volatility?

Wally Weitz: In the last three or four years we've had – I mean, I'm going to grossly overgeneralize, but my take has been that the firehose of money coming from the Federal Reserve with QE, 1, 2, 3, whatever, has both inflated asset prices, starts with the bond markets but has spread to the stocks and real estate and everything else. So, there is absolute inflation from the extra money, but there has also been – it's brought on sort of a complacency among investors about all the many things out in the world that would otherwise normally scare them. So, all the news we've been seeing this last week or two about China slowing down, they have an overinflated stock market, the emerging markets are feeling fallout from China, there are currency problems, Russia and Korea, all these things have been there. Greece – I haven't heard about Greece in the last couple of days.

All these things have been out there for quite a while; but again to overgeneralize, people have either assumed that it was safe to pay up, pay higher prices because the Fed would keep pumping money in or that even though that was dangerous they would get out at the last minute if everybody is going to try to get out the door.

Glaser: So what has that meant for yout portfolio?

Weitz : Our average portfolio price to values got up in the high 80s and touched 90% the end of last year and then with the market going more or less sideways and the companies continuing to grow the price/value a week or two ago, was more like mid-80s or low-80s and we're feeling a little more comfortable but not excited. And then when we have the market go down, what was it, 6% or 8% in the last few days, the price/value on the portfolios priced this afternoon [Monday, August 24th] at the close ranged from low-70s to mid-70s.

So, our level of interest goes up when the price/value goes down. The raw material to make this correction turn into something bigger has been there all along. We've had dozens of false starts and I don't know whether this will be another false start or whether maybe it will really turn into a 10%, 15%, 20% drop. We're just trying to react to what the market gives us. So, we are nibbling a little bit today [Monday, August 24th] and if the market – if our stocks keep going down then we'll nibble harder and harder and get downright aggressive if price/values get down into 60s again. But they haven't been there since the fall of 2011.

So, anyway, I'd say this--I don't know what normal is anymore because we've had the artificial support of the Fed. But it seems as if business value eventually matters, and business values have been growing and conditions for most of our businesses have been between fair and good, [with] exceptions like energy. But we're not really particularly worried about the world coming unglued, a la '08, '09, I don't think there are serious permanent losses to be had like there were in the mortgage securities. But if people get scared they can create panics and temporary liquidity problems that make prices way overshoot on the downside. So, we're just trying to be sensible in our response but we're not very good at predicting the pattern.

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What I just said was sounded sort of – maybe sounded depressing that if things are overpriced then they've got to reconcile. I think that's true. But in the process prices often overshoot on the downside and we are loaded with reserves to take advantage of that. So, this is really – if we do get a good healthy 10%, 15%, 20% correction, I think it will be good for our five-year returns. It just won't be very good for our three-month returns.

Glaser: Wally, thanks for joining me today.

Weitz: Okay. Thank you. You're welcome.

Glaser: For Morningstar, I’m Jeremy Glaser. Thanks for Watching.