Wallace R. Weitz, a follower of Warren E. Buffett's investment strategy, spent about $200 million on shares of Wal-Mart Stores Inc. and Tyco International Ltd. in the second quarter as he tried to revive his Weitz Value Fund.
The $4 billion fund, one of its category's best performers for much of the 1990s and during the three-year bear market that ended in 2002, is down 7 percent this year. Weitz Value ranks 95th in its class of 96 funds tracked by Bloomberg, beating only the $34.4 million Dreyfus Premier Select Fund.
Struggling through periods of decline is "the price of being a long-term contrarian," favoring beaten-down stocks, Weitz said from his office in Omaha, Neb., also home to Buffett.
Weitz bought shares of Wal-Mart, the world's largest retailer, and Tyco, the world's biggest producer of electrical connectors and the No. 2 maker of medical supplies, as he reduced holdings in hotel companies such as Host Marriott Corp. and Hilton Hotels Corp.
Weitz has managed the fund since 1986 and sticks to the value-investing philosophy developed by the late Benjamin Graham and adopted by Buffett, the world's second-richest man according to Forbes magazine.
During the past 10 years, Weitz Value has risen at an average annual pace of 12 percent, placing in the top third of its category. The Standard & Poor's 500 Index averaged 9.5 percent a year.
The 56-year-old Weitz first encountered Graham's theory as a student at Carleton College in Northfield, Minn., where he graduated in 1970. He started managing money for other people in 1973, the same year he met Buffett at a bridge game. His firm, Wallace R. Weitz & Co., today oversees $7 billion.
Weitz's fund owns stocks for four to five years on average, reflecting his buy-and-hold approach. The 10 largest holdings - all down this year - accounted for 44 percent of assets as of June 30. Media, including newspapers, radio and cable television, make up 19 percent.
Buffett's Berkshire Hathaway Inc. was his biggest holding as of June 30, at 6.8 percent of assets. Weitz said he first bought shares of the insurance and investment company in the 1970s at $300. They now trade for $82,500.
Investors must be patient, Weitz said, adding that bets on financial services companies in 1999 and cable-TV operators in 1996 - both out of favor at the time - paid off.
"Don't invest in this fund unless you're thinking of the long term, which in this case means 10 years or more, and be prepared for the ups and downs," said Christopher Traulsen, an analyst at Morningstar.
One reason for the fund's sagging performance this year is a tendency to invest in larger companies, while smaller ones have done better, Traulsen said. Another is the lack of a significant stake in energy companies, this year's leaders in the S&P 500.
"After avoiding dozens of false alarms, we failed to respond to a real one," Weitz said, referring to the rally in oil and gas stocks. "But it would have been out of character for us to speculate."
Weitz spent $123 million on shares of Wal-Mart after they dropped on concern an economic decline and rising gasoline prices would discourage customers from shopping.
Shares of the Bentonville, Ark.-based company are down 17 percent this year. While second-quarter profit growth was the slowest in four years at 5.8 percent, Weitz expects earnings to increase at an annual rate of 12 percent to 14 percent as new stores open.
Tyco is a "case of a fallen angel," said Weitz, who spent $76 million on shares of the conglomerate. He has followed the company for the past three years, through a scandal involving looting and fraud by top executives. Former Chief Executive Officer L. Dennis Kozlowski and his former top deputy, Mark Swartz, were sentenced to prison Sept. 19.
Edward Breen, Kozlowski's successor, is improving Tyco's finances, Weitz said. He expects shares of the company to generate a return of 50 percent in the next two to three years. Tyco's shares have lost 9.6 percent this year.