He steers clear of technology stocks, is not afraid to pick stocks shunned by Wall Street and believes in playing for the long term. Yet to thousands of his investors, Richard F. Lawson is a man with the Midas touch. Compared with the average stock fund's year-to-date return of 5.23 percent, Lawson's small-cap blend fund, Weitz Hickory (net assets: $791 million), has gained more than 20 percent. Although Hickory--like most stock funds--was down for the quarter ended September, it is the only fund in its category to get a five-star rating from Morningstar Inc. Sri Ramakrishnan of The Washington Post interviewed Lawson last week.
Q: Your fund has outperformed not just the market but also the category. Would you say you are really smart or just lucky?
A: (Laughs) I think I would answer that as neither. Clearly there is some luck involved, but basically what I think I add is not being smarter than the rest of the world but having a different perspective and, in effect, a different objective.
A lot of money managers will talk about focusing on the long term, but if you really get into what they do, what they think and what kind of forces play on them, they really don't. I am in a position--and have an attitude--where I am able to not make those kinds of short-term decisions.
Q: But it's one thing being patient and another being smart. How do you pick the right industries and companies?
A: Basically what I am looking for is stuff a lot of other people will talk about. I think of my philosophy as looking for growing value priced at a discount. And the way I try to implement that is first, try to understand the businesses and companies.
I am looking for the best companies in the best businesses I can find. What I mean by best is not that it is growing really fast, but that it is in a position to control its own destiny. It has the ability to grow value over time, it generates high returns on invested capital . . . the kind of business that if you had the chance to own you would want to.
Second question I try to answer is "What is the business worth?" If I had the chance to buy the entire business, if I expected to hold it forever and wanted a reasonable return on my investment, what would I be willing to pay? To me that's value. It's not where's the stock price today, it's not relative P/E [price-to-earnings ratio] to industry or Standard & Poor's 500-stock index.
The final question I ask is "Why is this stock cheap? . . . What has the rest of the world missed?" If you look from that perspective, there are a lot of situations where there are things people tend to miss.
For example, the issue of timing. There is a temporary problem--everybody knows it's a temporary problem, but nobody knows how long the temporary problem is going to last. If you are sure it will have to end sooner or later, from my perspective that's fine, because I can wait.
Q: Do you have any favorite industries or a set of companies?
A: I would say that I have certainly found industries that I have become comfortable with, I have invested in over a period of time. But nothing lasts forever. For example, our exposure to cable used to much larger than it is today. I still think it's a very good business, I just don't think the stocks are as cheap as they used to be.
We like service companies that have recurring revenue streams, where the company will form a relationship with its customers and it is likely to get revenue over a long period of time.
I am constantly looking at what's an attractive business, what's likely to be an attractive business in three to five years from now, and where is Wall Street missing the attractiveness. I would expect--and I have seen--that there will be a constant slow evolution in the businesses we invest in. I am never going to jump instantly to something new, I don't keep looking for new businesses.
Q: You have stayed off the pure technology bandwagon. Why?
A: I think technology is really, really important, and I spend a lot of time thinking about technology. One of the themes that runs through our portfolio is that we buy a lot of companies that use technology and take advantage of changes in technology to make their businesses better.
However, I find it very difficult--particularly in today's environment--to invest directly in the suppliers of technology. And the reason for that is there is so much change going on. It's hard for me at least to feel like I can know who's going to be the top dog five years from now or 10 years from now. There's too much uncertainty.
Q: Can you pick one of your favorite companies and explain how it reflects your investing philosophy?
A: Let me try Loral Space & Communications [Ltd.]. This is a company that is in the satellite business. They make satellites, they manage them up in space, and they are involved in several service businesses, most prominent of which is Globalstar [Telecommunications Ltd.].
What attracted me to this situation is the controversy primarily related to Globalstar. They are a competitor to Iridium, which has been a failure in the market thus far and has filed for bankruptcy. Globalstar is getting ready to begin marketing its service later this month.
There is absolutely no customer, no revenue today. I believe there is a tremendous skepticism in the investment community about Globalstar. And I am not smart enough to know whether Globalstar will be a huge success or a bust. You have some people who believe in Globalstar, but a lot of others think it's not going anywhere.
If I do the math and think about all of the operations there are within Loral--which owns 45 percent of Globalstar--if you count Loral's holding in Globalstar as being worth nothing, then I think that Loral is still significantly undervalued at the stock [price it is] today. If you believe that Globalstar is worth something, then that just makes Loral all the more attractive.
Q: What's your outlook on the market?
A: I honestly never think I really know the answer to that question. I guess I would put it this way: For a long time I have been concerned about the overall market. I see significant pockets of excessive optimism . . . if you looked at last year's overall S&P--the big old-line growth companies that were being treated like they were going to grow at ridiculous rates forever.
Some of that has been taken out. The Cokes and the Gillettes of the world are now significantly cheaper than they were a year ago. But you still see a tremendous optimism in the technology and the Internet world. And I am worried that it's overdone and not sustainable. At some point that bubble has to burst.
At the same time, I am finding lots of things I want to buy. The cash in my portfolio is down to about 4 percent, and I am feeling like there are lots of good opportunities.
I just believe that if you truly are a long-term investor and if you can like the merits of the companies you can buy, the prices you can pay on their own, then you should keep investing.
Q: One question a lot of our readers would be interested in is whether Weitz Hickory will reopen to investors any time soon?
A: I would say that there are no plans to reopen the fund. The basic thought process continues to stand true. I don't think Hickory is a small-cap fund, I see myself as an investor trying to find good ideas wherever I can find them. But I have no reason to believe that anybody should think the fund will reopen any time soon.