Weitz Investment Management Q2 2025 Letter To Shareholders

Most of what I know about soccer I learned from watching Ted Lasso. It turns out that an “own goal” occurs when a player accidentally scores a goal against their own team. Sadly, this embarrassing phenomenon comes to mind almost every day now as I read the news. Our new administration’s blizzard of policy pronouncements and executive orders has caused confusion and consternation at home and abroad. Much of the chaos seems unnecessary and counterproductive. We have concerns on many fronts. But this letter is about investing, not politics, so we’ll focus on how our portfolio companies may be affected by the policies and related uncertainties.

It is hard to know which issues will turn out to be the most important for the long term, but tariffs have probably caused the most widespread corporate handwringing. The initial “Liberation Day” rollout (aside from triggering a nearly 20% drop in the stock market) was confusing, and subsequent announcements and reversals leave corporate America genuinely bewildered. Import and export orders have been accelerated, slowed or cancelled in response to each new pronouncement. Supply chains have been disrupted. Consider Apple (AAPL), whose iPhones reportedly contain components from 40 different countries, and which has a highly interdependent relationship with China. Apple is a great business and will figure out how to adapt to a new trade environment, but making predictions about sales and earnings over the next year or two has gotten much harder.

What we do know is that a tariff is a tax. The tax will be shared among the exporter, the importer, and the ultimate customer(s). This means that profits will be lower and/or prices will be higher. Neither is a positive.

The stated purposes of tariffs are the protection of domestic producers and revenue generation for the government. These goals seem mutually exclusive since success in discouraging imports also precludes collecting tariff revenue. Another more subtle issue is that a protected industry has less incentive to innovate, while a competitive market forces innovation and survival of the fittest. This helps explain the difference between the U.S. auto market and China’s. After Tesla (TSLA)’s initial success in China, there are now dozens of Chinese EV manufacturers and many are world-class. Meanwhile, large American cars, built to appeal to domestic buyers, are not very competitive in export markets.

Critics argue (convincingly) that iPhone production cannot be brought back to America (Commerce Secretary Lutnick’s vision notwithstanding) and that protecting manufacturing of lower value-added goods will not benefit U.S. workers. We doubt that tariffs will have the desired effects.

We think our collection of businesses is probably less sensitive to tariffs than the average S&P company. Software, advertising, payments processing, and other services are less obvious targets—at least so far. But almost all businesses are directly or indirectly affected by global trade and supply chains. We believe our portfolio companies are flexible and will find ways to cope and adapt, but we do not see an upside to tariffs.

Another very prominent issue is immigration. This one is especially complicated because there are elements of law, politics and “humanity.” Setting aside the political and personal dynamics, immigrants are an important part of the U.S. labor force. After large numbers of immigrants—both legal and undocumented—were arrested, the administration received howls of protest from a variety of industries. Businesses need these people. A shortage of workers in building trades, hospitality, healthcare, and food production is a problem for consumers and puts upward pressure on wages. Thus, inflation and higher interest rates. Perhaps more importantly, while U.S. demographics are less dire than in some countries, we also face a shrinking proportion of younger workers supporting and caring for a growing proportion of retired people. Various bipartisan immigration plans have been designed over the years but have not been adopted. It would seem that a plan for controlled, legal immigration could be a clear win-win.

One of the most hopeful election outcomes, from investors’ point of view, was the prospect of widespread deregulation. Eliminating “red tape” and unnecessary or counterproductive rules can be very helpful for businesses. We should note, though: One person’s onerous, business-stifling regulation is another’s environmental or safety protection. We can hope for restraint and balance from both sides of a polarized debate, but our guess is that the pendulum will be swinging to the business-friendly side. We expect our portfolio companies to benefit on this front.

On the other hand, the proposed cutbacks in funding support for education and scientific research have had a “wet blanket” effect on our life sciences companies like Danaher (DHR), Thermo Fisher Scientific (TMO), and BioTechne (TECH). Cutting funding for the National Institutes of Health (NIH) and research universities introduces a new demand headwind for those parts of these companies’ businesses that rely on academic and government-funded research institutions as customers. More significantly, the uncertainty around future government funding leaves those customers—research universities, academic labs, and affiliated scientists—unable to plan long-term research programs or capital expenditures. Corporate and philanthropic money may replace some of the government funding, but the long-term impact on science and education may be significant. Our research universities are the envy of the world, a national treasure, and our hope is that damage to their work can be minimized.

Debts and deficits might be the most directly impactful factor for investors. Spending too much relative to our income is certainly not unique to the current administration. However, while there is talk of fiscal responsibility, the “one big beautiful (tax and spending) bill” as it appears to be shaping up, does not really address our growing budget deficit and national debt problems. Pundits have been wringing their hands over an impending debt “crisis” for the entire 55 years I’ve been in the investment business, and we have gotten by so far. We can’t predict when confidence may wane, but if at some point Treasury bond investors become concerned about inflation and/or solvency risks, they may demand higher interest payments to continue to finance the country’s debt. Higher interest rates affect every company’s cost of capital (and thus earnings), and they impact (negatively) the valuation, or P/E ratio of each company’s stock.

While on the subject of interest rates, we should add a word about the Federal Reserve (the Fed). I believe it is critical that the Fed remain independent and be free to pursue its dual mandate of maximum employment and price stability without political pressure or interference from the president. Having said that, though, there seems to be a major misunderstanding about what the Fed is able to do about interest rates. The Fed cannot tweak finely calibrated dials to set all interest rates at a desired level. It can dictate the fed funds rate, which is what banks charge each other for overnight borrowing, but not the longer-term rates that are important to corporate and mortgage borrowers. William McChesney Martin, Fed chair from 1951-1970, said that the Fed’s job was to “take away the punchbowl just as the party is getting going.” In other words, the Fed should lean against the trend when the economy is slowing or running too hot. It should aim for a stable middle ground. It is likely that every president has at some point nudged the Fed to make some politically expedient move to loosen credit, but the recent rants and threats against current chair Powell are not helpful.

We’ll wrap up with a final intangible variable—America’s image abroad (and at home). Our relationships with allies and adversaries. With trading partners. The sense that our country will do the right thing, even if it is not to America’s maximum advantage. Karma. “Greatness” is in the eye of the beholder. Our leaders’ policies and actions have been getting decidedly “mixed” reviews, and we believe that investor sentiment and confidence have been affected.

Outlook

We believe that damage has been done to important institutions and relationships and that some dangerous legal precedents have been set. On the other hand, it is unclear which policies and directives will turn out to be lasting, and it is possible that better versions of governance will emerge from the rubble. Another wild card is how the legislative and judicial branches will push back against changes driven (so far) mainly by the executive.

These observations are not a prediction of doom for stocks or bonds. The S&P 500 (SP500), (SPX) dropped nearly 20% from its high through the first seven days of the quarter, bounced back almost as quickly, and ended the quarter at a new all-time high. The trading pattern is reminiscent of the initial reaction to the onset of Covid in early 2020, and the S&P is now nearly double its pre-covid level.

Our guess is that there will be surprises and ongoing uncertainty for investors as tariffs, budgets and international relations are driven by an administration that views chaos as a key element of its strategy. Investor complacency will probably be challenged.

It may be some time before businesses (not to mention governments and real people) find their footing in the new environment, but people and countries are resilient. Companies are adaptive organizations, and good ones can find ways to win regardless of headwinds. We own some great businesses that will be worth considerably more in the coming years than they are today. We trust that their stock prices will reflect that. So, I feel very good about the future of our portfolio companies in spite of the “own goals” being scored by our leaders.

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