The recovery is weak and uneven and will probably continue to confuse investors. We're wary and trying not to be arrogant about our predictions. However, enough sectors are moving forward that we can see growth in various companies we're investing in. Our Weitz Partners III Opportunity Fund (WPOPX) is our most flexible mutual fund in terms of tactics we can use. We can look at companies of all sizes, sell stocks short, and use a limited amount of leverage.

To protect ourselves, we sometimes employ a "defensive short." This means finding a group of stocks, or a sector, that seems fully valued or overpriced and shorting it to buy more of our favorite stocks on the long side. In the last several years we've been shorting smaller-company stock indexes such as the Russell 2000. I'm not negative on small caps, but they've generally been more popular and a little more expensive than much larger companies. These shorts, which typically account for 10% to 20% of our portfolio, allowed us to make a bigger bet on our top five or ten best ideas, which has worked out well.

Lately we've been investing in broken growth stocks. For instance, Microsoft (MSFT) is benefiting from a positive product cycle and has a fortress balance sheet. It also has a reputation for having wasted tens of billions of dollars in R&D and new product ideas that haven't really worked. I don't pretend that Microsoft is going to be a dynamic growth stock like it was 20 years ago, but at 25 a share it seems very likely the stock will find its way back to the 30s. Dell (DELL) has also made missteps and been eclipsed by Hewlett-Packard (HPQ) in certain ways. Yet at 12 a share, it's being totally disrespected. It doesn't deserve the aura it had 10 years ago, but it's fairly easy to make a case for the stock going from 12 to 18—a 50 percent gain.

In this environment, large, high-quality but underappreciated companies seem to be the cheapest and the most comfortable to own. However, we have major exposure to a handful of smaller companies that have gotten no respect over the last three or four years, such as Liberty Media Interactive, which owns QVC shopping network. Another is Coinstar, which is rooted in a business that puts coin-counting machines in supermarkets. A few years ago, the company branched out into the DVD rental business, which has been very successful.

One of our most recent purchases is SandRidge Energy (SD). People saw it primarily as a natural gas company. It was underappreciated because of the low price of gas and a leveraged balance sheet. People ignored the fact that it had a pending acquisition of Arena Resources (ARD) [completed in July]. Arena is primarily an oil company and its assets made a major difference to the quality of SandRidge's balance sheet. SandRidge seemed mispriced because it was underappreciated for reasons that would only be temporary.

The Stats: Wally Weitz is sometimes called "the other oracle of Omaha." His Omaha-based firm, Wallace R. Weitz & Co., manages about $3 billion for the Weitz Funds. One of his oldest funds, Weitz Partners III Opportunity, was a hedge fund that converted into a mutual fund in 2005. Since its 1983 inception, it has had a 12.8% annualized return, vs. 9.8% for the S&P 500.

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