PORTFOLIO MANAGER LETTER –
VALUE, HICKORY, PARTNERS VALUE, PARTNERS III OPPORTUNITY
December 31, 2006 – QUARTERLY REPORT

January 2, 2007

Dear Fellow Shareholder:

Brad and I are happy to report that 2006 was a very good year for shareholders of our Funds. Each of the four stock funds earned total returns of over 20%, comfortably in excess of returns on the S&P 500 (larger companies), the Russell 2000 (smaller companies) and the Nasdaq Composite (a proxy for technology companies). The Balanced Fund also exceeded its benchmark by a wide margin and Brad will comment on Balanced in a separate letter. The table below shows comparative results as of December 31, 2006 (after deducting expenses) for various intervals since the firm was founded 23 years ago.

* All performance numbers assume reinvestment of dividends (except for the 15-year, 20-year and since inception Nasdaq numbers for which reinvestment of dividend information was not available) and all Fund performance numbers are calculated after deducting fees and expenses.

My high school Latin teacher, Dr. Romeo (really, that was his name), was fond of pointing out that most of the ideas we thought were new in the sixties had been thought by the "noble Romans" before us. He saw almost everything as a sign of what he called "changing changelessness." As 2006 unfolded with successively stronger quarters, I was reminded of Doc Romeo’s conviction that "the more things change, the more they stay the same."

The clearest lesson in changing changelessness was that while cheap stocks eventually go up, you cannot predict when it will happen. The stocks that generated great returns in 2006 were practically the same group that had languished in 2005. In our December 2005 letter, we discussed five companies whose business values had grown but whose stocks had weighed particularly heavily on 2005 results. These stocks are shown below along with their subsequent returns in 2006.

The details change, but human nature stays the same. Short-term thinking leads to alternating bouts of fear and greed. This makes stocks much more volatile than the underlying business values of the companies. In 2005, investors feared that rising interest rates would devastate financial service companies so they wanted nothing to do with Countrywide, Fannie Mae or Redwood. This same "sell financials when rates are rising" conventional wisdom caused heavy selling in banks and mortgage company stocks in 1990, 1994 and 1999 and led to big gains the following years. Cyclical earnings disappointments caused selling in Tyco and fears of competition from telephone companies depressed Comcast. A year later, very little had changed in Tyco’s or Comcast’s long-term outlook, but for some reason investors’ fears turned to optimism.

Another classic case of apparent, but not real, change has been Liberty Media’s dividing its business into four separate companies over the past two and a half years. Beginning in June of 2004, Liberty Media spun out Liberty Global (which in turn issued three classes of stock), Discovery Holdings, Liberty Interactive, and Liberty Capital. This capital structure hyper-activity was designed to "surface shareholder value" by dividing a complicated company into parts that would appeal to various shareholder constituencies and do so in a tax-efficient manner. In the two and a half years since the first spin-off, the successor stocks, in the aggregate have returned 32%, (11% annualized). Investor confusion and/or disinterest led to early price weakness in several of the new companies’ stocks, so we have been able to more than double our holdings in the Liberty "complex" at very favorable prices. The assets and management are the same, but the repackaging is turning out well for our investors.

The story of 2006 was really one of maturity/recognition/vindication of long-held positions. We try to know a few things well, take big positions when warranted, and wait for other investors to eventually come to the same conclusion. This has been described as a "hedgehog" strategy, and while the image is not particularly flattering, it is probably apt.

So, what next? There have only been a few times when stocks were so cheap that good returns seemed assured—and those times were so scary that it was not clear that stocks would not fall a lot more before finally doing well. Stocks in general don’t seem particularly cheap today—most of our stocks aren’t terribly cheap—but I feel very good about our chances of earning reasonable returns over the next several years.

Our largest positions are in companies that are doing very well. Their business values are growing at 10-15% per year. Their valuations are reasonable. Whether or not their stock prices go up in 2007, their value increase will eventually be realized. Berkshire Hathaway will collect cash from its operating companies, it will write lots of insurance if premiums are adequate, it will make acquisitions, and it will buy stocks and bonds if the prices are right. In short, Berkshire will become more valuable—and if the price does not go up in ’07, it will go up in some subsequent year. The same is true for Countrywide, Tyco, UnitedHealth, Liberty Interactive, Redwood Trust, Fannie Mae, Wal-Mart, AIG, Liberty International, Liberty Capital, Washington Post, and the others.

Any number of things can go wrong in the next year or two, and a few undoubtedly will. We go through the litany in every letter—debt, credit risk, fragile economy, weak currency, geopolitical risk, etc. Something will shake investor complacency and lead to increased market volatility. This means that our quarter-to-quarter and year-to-year returns are not predictable, but if we use common sense and discipline, we should have opportunities to make investments that will earn us very good returns over the next several years. After 35+ years in the investment business, I’ve learned that we can’t know more than this, but that this is enough to know.

We appreciated your patience during 2005 and have enjoyed reporting on 2006.

Sincerely,

Wallace R. Weitz	Bradley P. Hinton
Co-manager Value and Partners Value	Co-manager Value and Partners Value
Portfolio Manager Hickory and Partners III