Bill Nygren's Q&A at GuruFocus.com

Bill NygrenBill Nygren, portfolio manager of Oakmark Fund and Oakmark Select Fund, recently had a great Q&A session at GuruFocus.

I highlight some insightful points below:

  • Buy Criteria
    1. it sells it a large discount to our value estimate,
    2. we believe the value growth will be at least average, and
    3. we believe management will act like owners.
  • Sell Criteria
    • We sell when we lose any of those three supports.
    • Failures are when we lose confidence in management or the ability to grow.
    • Successes are sold when the value gap has become deminimis, or other stocks have fallen such that they are far more attractive than those we hold.
  • 4 exceptions of selling at 90% of estimated intrinsic value
    • We sell at less than 90% of value if we lose confidence in either the management or the ability of the business to grow. Effectively, those are sales of our mistakes.
    • We sell at less than 90% of value if the business needs to be owned by someone else to maximize value (generally meaning acquisition synergy) and there is no reason to believe such a change in ownership is imminent.
    • We will sell at less than 90% of value if non-owned stocks are available at less than 60% of value. The relative gap of 40-50% appreciation is what we are really trying to capture.
    • We will wait for a holding to go long term if it is selling at around 90%-110% of our value estimate. If it increases past that, we’ll accept the short term tax penalty to avoid the risk of holding a significantly overvalued security.
  • Important Traits
    • To me, the most important traits are a combination of passion and discipline.
      • Being able to stick to one’s investment philosophy through tough times is perhaps most important.
      • Indeed, if it is thought of as a “job” that already makes success difficult. Successful investors have a passion for the challenge of investing, and to them, it is their way of life, not just a job.
    • To be a value based consumer, and to have the confidence to rely on my own judgment even when the crowd came to a different conclusion.
  • Investment Mistakes & Lessons
    • Over the next twenty years, KM went bankrupt and Wal-Mart returned many times its cost. That mistake taught me a lot about sustainable competitive advantage, and the importance of corporate cultures. That was the start for me of realizing that qualitative analysis was as important as quantitative analysis.
    • Sometimes value investors buy a stock to capture a valuation gap, but don’t adjust their valuation targets based on information that comes out after they purchase it.
  • Investment Process
    • I believe the most critical part of value investing is following a disciplined buy and sell process. If that is a given, then yes, finding new ideas is the next most important thing.
    • We try to identify change that might make them qualify: for those that looked too expensive, we look for large stock price declines.
    • Second largest source is probably management change.
    • Statistical cheapness was a starting point, not an ending point.
  • Value Investing
    • To me, value investing is a way of making sense of the world, not just investing.
  • Outlook
    • We’ve seen small stocks outperform for about 7 years, and for 4 years we’ve seen commodity and cyclicals outperform stable growth, low quality outperform high quality, and International outperform US. Looking for values today, I would look away from those categories that have done well recently.
Full Q&A - Gurus On Board: Ask Bill Nygren - The Answers.

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