Bill Nygren's Q&A at GuruFocus.com

Bill 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.