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David Herro: Hard to Believe Japan Selloff Is Real Value Lost

March 28, 2011


David Herro manages Oakmark International and he was named Morningstar’s Fund Manager of the Decade last year. Apparently his fund owns some Japanese names, and the recent market action there does not bore well for his fund.

Morningstar’s Jason Stipp interviewed him recently. Here is the first Q&A.
Stipp: So, the first question for you, overnight the Nikkei 225 was down about 6%. There's obviously a lot of concern about the situation in Japan. It's a story that's still developing.

I wanted to get a sense from your perspective--and you do have a good number of holdings in Japan--how much of the selling that's happening in Japan right now is due to a real fundamental loss of value due to the natural disaster that occurred there, and how much is fear right now in the market about what could happen?

Herro: I think when you look at the severe price downward movements, and you mentioned that Nikkei was down 6.18%, the TOPIX was down 7.5%, and the JASDAQ, the smaller companies, was down 9.92%. I think it's hard to believe that the average Japanese company is worth 8% to 10% less as a result of what happened with the natural disaster.

Clearly, it was a bad disaster, and clearly there's going to be damage to the macro economy, but the intrinsic value of a business is not determined by what's going to happen in the next day, week, or quarter. The intrinsic value, especially our belief is, and the fundamental financial sense tells you, the intrinsic value is the present value of all future cash flows.

So you have to look at what a business is going to do, not just over the next couple of weeks but over the next couple of years and decades, in fact, when valuing a company. And when you look at it with that perspective and when you look at the price of Japanese companies, it's hard to believe that most companies have been diminished in value by this 6% to 10%, which the markets are showing.

So, what often happens in these situations is people sell first and ask questions later. And as everyone heads to the exits, what you see is a broad-based and uniform selling that doesn't quite match with what's happening fundamentally.
Watch the video

Read the complete transcript at

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