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Bill Nygren: Why we underperform?

April 11, 2006

"For the three years ending 12/31/05, your Fund returned 38%. Normally, we would be excited about 38% over three years, but the stock market, as measured by the S&P 500, returned 50%... we made two major mistakes over the past three years. First, we significantly underestimated the strength of the economic recovery and the impact this would have on corporate earnings."

"Second, our failure to anticipate dramatically rising energy prices resulted in little exposure to energy stocks. Had we believed that corporate America’s earnings would rebound so strongly or predicted that the price of a barrel of oil would comfortably exceed $50, your Fund would have likely owned some different businesses. Instead, we believed there was greater opportunity in owning a growing number of above-average businesses that were selling at average prices. Most of these above-average businesses have continued to achieve good earnings growth, but other businesses grew faster. This positioning was costly; the stocks of many businesses we didn’t own outperformed your Fund’s holdings. Despite regretting these missed opportunities, we know we can’t change the past. Our job is to make the best investment decisions we can with current information. So, where do we stand today? "

Read the complete letter



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