Renowned value investor Bill Nygren (Trades, Portfolio) from Oakmark Fund gave a great presentation at the CFA dinner held two days before the Berkshire Hathaway annual shareholder meeting. The title of his presentation is "Perspectives on Value Investing." Below are my notes from the presentation.
1. It's not enough to study just the great value investors. It's also very important to study the successful non-value investors. You may be surprised to find out that you may learn a lot from them. Nygren has learned tremendously from the following investors:
- George Soros (Trades, Portfolio): He learned the concept of reflexivity from Soros. This is useful to fundamental analysis because not only does fundamentals affect stock prices, stock prices sometimes affect the fundamentals of the business. Oakmark applies this concept in its investment analysis by paying attention to what they call fundamental momentum, which will be discussed later in this article.
- Anthony Bolton: Nygren said he learned from Bolton that you should know what wrong looks like before it happens. Therefore, you should study the mistakes of other investors and try to avoid those mistakes on your own.
- Michael Steinhart: Variant perception and clean state. Nygren brought up a very interesting example of Steinhart - Steinhart once sold his entire portfolio in one day and the next day, he had trouble buying the ones he had the least conviction in. This is a great way to illustrate the endowment bias. Once we own something, it doesn't matter if it's a share of stock or a water bottle, we immediately have emotional attachment to it. I think this is an expensive way to eliminate a behavioral bias. An alternative way to tackle this bias is to start a small portfolio and only pick the stocks from your current portfolio that you like the best. At the end of the exercise, you may realize that you should probably rethink about your current portfolio.
- Paul Tudor Jones (Trades, Portfolio): Losers average losers. Paul Tudor Jones (Trades, Portfolio) is one of the greatest traders of all time. The following words from him illustrate the point of "losers average losers": "The most important rule of trading is to play great defense, not great offense. Everyday I assume every position I have is wrong. I know where my stock risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan to get out. " As value investors, we can also adapt his lesson by tactically dealing with the downside and by playing great defense when the market condition warrants such strategy.
2. There is nothing wrong with buying the best companies and paying less premium for them. Such is the case in today's market. Oakmark Fund can buy some great companies at less premium to mediocre companies. This point may need further illustration. Wells Fargo is a great company. Citibank is not as great as Wells Fargo. Therefore, Wells Fargo should trade at a premium to Citibank. So far so good. Nygren's point is, if historically Wells Fargo has been trading at say 25% premium to Citibank and today the premium is only 15%, you are getting a good deal here because you can pay less, relative to what you have to pay otherwise in another market where the premium larger for great businesses.
3. Nygren found it alarming when many shareholders send him congratulatory emails regarding a new position. The point here is pretty clear: When your investors congratulate you on a new position, it tells you that this position might be a herd stock and your thesis may not be the variant view.
4. The concept of fundamental momentum: The stocks that beat the estimate are likely to continue to beat the estimates. Conversely, those that miss the estimate are likely to continue to miss the estimate. Nygren remarked that his analysts have found out that when stocks his analysts follow start underperforming, they tend to continue to underperform. The value gap you identified in your analysis may never exist, or it is getting narrower as business fundamentals deteriorate.
5. Opportunity loss: This is an exceptional point. If you have held a loser position for a long time, not only do you lose money, you also suffer from the opportunity cost - what you could've bought if you have sold your losers. You have to differentiate being patient from being stubborn.
6. We have met the enemy and he is us.