Gurus On Board: Ask Bill Nygren
Bill Nygren is the portfolio manager of the $5.8 billion Oakmark Fund (10–year average 7.26%) and more concentrated $5.9 billion Oakmark Select Fund (10-year average 15.16%).
Bill Nygren requires any business he buys to possess these three characteristics:
1. Discounted price
2. Growing per share value
3. Shareholder-oriented management
Nygren defines a company’s intrinsic value or worth as “the maximum amount an intelligent, knowledgeable buyer could pay to own the whole business and still earn an adequate return on his investment.” When determining a firm’s worth, Bill does not focus on one magic statistic that he believes works for all companies, such as its price-to earnings (PE) ratio, PE-to-growth (PEG) ratio, or price-to-cash flow. He believes different statistics do a better job of estimating values for different industries.
To estimate a firm’s intrinsic value, Bill first examines prior purchase transactions for other businesses in the same sector to identify the key variables analyzed by buyers. He prefers to look at cash transactions because he does not want to be influenced by companies that were anxious to issue overvalued equity to buy stock.
Bill Nygren runs concentrated portfolios with his funds:
“The Oakmark Fund is the more diversified of the two Funds I work on. But even Oakmark is much more concentrated than the average mutual fund. At most times our portfolio is invested in about 50-60 stocks, roughly half the average fund’s number of holdings. A typical position for us is just under 2% of assets, and it is unusual to have a position as high as 4% of assets. We keep Oakmark this diversified so that we are comfortable when a long-term investor tells us they have put most of their stock market investments in The Oakmark Fund.”
“The Oakmark Select Fund owns less than half as many stocks as The Oakmark Fund does – usually about 20 stocks. It is a non-diversified Fund, and because of that, we routinely caution that it is a high-risk strategy to use it as your only mutual fund. With only 20 stocks, a normal position for Oakmark Select is about 4% of assets (bigger than Oakmark’s largest position), and our top holdings are usually a double-digit percentage of the portfolio. For example, both Funds’ largest position today is Washington Mutual. It represents 3% of Oakmark’s assets and 15% of Select’s. If Washington Mutual continues to be a profitable stock, then it will be an important positive for Oakmark, but it will be far more important to Select. And if it doesn’t, Select will suffer more than Oakmark does. We believe that the risk is worth taking...”
Bill Nygren thinks it is important to avoid value traps while practicing value investing. "A value trap is defined by disappointing fundamentals rather than a disappointing stock price," says Bill Nygren. "It's one of the risks of value investing," he says. "The stock keeps getting cheaper and the outlook keeps getting worse."
To our honor, Bill Nygren comes to GuruFocus, too, just like you. He said, “I would be happy to participate in a Q&A piece for your readers … I do occasionally visit GuruFocus and always find something of interest to read.”
Ask your questions to Bill Nygren by following this thread. We will send the questions to him and let you know his replies as soon as we get back from him.