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Gurus On Board: Ask Bill Nygren

July 15, 2007

We have started a Gurus on Board program with which our readers get to ask questions to Gurus. After we ask questions from Mohnish Pabrai, now we have Bill Nygren answering your questions.

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.


Rating: 2.5/5 (31 votes)

Comments

billytickets
Billytickets - 7 years ago
Bill what is your outlook on JNJ
expectingrain
Expectingrain - 7 years ago
Bill, you stated that you occasionally read gurufocus, have you incorporated any ideas you've found there in your fund?

Gangstarr
Gangstarr - 7 years ago
Bill, I understand that you sell when the price of the stock reaches 90% of your estimate of its intrinsic value. Have there been any exceptions? On average, have you found this to be an optimal sell strategy?
buffetteer17
Buffetteer17 premium member - 7 years ago
I presume that a buyer of a whole business is willing to pay a premium for control. How much is this premium, typically? Is this premium the reason you as a non-control owner sell at 90% rather than 100% of fair value?
cyrano
Cyrano premium member - 7 years ago
Bill, just two questions about Discounted Cash Flow Analysis. First, can Return on Equity help you come up with a longer term (5 to 10 years) earnings growth rate? And do you count Book Value and expense options in DCF? Thanks in advance.
arunkirpalani
Arunkirpalani - 7 years ago
Hi Bill, could you let us know if you use options to minimise the risk in the portfolio ( eg married puts) and also to maximise your returns?
musto
Musto - 7 years ago
Hi Bill,

Several years ago Washington Mutual was your most favorite stock.

Can you tell us what you've learned from that association over the years,

and how do you feel about the company and it's prospects right now?

Thank you.

marco.guerreiro
Marco.guerreiro - 7 years ago
What is your view on the current subprime mortgage situation. Are there any sectors or stocks you feel are especially cheap at the moment and why?

chrislambert
Chrislambert - 7 years ago
I am wondering why you are preferring FDX to UPS? Both are trading below historical valuation metrics, however from a business economic perspective UPS appears the stronger with higher EBIT margins ROIC. Is the FDX preference based on a lower valuation multiple which you believe compensates for the comparatively weaker economics? Thanks
stmmoore23
Stmmoore23 - 7 years ago
Bill, are there any specific areas that you are finding value these days? Also, what is your favorite stock that you already own where you don't think the market has realized its discount?

shamada
Shamada - 7 years ago
Bill. How would you define your investment style - classic value, or GARP (growth at a reasonable price)? In your analysis of Best Buy, you speak about it's potential for further growth, so that implies GARP. Also, one of the characteristics you look for in a stock is "growing per share value" - again implies GARP. I'd like to know how you see yourself, rather than how others describe you?
williase
Williase - 7 years ago
Bill, what is your current view of Western Union?
biscosc
Biscosc - 7 years ago
I find that initially finding undervalued stocks is possibly the most critical part of value investing. Could you provide us with more information on the Harris search strategy? Also, after finding a list of stocks for further research do you speed up the research process based on how undervalued they seem at first glance?
AlexSummersOfToronto
AlexSummersOfToronto - 7 years ago
Hi Bill,

I'm wondering what's your opinion of BSC. I feel that they are cheaper than their competitors now, while having superior management to all of them minus GS. I feel the subprime issue is completely priced in right now. What's your take?
carymiddlecoff
Carymiddlecoff - 7 years ago
Bill in an interview with Motley Fool a few years back you mentioned that you enjoyed the John Train books and Jack Schwager books because the short profiles of investor's helped you find an investing personality. You also mentioned that Warren Buffett is one of your hero's. What are the five most important books you have read? And if you were to expand your list to three most influential people in your life who would they be? Thanks for your insights over the years.
kfh227
Kfh227 premium member - 7 years ago
Washington Mutual is your largest holdings. I've held it for 4 years with a cost basis of about $39. While the capital appreciation is slow, I am more than happy to hold on and collect the dividend, which as you know is increased almost every quarter and the yield is over 5% right now). The dividend helps me sleep at night. This whole time, I have found it to be undervalued and I am convinced staying the course will end in good rewards. And now, I think it is worth $50+ (I think the sub-prime, Alt-A concerns are overblown in WM). I think it is safe to say that it is undervalued and I think you agree on this. I suppose I don't have a particular question on this stock, but could you give some more insight as to why you like WM so much as to make it your largest holding. In particular, what metrics do you look at when trying to determine the intrinsic value of WM?

kfh227
Kfh227 premium member - 7 years ago
Billytickets, you make me laugh ;-)

I have the same question as Expectingrain. I second his inquery. "Bill, you stated that you occasionally read gurufocus, have you incorporated any ideas you've found there in your fund?"
kfh227
Kfh227 premium member - 7 years ago
I will borrow a question from our previous Q&A with Mr. Pabrai.

What has your biggest invesmtent mistake been and what lessons can be learned from it?

How about missed opportunities. Has there been any stock(or stocks) you passed on in the past 5 years which in hindsight represent a missed opportunity? A stock that had everything you look for but for some reason you decided to take a pass on them? What lessons can be learned from it? Why did you pass on them at the time?
WEB
WEB - 7 years ago
Bill, H&R Block has experienced a lot of turbulance in the past 5 years. As a long term shareholder, how do you rate the performance of its management? If Mark Ernst asked your opinion, would you recommend that it focuses on core tax business or would you still support a certain degree of diversification (bank, financial services, business services). What is your opinion of the OOMC deal? (price and chance of closure in Oct)
kfh227
Kfh227 premium member - 7 years ago
Any word on when the questions are going of to Mr Nygren?
gurufocus
Gurufocus premium member - 7 years ago
Send yesterday. We have not heard from him yet.

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