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Bill Nygren's Buy and Sell Criteria

February 28, 2006 | About:

The following summarizes the main points of Nygren's investment philosophy. Buy Criteria: 1. Buy stocks only when they sell for at least a 40 percent discount from their fair market values. If things do not go as well as you expect with an investment, this provides downside protection. If things go well, this gives a slingshot effect on the upside as the market closes the gap between a firm's price and its value.

2. Avoid purchasing structurally disadvantaged businesses by requiring that companies’ per share value growth plus dividends at least match the market’s value growth.

3. Demand that a firm’s management treat its shareholders like partners. Make sure leaders’ economic incentives are well aligned with shareholders’ goals. Look for management that communicates openly with owners regarding the state of the business.

4. Maintain a very long-term investment horizon. Focus on what a business will look like in five years.

Sell Criteria: 1. Sell a company when its price reaches 90 percent of its fair market value because (1) a firm is often worth less as a stand-alone entity than as an acquisition target; (2) valuing a business is not a precise exercise, and it is better to sell early than wait for a stock to reach what may be an overvalued level; (3) finding a buyer could prove difficult if all the shareholders hold on to a company until it reaches its full value before they sell it; and (4) buying a stock at 60 percent of its fair value should generate a higher return

than holding one selling for 90 percent of its worth. 2. Liquidate a position when a company fails to perform fundamentally as you expected.

2. If you realize you made a mistake, the sooner you admit it and deal with it, the more likely you will minimize its impact on your performance.


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