One of the value investing firms that we follow closely here at The Acquirer’s Multiple is Oakmark Funds and portfolio manager, Bill Nygren. Nygren is a value investor who focuses on companies trading at what he considers to be a substantial discount to their true business value. He has been a manager of the Oakmark Select Fund since 1996, Oakmark Fund since 2000, and the Oakmark Global Select Fund since 2006.
In a recent interview with Outlook Business Nygren explains why successful value investing is about doing something differently to most investors, and studying other successful investors, who do things very differently from you. Here’s an excerpt from that interview:
You describe your approach as that of a private equity (PE) firm in public market investing. Can you elaborate on that?
What you see today in most public market investors is a momentum focus on stock price and earnings. Most investors are trying to outguess each other about what a company is going to earn in the next quarter, or for those who call themselves long term, in the next year. What we do is quite different; we look at a company and try to project what it will look like five to seven years from now. We also think about how the balance sheet is likely to change, and how each division of the company might be different from what it is doing today.
Some of those divisions might need money, some might be revitalised in ways that can get them a reasonable return or, in case that doesn’t happen, get them sold. We try to estimate how public investors might look at this company differently five to seven years in the future. When you think about it, this is not very different from what a PE investor does: trying to find a company that in the market today is worth significantly more than what investors are paying for it.
Certainly, there are important differences here. We don’t want to invest in a company unless we think the right management is in place to maximise that value seven years from now. A PE firm will often begin by removing the existing management and putting its own people. We don’t do that. Liquidity is obviously very different, you make a private equity investment and you can make a guess as to how the value has changed. But there is no liquidity unless the company is sold or it goes public. You rely on the estimates of the value. Compare that to our fund, where everyday you can see the price of that is based on what each of the securities are trading at in the marketplace.
The fees, too, are different. A typical PE firm is charging 2% of assets and 20% of profits, whereas our fees are just below average. For the mutual fund industry, it is less than 1% of assets or a fraction of 1% and 0% of profits. We provide liquidity, better disclosure of holdings and lower fees, but the thought process is similar to that of a PE firm.
Tell us your experience as an investor — the biggest mistakes and lessons you’ve learnt.
When people talk about their biggest mistakes, what always comes to mind is the investment that you made where you were too optimistic and the stock price went down significantly. Were you to ask me our bigger mistakes, they would be not getting over the hump to make the investment in companies that went up by multiples of the price when there was an opportunity to invest in them. For us, that is Google when it became public, or Apple when we bought it in Oakmark Fund but weren’t quite confident to buy it in Oakmark Select, and then you watch it go up seven-fold or more than that right now.
Those are the big mistakes — the things that you should have invested in that went up by multiples and met your criteria, but you paused and decided against making that investment.
How has your evolution been as a value investor? What does and doesn’t work according to you?
As a value investor, you always have to be doing something that most investors aren’t doing. When I started in the business, even a simple screen of ranking an industry on P/E basis on forward earnings produced interesting results.
A lot of people weren’t doing this. You could see that some of those companies were 15x earnings, while some were at 8x earnings. In some cases, the few that were at 8x didn’t look very different from the ones at 15x. During my early years, very simple quantitative screens created value and produced interesting output. Today that screening is so easy to do that everybody is doing it, which is why the outcomes aren’t very interesting. You have ETFs where the computers are programmed to just buy the lowest P/E companies.
The definition of value always has had to be somewhat fluid to be more advanced than what other people are doing. For us today, it’s less about saying this company is at 10x earnings in an industry that is at 15x, more about saying this company does not look cheap on a P/E basis but if you think about the following adjustments, it would be cheap.
Who are your role models in investing? You’ve previously talked about Michael Steinhardt as your role model, but isn’t he at the other end of the spectrum?
That is right. But I’ve always found it interesting that most value investors like to read only about other value investors. If you ask any value investor about their investment hero, Warren Buffett will be on the top of their list. He is on top of our list too, but once you’ve read seven books on Buffett, is the eight one going to add more value?
Would not reading about somebody else, who did things very differently from you but who also succeeded tremendously, be more valuable? I find that I learnt a lot by reading about some of the hedge fund managers such as Michael Steinhardt, Paul Tudor Jones and George Soros, all of whose approach was very different from what ours is. Perhaps you may find one thing from their approach that is consistent with your own philosophy.
One of the things that Michael Steinhardt famously relied on was variant perception. On every company he had a position in, he knew what the bulls and bears thought, and why his point of view was different. Sometimes, as value investors, we don’t spend enough time doing that. We assume that if a company has a low P/E, or a low price to book, that’s enough to conclude it’s cheap. But we’ve learnt by studying Steinhardt that we can add value in our process even in a stock that looks statistically cheap by stating our different and distinct point of view. Anybody at Oakmark will be able to tell you what our variant perception is of a stock that we own.
There is a famous picture of Paul Tudor Jones with a piece of paper on his bulletin board that says ‘Losers average losers’. As value investors, we always want to believe that the stock is overreacting to bad news. A typical analyst report goes: This is a disappointing quarter but my value estimate fell only 5% while the stock fell 15%, so it’s a lot cheaper than what it was yesterday. This led us to do a lot of research into our own ideas. When the fundamentals start deviating from what our analysts had projected, averaging down on those names tend to not work. It made us alter how we thought a little bit more, which for us is certainly more valuable than learning what Warren Buffett eats for breakfast.
What Warren does — buying great businesses that are run by good people, buying and holding, thinking about long term — is still the core of our investment approach. Nothing pleases me more than when somebody says that what we do at Oakmark is very similar to Buffett. At the same time, that doesn’t mean we can’t learn from people who do things very differently from what we do.
You can read the full interview here.
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