In a recent interview with GuruFocus, Oakmark’s Bill Nygren and Win Murray answered a number of questions on their value investing strategy, portfolio holdings, value traps, and how to deal with positions you’re holding that are running at a loss, but you believe remain undervalued. Here is Nygren’s response:
Question: How do you control your emotions when dealing with a position at a loss, where you know that it is still undervalued?
First, you say “where you know that it is still undervalued.” I think it’s important to state that we never have enough certainty to say we know a stock is undervalued. We may believe it is undervalued, but it is extremely important to keep an open mind to new information that could prove the thesis incorrect. As a value investor, discipline and patience are prerequisites for success. However, taking them too far and becoming stubborn can be a fatal flaw. A great way to prevent becoming stubborn is to always search for non-confirming information.
I think the best way to keep emotions under control is to remain focused on business fundamentals rather than stock price. When we buy a stock, we establish a roadmap for how we expect the business fundamentals to progress. If the fundamentals are meeting our expectations but the stock has declined, we often use that as an opportunity to add to our position. On the other hand, if the fundamentals aren’t aligning with our expectations, we will usually consider our thesis broken and move on, regardless of how cheap the stock may look relative to our original expectations.
You can read the entire interview here:
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