Bill Nygren: How To Avoid Value Traps

In his latest interview on the Millennial Investing Podcast, Bill Nygren discusses how to avoid value traps. Here’s an excerpt from the interview:

Anything that we look to buy in any of our Oakmark Funds has to meet three criteria. First, it has to be cheap. We want it to sell at a significant discount to our estimate of long term business value. Second, we want to make sure that value is growing. One of the traps that long term investors often fall into is they end up owning businesses that are structurally disadvantaged, maybe losing market share. And to avoid those traps, we look for companies where we expect the combination of dividend growth and per share value growth to at least match what we expect for the S&P 500.

Say we expect earnings growth of about 5% at the S&P with a 2% dividend yield. We want ours to have a combination of at least 7% and we’re agnostic as to whether it’s a 7% dividend yield with no growth or 7% growth with no dividend yield or anywhere in between. And then the third thing that we want is we want a management team that’s aligned with the outside shareholders whose intent on maximizing long term per share business value. And all those terms are important. We want long term value maximization, not next quarter. And we want them to think on a per share value basis.

We don’t want management teams that are just trying to grow the value of the enterprise, maybe by making overpriced acquisitions and issuing lots of stock. On a per share basis, we want them taking actions that maximize value for the long term. And when we get all three of those, it gives us the luxury of a timeframe that’s longer than almost any of the other investors in public markets are using. Our analyst look out seven years and work very comfortable maintaining our positions over that length of time. We like to say that gives us almost a private equity perspective to public equity investing.

You can listen to the entire interview here: