Bill Nygren: Stock Selection: Devil’s Advocate Reviews

In his recent interview on The Investor’s Podcast, Bill Nygren discussed his Devil’s Advocate Reviews, when it comes to new stock selection and existing holdings. Here’s an excerpt from the interview:

Nygren: Each week we have what we call it our stock selection group meeting. And all of the domestic investment professionals sit around a very large table. It’s probably 25 of us in the room. That meeting for us is Tuesday morning. And Monday at lunchtime, we’ll get a packet of everything the analysts want to present at that meeting. And that meeting includes our new ideas.

We probably average a little more than one new idea a week over the course of the year. And in a new idea report an analyst is saying, this is a stock we don’t own. It’s not on our approved list. I think it meets our criteria for these reasons. And this is what I think it’s worth. This is why I think it’s being well managed.

This is why we think it’ll be a winner in the competitive marketplace. It deserves to be in our portfolios. We’ll spend Monday afternoon reading it, reading sell-side reports on the same company and coming up with questions for why we think the analyst’s viewpoint might be wrong.

Somebody else will have been assigned the job of being the devil’s advocate. So the analyst will come into the meeting and in front of 25 people summarize why they think this stock should be bought. The devil’s advocate will summarize why they think the analyst is wrong.

Three of us that are most senior investment professionals, myself; Clyde McGregor, who runs our equity and income fund; Tony Coniaris, who runs a lot of our institutional products. He’s also a co-manager with me on OakMark Select and Global Select. The three of us lead the questioning.

We’ll basically have a heated argument for half an hour with the goal of identifying our mistakes in that meeting before we’ve lost a single dollar of client money on those mistakes. At the end of the meeting, the three of us will vote on whether or not we think the case has been made to see this stock added to our portfolios. And if two of the three of us believe that it should be added, then the stock goes on the approved list.

And I would say at that point, 80% or so of those names end up in our portfolios. Now, in addition at those meetings, we’ll also have devil’s advocate reviews on our large holdings. We target once a year. Our 25 largest positions will assign an analyst or an analyst who feels passionate about it will volunteer to say: I don’t think we should own X, Y, Z anymore and here are the reasons.

And again, just like when it’s presented for a new idea, we’ll sit there and argue for half an hour about whether or not it belongs in our portfolios. The result of that process is very rarely that we immediately sell the stock. But quite often, that discussion helps us better set our signed posts for what it would take to see a new information over the upcoming year to concede that our thesis might be wrong, or conversely, what are the things we’d see over the next year that give us a higher conviction level and maybe would be deserving of increasing our position sizes.

And then finally at these meetings, once a year every name on our approved list is represented by the analyst to update us on all the new information since last time it was presented, updating our targets. Importantly, we never change our buy and sell targets because of the stock price movement.

We change them because of the fundamentals in the company are unfolding slightly differently than what we’d originally anticipated. So stock on our buy lists that maybe earnings are coming in better than we had expected that would lead to us increasing our target price a little bit, or conversely decreasing it. The meetings are fun. We’re a very intense group for this meeting, but we can have knock-down-drag-out arguments and walk out of the room and say: Hey, you want to grab lunch? It’s never about the individual. It’s always about the idea.

You can listen to the entire discussion here: