During his recent presentation, Bill Nygren discussed why investors must take larger position sizes to have maximum impact on their portfolios. Here’s an excerpt from the presentation:
Nygren: We think the biggest skill we bring to the table is stock selection. And we want to magnify the impact that our stock selection has on the portfolio. There are some people that position size and they want their positions so small that when they make mistakes, they don’t really affect the portfolio.
The problem with that strategy is your successes also don’t really affect the portfolio. So we take the opposite position. We think stock selection is our greatest skill, and we want the names that we have the most confidence in to have the biggest impact on the portfolio.
The Oakmark strategy doesn’t use a typical value approach where you can only buy low P/E or low price-to-book value stocks. What we do at Oakmark is we look out 5 to 7 years into the future and we want to buy companies that, based on what we think they can be 5 to 7 years from now, are selling at much too cheap a price today.
So we’re looking for stocks that are selling at a big discount to intrinsic value – where we expect that value to grow over time. Because when we buy a stock at Oakmark, we expect we’re going to own it for five years or so. And during that period, the decisions management make have a big, big impact on the ultimate return to investors.
You can watch the entire presentation here:
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