During this interview with Stephen Clapham – Bill Nygren reflects on 40 years of value investing, emphasizing the importance of not only analyzing companies’ balance sheets but also the quality of their management.
He explains that early in his career, he learned to focus on undervalued companies with strong leadership capable of driving long-term growth. Over time, his approach evolved to include companies that combine business value growth and shareholder returns, even without immediate catalysts.
He stresses the importance of patience, aligning with capable management, and making long-term decisions, where leadership’s choices on capital allocation often matter more than initial valuation.
Here’s an excerpt from the interview:
Nygren: When I started 40 years ago… I worked for one of our partners, Peter Foreman, who said, just remember that every time you make an investment, you’re buying the balance sheet of the company, but also the person that’s running it. We’ve evolved a little bit, but the guts of our current process were there 40 years ago.
It wasn’t just identifying cheap companies. It was identifying cheap companies that had managements that we wanted to have in control of our investment.
And I think as catalyst-based investing became so popular 20, 30 years ago, we added that third criterion of saying, we’re looking for companies that can give us a combination of business value growth and dividend income that at least matches what we expect from the market.
Because that’s really what it takes to put time on our side and give us the luxury of being incredibly patient.
And you had a lot of value investors back then that kind of moved away from just an accounting-based value investing model and said, we still do that, but we wait for a catalyst to be in place.
Because they were often looking at these structurally disadvantaged companies that their best days were behind them. And the longer you waited for something to happen, the worse your annualized return became.
And we said, we’re not looking for catalysts, but we’re looking for companies that can grow and that they generate capital and they return capital to shareholders. And even though they’re cheap, we still expect them to grow and return capital at least as fast as the rest of the market does.
When you think about buying at a discount, getting a company that grows as fast as the rest of the market, and getting a management that’s aligned with the outside shareholders, then you’ve really got everything in place for kind of waiting as long as it takes for the market to recognize the value.
And I think one of the biggest lessons learned over being the 23-year-old kid who started in this business to the other end of 40-plus years doing it today is realizing how important the people are.
You know, you come into this business, you’ve got spreadsheet skills that run circles around the more senior people, but they’ve got the nuance of being able to understand the importance of qualitative and the importance of assessing the people you’re investing with. You know, a lot of our holdings, we probably average five years for a typical holding.
During that period, a management team has got some big decisions to make with how do they deal with excess capital? Are they willing to give it back to us? Do they just try and reinvest, maybe in areas that they aren’t experts in?
What do they do with tangential businesses that might be worth more to somebody else than they’re worth to them?
Are they willing to sell it off and maybe shrink their capital base in a value-per-share additive way? What happens if somebody comes along and realizes the company is worth more to their company as part of their company than it is as a standalone?
Are they open to the idea of selling out the business when they can get a good price?
Those things often matter more over a five-year period than whether your initial price was 60% of the market multiple or 75% of the market multiple.
You can listen to the entire interview here:
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
