12 December 2008
he only investors who belong in the stock marketare investors who can take a long-term time hori-zon,” declares Bill Nygren, und manager o theOakmark Fund and the Oakmark Select Fund.There’s no time like the present to drive home the truth o that statement. Even as short-sighted investors stampedeor the exits amid a growing global nancial crisis, valueinvestors like Nygren, 50, are gearing up to do what theydo best – buy into undamentally sound, long-term busi-nesses at relatively cheap prices.Nygren’s rst brush with the world o investment tookplace at Northwestern Mutual Lie, which he joined as ananalyst in 1981. Two years later, he moved to investmentrm Harris Associates. Today, Nygren is director at therm, and his career graph depicts a steady climb. It wasater being named director o research in 1990 that Nygrenpushed his rm to create a und that would manage assetsin a much more concentrated ashion than those handledby other money managers. That idea came to ruition in1996 when the Oakmark Select Fund was created.Interestingly, Nygren never promised extraordinarygains rom his unique style o investment: instead, he toldhis bosses that over the next ve years, they could prob-ably hope to see one exceptionally good year, one year that would ‘hopeully, not be horrible’, and threeyears o mediocre returns. Happily or ev-eryone involved, the und experienced veexceptionally good years: since inception, ithas handed in a 29 per cent return (annu-alised) compared with the S&P 500’s 11.5per cent and 16.8 per cent a year return orthe S&P MidCap 400. In act, so impressive was the und’s perormance that it rankedamong the top 1 per cent o all unds trackedby
, a und tracker, duringthe period.To date however, the und’s perormanceis more modest, but still creditable with an11.9 per cent return (annualised). As o to-day, Bill manages $3.6 billion worth o assetsunder the Oakmark Fund and $2.5 billion inthe Oakmark Select Fund.Nygren’s investment style is simple: hebuys stocks when they all to or below 60per cent o the estimated business value and sells them when they hit 90 per cent. To calculate business value, heuses the discounted cash fow (DCF) method, eschewed byother value investors. He says, he understands the prob-lems in depending solely on DCF to estimate business value, but points out that his rule about buying only whenstocks all to 60 per cent o business value itsel oers acushion against making grave mistakes in calculatingbusiness value.Nevertheless, this astute investor has made his shareo mistakes. Ater the tech bubble (which Nygrendid not participate in) burst, value investors ound ahappy hunting ground in nancial stocks. Many o them believed that these stocks were intrinsicallyhigher than the prices they were trading at. Nygren wasone o them. But that was a bet time proved wrong, as therisks attached to these stocks were ound to be greatlyunder-estimated.Nygren had bought into regional bank Washington Mu-tual (WaMu) enthusiastically (at one point, the stock ac-counted or 15 per cent o Oakmark’s portolio), promptedby bullishness on the institution’s retail asset base whichhe thought was not ully valued by the markets. Whenthe credit crisis ripped through the nancial sector, thebank’s operations crumbled and it had to le or bank-ruptcy. Nygren openly admits he made a mistake with Wamu. “Selling was the right decision, but by the time wesold, the damage had been done,” he wrote in his latestund note to investors. Ironically Wamu’s retail bankingassets were sold to JP Morgan (another Nygren hold-ing) beore it went belly up. In an interview with
, Nygren explains what went wrong with Wamu, hisoverall investment strategy and his take on the US econo-my and stock markets.
What is your prediction or the US stock markets ?
I think it’s very hard to predict what is going to happenin the short run; the longer you stretch your horizon, theeasier it becomes to orecast. I you think about a ve-year time rame, it’s sae to assume that P/E ratios goback to normal and it’s pretty easy to assume that theeconomy will go back in ve years to something resem-bling normal growth rates. In 2009, it is easy to assumethat corporate earnings will be down a little bit and may-be even that investors will award an above-average mul-tiple to earnings, but I have a very hard time making thatprediction.Thinking ve years ahead, I think corporate earnings will be higher, P/E multiples or the S&P500 will be higher and that will create verygood returns rom the US stock markets.These returns will oer a very substantialpremium relative to xed-income markets,especially treasuries. So we think this a very attractive opportunity or investors tocommit new capital, with the caveat that in- vestors who worry about day-to-day pricefuctuations should stay away. Regardless o the opportunity, the only investors who be-long in the stock market are investors whocan take a long-term time horizon.
Where do you see value emerging in the USequities now?
First, I’d like to say that I nd the S&P 500attractive across the board. To me, this isnot a time when only one or two sectors arecheap and the rest o the markets are air-ly valued. This is a time when most large-cap US stocksappear to be selling well below business value.In concept, I would say the characteristic that is mostovervalued in today’s market is saety: look at treasurybills that yield almost nothing and how large the premi-um is or holding long-term corporate bonds instead o long-term treasury bonds. Within equity markets, compa-nies that have perormed the best have been those thathave seen the least volatility in their business models. Ibelieve it is becoming increasingly dicult to justiy own-ing those stocks versus the rest o the market where pric-es have come down sharply.
Could you elaborate on your investing strategy?
There are three things that we look or when consideringinvesting in any company. First, the stock price should beat a signicant discount to the intrinsic business value.To us, the intrinsic value would be the highest price anall-cash buyer would pay or the entire business and stillmake a reasonable return on investment. For most large-cap companies that we invest in, it’s not very dierentrom estimating the discounted cash fow (DCF) to esti-mate the intrinsic value o the stock. For smaller com-panies, it could end up being dierent as we explicitly
This is anattractiveopportunity tocommit newcapital, withthe caveat thatinvestors whoworry aboutdaily priceuctuationsshould stayaway