Bill Nygren On ... Everything

GuruFocus’s two-part interview with top fund manager Bill Nygren is a must-read, offering insights into Nygren’s incredibly successful value approach.

In Part I, Nygren talks about his rigid standards for buying stocks. “We defined our criteria at Oakmark such that companies that don’t fit our criteria are stocks that we would not want to invest in,” he says. “So for every stock we invest in, we believe it is selling at a discount to value, its value will grow with time, and that management is working in its shareholders’ interest.”

Nygren also talks about the “line in the sand” he won’t cross for each criterion. He will not:

  • Buy a stock that isn’t priced meaningfully below his team’s estimate of current business value.
  • Buy a stock unless the combination of its dividend yield and projected per-share value growth at least match what he expects for the S&P 500.
    • Invest with a management team that is willing to sacrifice per-share value growth in favor of rapidly growing the business’s size.

“It is only when all three [of these criteria] are met that we can be confident holding the stock for a long time – for Oakmark that usually means five to seven years,” Nygren says. “And it is that long time horizon that I believe gives Oakmark its greatest competitive advantage.”

In Part II, Nygren talks about oil’s plunge, and how his firm goes about assessing oil prices when analyzing energy stocks. “We look at two things to estimate the long-term market clearing price of oil,” he explained. “First, we look at the far out futures prices. When the spot price of oil fell to $40, the futures five years out still traded in the upper $60s. Additionally, analysis of marginal supply and demand for oil suggests that producers need a price in the $70s to earn an adequate return on new investment. One fact in the favor of oil and gas investors relative to other commodities is that the depletion rate of existing wells is high enough that the market requires new supply quickly or else a shortage would result. Unless you think that either the producers willingly invest at inadequate returns, that demand for oil suddenly falls sharply, or that new technology sharply reduces cost of production, prices need to recover to ‘normal’ relatively quickly.”

Nygren covers a variety of other topics, too, including inflation, process, and what “quality” means to him.