Nygren: Returns to be "Historically Large"

BusinessWeek recently took a look at the dilemma facing value investors right now — that is, with the economic outlook still extremely hazy, the big recent rally generating predictions of a pullback, and valuation metrics bouncing around quite a bit, is it time to scale back stock holdings to wait for even better prices? Or should value-minded investors be happy with the current good buys in the market?

One of those weighing in is Oakmark Fund manager Bill Nygren, who has an excellent long-term track record of picking value stocks. Nygren sees big opportunities in stocks, and he’s been putting his money where his mouth is, with about 94% of his fund’s money in equities.

Nygren says that the market has a way of playing with people’s minds, writes BusinessWeek’s David Bogoslaw. While many have been fretting over the poor returns stocks have yielded over the last ten-year period, Nygren says that “part of what makes prospects for the future so exciting is that the losses stocks have suffered in the last year create an entry level today that is very attractive, relative to most historical entry levels. … We think it’s quite likely that returns for assuming risk will be historically large.”

Nygren also offers an interesting perspective on what value investing means — or should mean. He says that while many people make the mistake of defining a value stock by its business characteristics, he defines it solely by price, Bogoslaw writes. “When Apple was trading at 200 and [earning] $5 a share, you needed to believe they were going to achieve extremely high growth rates [in earnings] to justify an entry point,” Nygren says. But when the stock got to less than $80 a share, with $6 projected earnings, its earnings multiple got to levels at which investors only needed to expect above-average earnings growth from Apple to justify buying it.

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