Bill Nygren is a partner and the chief investment officer-U.S. at Harris Associates/Oakmark Funds. He is also the co-portfolio manager of two Oakmark Funds. Bill was my first guest on The JRo Show, and I've published four prior interviews with him on Fool.com, which you can find here, here, here, and here. Bill was also part of an all-star stock-picker roundtable that I hosted, which you can watch here.
Recently, Bill and I have been talking off-line over email and we decided to turn those private chats into another interview. So here you go...
John Rotonti: Bill, if all else is pretty much equal (strong enough balance sheet, good-enough business quality, strong management team, etc) would you prefer a stock with a 10% earnings yield with expected growth of only 5% versus a stock with a 1% earnings yield but with expected growth of 14%? Why or why not? What about a stock with a 7% earnings yield and expected growth of 5% versus the stock with the 1% earnings yield and expected growth of 14%?
Bill Nygren: While it's tempting to say that both stocks have a total return of 15%, part of being a value investor is heavy skepticism about extrapolating current growth rates far into the future. We don't like having to believe that a company needs to remain an above-average grower more than seven years into the future to justify the current price. Your 10% earnings yield stock, by definition, is selling at 10 times earnings. EPS growth of 5% for seven years totals 41%, so the year seven P/E is 7 times. The 1% earnings yield stock trades at 100 times earnings today, and the year seven P/E will fall to 40 times. We would clearly prefer the lower P/E stock.
Same in the second example where the low P/E stock would have a terminal P/E of 10 times and the high P/E stock again only falls to 40 times.
John Rotonti: In a recent Morningstar podcast chief investment officer for T. Rowe Price Investment Management David Giroux said, "GARP investing over long periods of time generates the highest returns in the market--beats value, beats growth, and has better risk-adjusted returns than those two as well... These companies that have these incredible characteristics where they grow organically a little bit faster than the market; have probably better free cash to conversion; lower volatility; tend to deploy capital very, very well; very, very limited secular risk. And you're basically buying companies that will grow earnings over a full cycle, let's say 10% to 13%, which is 1.5 to 2 times the market, with much lower volatility, faster organic growth, better capital allocation, less secular risk for usually, let's call it, between a market multiple and a 1.2 times market multiple. And if you just think about that, the risk/reward of those because of the structural imbalance of buyers and sellers just allows you to buy these incredible companies for valuations that they shouldn't be trading for. They should structurally trade for 1.5 or 2 times the market given those characteristics."
My take is that he's really describing value investing (buying an above-average business at an average multiple with the thesis that the multiple should be higher)? What are your thoughts?
Bill Nygren: Buying great businesses at average prices is as much value investing as buying average businesses at great prices. The idea that every business trading at a low P/E, P/B, P/anything ratio is a "value stock" is just plain stupid. Some businesses are truly inferior and deserve to sell at low multiples. GARP is a segment of value investing. Munger says always invert. What would GAUP (Growth at Unreasonable Price) be? It would be a price-insensitive style of investing, much like momentum investing. It would be the opposite of value.
John Rotonti: You recently published an article saying "Our analysts model financial statements for the next two years and then apply a growth rate for the next five years, giving us a seven-year forecast. If a stock can't grow into a below-market P/E ratio in that time, we aren't likely to consider owning it." When you wrote that you were referring to paying "premium multiples" for faster growth. But I'm curious if the P/E on your stocks seven years out is usually much less than a market multiple. I assume that the P/E on most of your stocks seven years out would be 10x or even much lower. Is that a fair assumption?
Bill Nygren: Yes, completely fair assumption. Today our median P/E two years out is barely double-digit, and we expect our companies will grow past the next two years. My statement was more to say that no matter how good the business appears today, we believe there is too much risk past seven years to make assumptions about businesses performing better than average past that time frame.
John Rotonti: I just listened to a great interview with John Armitage on Tano Santos and Michael Mauboussin's Value Investing With Legends podcast. And, in the interview, Armitage says, "Sometimes you get a visceral reaction and people don't want to rate stocks more highly...sometimes companies are anchored by the valuations of what people compare them to." And then he gives the example of HSBC and Ryanair. He says the reason HSBC trades at 6x earnings is simply because it's a "European bank" and all European Banks are rated poorly. And he says that Ryanair trades at 9x earnings even though it is clearly a much-better-than-average airline. So, my question is: are you worried that some stocks/industries will just perennially trade at low multiples, even if unjustified (in the Oakmark Fund case I'm thinking about maybe energy and traditional banks)? And, in those cases, if you are worried that the market may never give these companies the multiples that they deserve, are you less willing to base an investment thesis on multiple expansion? Or do you think that eventually the market will get it right and give these companies the justified multiple that they deserve?
Bill Nygren: This is one of the reasons we want to invest with managements who understand that when they don't have opportunities to invest where they are competitively advantaged, they need to return capital to shareholders. One of the reasons we believe banks and energy companies have become more attractive is that most all of them now understand this concept, and will return capital through dividends and repurchase rather than chasing growth that isn't there. If a company generates a lot of excess cash and buys back stock when the valuation is too low, that eventually forces the valuation higher.
Beyond that, I've always believed analysts need to be a little creative when they think about companies they should present on a comp sheet. One of my pet peeves is when an analyst is recommending the highest priced stock on the comparables sheet (perhaps akin to your Ryanair example). The analyst will say that the stock deserves the highest multiple in the industry, and I'll say it already has it! A question I will always ask is, "If these aren't the right companies to compare to, who are the real comparables it should be priced like?" I want analysts to look beyond a specific industry and compare to companies with similar characteristics. An example would be American Express never looking cheap versus other credit card lenders. That's because it's a better business. American Express is part lender to extremely credit worthy customers, but part of it is similar to Mastercard and Visa, which trade at much higher multiples. American Express doesn't have to sell cheaper than Capital One or Synchrony to be cheap.
John Rotonti: I just regained access to S&P Capiq and I'm building out my dashboard of stocks I own and that are on my watchlist. This is not a screen I'm running, but rather my main dashboard. On the dashboard I have several valuation ratios including TTM P/E, NTM P/E, TTM EV/EBIT, NTM EV/EVIT, P/B, and TTM EV/FCF. I'm curious if you would remove any or if you would add any? For example, would you maybe consider adding price-to-two-year forward EPS estimates or even price-to-three-year forward EPS estimates as a way to (1) get a better sense of what the normalized P/E may be and (2) see how a company may grow into its P/E over time? I'm not even sure if adding those two are possible, but if you think it's a good idea, I'm going to look into it.
Bill Nygren: Our favorite metric would be EV to seven-year forward EBITA. We prefer EV/EBITA to a simpler P/E because it adjusts for leverage and non-cash amortization. No data source I know of looks out seven years, but I think if you could go out at least a couple years you would get a fairer rank ordering. You didn't list any EV/sales metrics, either forward or backward looking. We find that to be a very useful metric when comparing companies in the same industry.
John Rotonti: Why EV on seven-year out EBITA? Is that just because it correlates with your seven-year models and you are capitalizing your final year of estimates?
Bill Nygren: It's because we want to give credit for expected growth, but we don't trust our ability to forecast more than seven years into the future.
John Rotonti: It seems to me that there is an idea out there popular with public market tech investors that take a VC approach to public markets investing that one massive winner can make up for a bunch of massive losers in a portfolio because of the asymmetric upside that stocks provide. What do you think about this approach to public markets investing?
Bill Nygren: It is true, and not just among tech investors. We've studied the Oakmark and Oakmark Select track records and found that despite the Funds both substantially outperforming the S&P 500 since inception, under half our stocks have outperformed. More than all the outperformance comes from winners outperforming by more than losers underperform. Think of a continuum based on risk, so starting with bonds on the far left, then value stocks, then the S&P, then high growth, then VC. It would show high percentage of success on the far left and low percentage on the far right. That would be offset by low magnitude of each success on the left and very high on the right.
John Rotonti: How much time does your team spend thinking about whether a company has historically traded peak-on-peak (peak P/E on peak fundamentals) or trough-on-trough compared to more cyclicals that may have peak fundamentals (peak earnings for this cycle) but a low P/E or trough fundamentals/earnings but a high P/E? An example of the first category may be Netflix...when subs (fundamentals) are surging, the P/E expands, and the stock moves up a lot and when subs (fundamentals) disappoint, the P/E contracts, and the shares tend to fall a lot.
Bill Nygren: We certainly don't predict an endpoint that relies on the market paying too high a price relative to what we believe a company will earn. However, the market's tendency to pay trough-on-trough is a good source of ideas for us and a point when we typically add to positions. You mentioned Netflix, which we owned when they reported disappointing sub growth. Not only did the market reduce its estimate of terminal subs for Netflix, but it drastically cut the value per sub. We thought that was a big overreaction and used it as an opportunity to add to our position. Because we added when the market reacted so negatively, we were able to more than earn back the losses we suffered when the disappointing quarter was reported.
John Rotonti: If I remember correctly, you previously owned Amazon in the Fund and sold it for a roughly 100% return. Was selling it a mistake? If you take into account where you redeployed the funds, taxes, opportunity cost, sticking to your proven framework, and everything else, do you think previously selling Amazon stock was a mistake?
Bill Nygren: We bought Amazon in 2014 and no doubt we would have made more had we kept it than reinvested the sales proceeds. Looking only at results, I guess you would conclude it was a mistake. But it's one I'd make again in the same circumstance. We bought Amazon back then because it was selling at what we believed was an unjustified discount to other retailers using an EV/sales metric. After about a year, Amazon had risen to roughly what we thought the retail business was worth. Amazon Web Services (AWS) was brand new, and analyst reports were starting to attribute large potential valuations to it. We thought it was way too early to conclude that AWS would become one of two winners in the cloud business. Because the stock price fully reflected the values that we thought we understood, our process required us to sell it. That same process has kept us out of trouble in countless other situations. Because of that, I don't look back on selling Amazon as a mistake. (And as you know, now that the AWS value seems better defined, we again own Amazon on the theory that it sells at a discount to the sum of the retail and AWS businesses.)
John Rotonti: You said that "Because the stock price fully reflected the values that we thought we understood, our process required us to sell it." Does that mean that you won't hold a stock that you believe to be fully valued even if there may be some "optionality" upside to the valuation? How do you treat optionality in your analysis?
Bill Nygren: Optionality should be incorporated on an expected value basis. Take two stocks, the first you think is worth $50 and has no optionality. The second has a business worth $25, and a lottery ticket that has a 5% chance of being worth $500. We'd add the expected value of the lottery ticket ($25) so both stocks would be worth $50. But the stock with the lottery ticket is much riskier, so we would sell it at a larger discount to fair value than we would the one that is worth a more certain $50.
John Rotonti: Do you look for ten-baggers or even multibaggers of larger size than 10x? Specifically, do you ever ask your analyst if they think the stock can 10x in a reasonable amount of time? Why or why not?
Bill Nygren: We don't set out looking for them, but have ended up owning some anyway (Visa, Mastercard, Apple, TE Connectivity, Capital One Financial). When we bought those stocks we thought we were buying fifty cents on the dollar, but the magnitude and duration of growth positively surprised us. I think a mistake young analysts often make is being too anxious to claim a win and recommend selling a successful stock too early. With experience, analysts learn to reassess their sell targets both up and down based on new fundamental information. Many times, when stocks are first recommended, the analysts present models that they think are conservative. We try to avoid conservatism in favor of better being able to rank order our Approved List based on attractiveness.
John Rotonti: Why is paying a low P/E multiple so important to compounded returns?
Bill Nygren: I'd like to slightly shift the question to, "Why is it so important to pay a low price relative to business value?" While that always translates to a low multiple on some metric, it doesn't have to mean a low P/E multiple. Efficient market theorists will say that regardless of the price you pay, you can get a fair return relative to the risk you incur. However, if you believe as we do, that most of the time a stock will trade reasonably close to intrinsic business value, then buying at a discount to business value beats a mostly efficient market. By purchasing at a discount to value, risk is reduced because the expected terminal price is a higher percentage of business value. Further, reward is amplified for the same reason, the terminal value is a higher percentage of business value. The efficient market hypothesis would say that an investor's holding period return should roughly match the change in business value during that time. To that, we add the increase in price due to the gap closing between initial price and initial value. Note that paying more than business value has exactly the opposite effect.
John Rotonti: What makes the investing process at Harris/Oakmark repeatable? Why will the proven process endure once you, Clyde McGregor, David Herro, and Tony Coniaris decide to retire?
Bill Nygren: First, let me make clear that we are not the first generation of leaders at Harris/Oakmark. The firm had a successful investing record before any of us joined, and I expect that will continue long after we are gone. Second, it is important to understand that there is a long list of current employees who contribute to our success today. Most of our investment decisions are made by people other than the four you mentioned.
I think most firms struggle with generational transitions because they typically have a dominant leader who fully controls decision making until they retire. That means that the retiring leader is replaced by someone who is new to being responsible for decision making, which of course, is a big risk. At Harris/Oakmark, our structure is much more horizontal, with democratic decision making on most products. So, when we retire, we are replaced by investors who for years have been responsible for important decisions. Further, we only hire investment teammates who believe in value investing, meaning we won't be facing a change in investment philosophy as today's leaders retire.
John Rotonti: Do you ever evaluate your portfolio based on what themes it has exposure to? Not industries or sectors, but secular themes. And, if so, do you try to add stocks from themes you may think you lack exposure to?
Bill Nygren: We would never add a stock because we think we need exposure to a certain theme. But we always look at where we might have inadvertently high exposure to a theme. Typical portfolio risk analysis looks at how portfolio exposure by industry differs from the S&P and tags as risky the industries where exposure is higher than the market--but it misses thematic risk. For example, exposure to travel could include airlines, hotels, theme parks, retailers and credit cards. Each of those could be classified in a different industry. In our portfolio today we have exposure to housing through the homebuilder Pulte, building products companies Fortune Brands and Masco, financial companies Equifax and Intercontinental Exchanges, and so on. We think that good risk management requires a thematic look at a portfolio, and a progressively higher hurdle for adding additional investments in a heavily weighted theme.
John Rotonti: Now that we know how you think about themes at the portfolio level, does your team ever start the idea generation process with a theme? In other words, do you or your analysts ever identify a secular theme you are interested in and then look for undervalued stocks that you think can profit from that theme?
Bill Nygren: It rarely happens like that. Rather, our analysts working bottom-up identify a company that they believe is undervalued. We will then typically ask if other companies with similar exposures might also be attractive. A well-designed comparables sheet can often highlight similar companies that are also attractively valued.
John Rotonti: In the last couple months Exxon announced plans to acquire Pioneer Natural, Chevron announced plans to acquire Hess, and Occidental announced plans to acquire CrownRock. It seems like there is another major round of consolidation happening in the oil and gas space. But two of your large energy holdings Conoco-Philips and EOG have so far not taken part in the consolidation. What do you think about this and what sorts of team discussions do you have when a major consolidation phase like this takes place? I'm mainly interested in what your team does with this information. Does it create discussions around the energy space and/or your energy holdings in particular?
Bill Nygren: We look at all acquisitions in an attempt to refine our estimates of fair value. The oil industry deals you mentioned raise the question of why the acquirees were willing to sell at such small premiums. We conclude that the sellers believed the buyers were also undervalued, and were therefore anxious to take stock in the acquirors. Clearly there are cost synergies in these acquisitions and by retaining equity in the acquirors, the sellers participate in that value accretion. Rarely do we conclude that a company sees its value decrease because it stood still during a consolidation wave.
John Rotonti: What is your definition of a value trap? What types of stocks do you think are the most likely to end up being value traps? Do you think that companies with low or declining terminal values are susceptible to being value traps? And what actions do you take to actively try to avoid investing in potential value traps?
Bill Nygren: We define value traps as companies where value does not increase with time. The term would primarily be applied to structurally disadvantaged companies that currently trade at low multiples. To avoid them, we require analysts to project business value seven years into the future. If the combination of expected annual value growth and dividend yield doesn't at least match the market, we won't buy them.
Of course, sometimes we expect value to grow as time passes, but we turn out to be wrong. We try to sell those mistakes as rapidly as we can. We track an analyst's estimated business value from the time the stock goes on our Approved List, and if actual growth meaningfully lags projected growth, the stock is given extra attention, including extra reviews, devil's advocate reviews and maybe even changing the analyst who covers the stock. The goal is to make the path of least resistance selling the stock rather than holding it.
John Rotonti: Do you and your team frame your investing discussion around your perception of a business's terminal values? For example, do you think that oil and gas companies have low or declining terminal values, and if so, how does that factor into your analysis and valuation? Do you think that traditional auto manufacturers have low or declining terminal values, and if so, how does that factor into your analysis and valuation? Do you avoid investing in certain businesses or industries that may seem to have terminal values that are melting ice cubes, even if those ice cubes are melting at a slow rate?
Bill Nygren: Yes, we frame investment opportunity relative to a terminal value. But very importantly, that estimated value includes deploying free cash flow. So, consider a stock at 6 times earnings where business value is flat. If the cash conversion rate is 100%, the company could reduce shares outstanding by 17% annually and grow per share value by 20%. We look at expected per share value growth plus dividend yield and require that combination to exceed what we expect for the S&P 500. If it doesn't cross that hurdle, then time is working against us, violating one of the tenets of value investing that patience will eventually be rewarded.
John Rotonti: It seems as if you are selling out of Pulte Group. What was your thesis? Was it a successful investment? And why are you selling?
Bil Nygren: Pulte traded in the $40s when consensus earnings were about $12. The consensus view was that Pulte was at peak earnings and that troughs would be negative. We believed that the company was being managed much more conservatively than in the past, making "normal" earnings much higher than consensus. Oversimplifying, consensus was peak of $12, trough of $-4, so average earnings of $4. We thought the trough would be positive $4, so average of $8. The stock doubled in a short time and we exited.
John Rotonti: During the banking mini-crisis earlier this year, Charles Schwab stock traded down to a low of $45 and has climbed back up to around $70. Do you still think the reward/risk is still attractive at $70?
Bill Nygren: By definition, it isn't as attractive at $70 as it was at $45 (our value estimate certainly didn't increase by 60%). We view Schwab as competitively advantaged because its cost structure is so much lower than the large traditional brokers. Therefore, we believe Schwab will grow at an above-average rate and deserves an above-average P/E. Additionally, we believe most investors are not giving Schwab full credit for the spread income they typically earn at normal interest rates. So, Schwab is unusual for us in that we think most investors underestimate both trend earnings and the appropriate P/E.
John Rotonti: Banks will likely face even stricter regulatory and capital requirements following the banking crisis with more oversight over when they can pay dividends and buy back stock, and by how much. How do you factor this into your thesis for big bank stocks such as Wells Fargo?
Bill Nygren: I think that is a pretty consensus view. What we think other investors are missing is that there should be a reduction in investors' required returns as the industry becomes less risky. Utilities are low growth businesses, but trade near the S&P multiple because of their low risk. Banks trade at less than half that multiple.
John Rotonti: As of December 19th the S&P 500 is up about 25% and the Nasdaq-100 is up nearly 55% YTD. What does that tell you, if anything? And what sorts of conversation are you and your team having around the performance of the U.S. stock market in 2023 and around market valuations?
Bill Nygren: First, I think it highlights how hard market timing is. Most market timers a year ago were talking about what a tough year 2023 would be for equities. Our discussion has mostly been about the growth/value performance chasm. At the end of 2021, we agreed with most value investors that low P/E stocks had become unusually undervalued because of the decade-long bull market in growth. While 2022 was a relatively good year for value, dodging much of the S&P's decline, that entirely reversed in 2023. We look back on the two-year period and are surprised that growth has slightly outperformed despite the increase in interest rates. Because high P/E stocks have their cash generation further into the future than low P/E stocks do, they generally perform worse when interest rates rise. Given the attractive starting point for low P/E stocks at the beginning of 2022, and the subsequent underperformance, we again think low P/E stocks are unusually attractive today.
John Rotonti: Thoughts on the Magnificent 7???
Bill Nygren: We own a lot of Alphabet, so I can't say we think they are all grossly overvalued. I don't have much to add to a topic that dominated financial news in 2023, but one point I think is generally missed is that the group's strong performance has really increased the technology industry concentration in the S&P 500, and to an even greater degree, the Russell Growth and NASDAQ. Many investors who have been taught to think of index investing as low risk may be unaware of how risky those investments have become.
John Rotonti: Do you monitor your portfolio exposure to factors and flows? Why or why not?
Bill Nygren: No. We don't think either affects business value.
John Rotonti: Some questions on corporate governance... With regards to corporate governance and proxies, what do you think about companies that have change of control agreements (golden parachutes) in place? I know it's quite common, but is it always a negative in your opinion? Or is it more nuanced than that?
Bill Nygren: We don't oppose all golden parachutes. We want to invest where managements are economically aligned with outside shareholders. A golden parachute is one way to compensate management for doing the right thing for shareholders even when it means losing their jobs.
John Rotonti: Sticking with corporate governance, what do you think about directors that serve multiple year terms? In other words, is it negative if a company does not have a policy for annual election of directors?
Bill Nygren: We think some degree of board stability benefits the shareholders, so we don't object to multi-year terms.
John Rotonti: When I think of strong corporate governance I think of separate CEO and Chairman (usually), annual election of directors with majority voting, a diverse qualified board, clawback policy, no repricing of options, strong director and CEO stock ownership guidelines, no excessive executive perquisites, and incentive compensation tied to metrics that drive intrinsic value per share over time. Are there any glaring absences in this list?
Bill Nygren: That seems like a thoughtful list to me. We prioritize good governance in our stock selection, which means an oversight role to assure that management is acting in the interest of outside shareholders. The most important aspect of good governance, to us, is that management recognizes that the cash a business earns is owned by the shareholders, and should be returned to the shareholders unless the business is competitively advantaged such that cash reinvested in the business is likely to earn a significant premium to the cost of capital. Absent that, shareholders have a much broader opportunity set for reinvesting that capital than the company does, which should lead to higher returns. In general, we believe that most companies retain more capital than they can invest in an advantaged manner, and should instead be returning more via repurchase and/or dividends.
John Rotonti: What do you think of executive comp tied to or partly tied to TSR or EPS growth?
Bill Nygren: Imperfect, but directionally right. I prefer metrics that are more under management control than is TSR, but it at least aligns them with outside shareholders. EPS growth is trickier as it can result from value destructive moves, such as levering up to increase EPS. But at least it has a denominator, so is tougher to game than just, say, a net income metric.
John Rotonti: In an old Value Investor Insight Interview, Lee Ainslie (the Tiger Cub founder of Maverick Capital Hedge Fund) said "We distribute every day something we call the 'Sheet of Shame.' It shows our ten largest losses, cumulatively from the inception of the position, year-to-date, month-to-date and yesterday. It's a way of focusing our attention on what's not working. There are only two ways to get something off the Sheet of Shame – which people are eager to do – either eliminate the position or increase the position and be right, earning some of the losses back." What do you think about this "Sheet of Shame" exercise?
Bill Nygren: I'm generally in favor of any mechanism that forces you to increase attention on the companies where your thesis isn't playing out. Notice I said "companies" rather than "stocks." We have what we call a "poisoned pond," which is the companies on our approved for purchase list that have fallen furthest short of our fundamental expectations. Our firm's own history has shown that companies that are underachieving our expectations tend to continue to do so. So, the goal of our poisoned pond is to prevent us from following our knee-jerk tendency as a value investor to believe that stocks that have fallen are always more attractive. By definition, when we buy a stock, our thesis is more positive than the consensus. After we've purchased a stock, we want to rigorously review new fundamental data to see if the data fits better under our thesis or under the consensus thesis. We want the path of least resistance to be selling a stock that isn't meeting our fundamental expectations.
John Rotonti: Super random question here, but what do you think it would take to be a great concentrated stock fund manager (like 10-12 stocks or less)? I'm not asking about you specifically, but just in general. And what do you think would be the biggest challenge for YOU of running a really concentrated fund? Do you think it would be the volatility? Do you think it would be difficult to pass up on so many stocks that may be "good enough" for a 20 or 40 stock fund, but that weren't good enough to make it into a ten stock fund?
Bill Nygren: I've comanaged both concentrated (20 stock) and diversified (55 stock) portfolios for some time. Almost by definition, the stocks that qualify for the higher hurdle of a concentrated fund are those where our thesis is most different from consensus. And, therefore, most likely to be wrong. Running a concentrated fund, one is tempted to pick the highest risk, highest return ideas. We've found the better strategy is to opt for more certain undervaluation than potentially the largest undervaluation. Effectively, that means looking for bigger cushions for negative surprises than looking for upside. I don't think the thought process for a 10 stock portfolio would be that much different than what we use for our 20 stock Oakmark Select Fund.
John Rotonti: Have you ever considered writing an investing book?
Bill Nygren: No. I don't think I've got enough to add compared to successful value investors who have already put their learnings into a book. Writings by Buffett, Klarman, Marks cover much of the same ground that I could write about.
John Rotonti: Have you ever considered launching a family office after you retire from day-to-day at Harris/Oakmark and shift more into a mentorship role at the firm?
Bill Nygren: No, I haven't considered that. I expect to stay with Harris/Oakmark for an extended period, eventually transferring my current responsibilities to the younger generation, but maintaining a role as an external spokesperson and internal mentor. I've been very happy having my assets invested in Harris/Oakmark and expect that to continue when I eventually retire.
John Rotonti: On my podcast The JRo Show you told me that the term compounder is like fingernails on a chalkboard to you. Is there anything else you witness about stock investing that gives you a similar reaction?
Bill Nygren: I try not to be too sensitive, but you're right that I don't like the term compounder. It elevates companies that have business value growth due to sales increasing above those that grow from excess cash generation and shrink their capitalization. Other terms I think of as misleading are:
Volatile market – Usually only used when stocks are declining as a euphemism for weak market. Used accurately, 2023 could be called volatile, but nobody ever uses it referring to upside volatility.
Stock picker's market – Usually used only when one thinks the market is overvalued, implying that good stock selection will be needed to overcome a tough market. Used accurately, it should mean that the valuation spreads are unusually high, creating more opportunity for fundamental analysis to add value.
Last, is when I'm asked, "How can you not own XYZ, it has gone up so much?" Completely backwards. They should instead ask that after a stock has declined.
