Value Investing Principles & Approach Bill Nygren

Evolution of Investing

  • Mutual funds were an advantage historically because most of the public relied on stock brokers to trade stocks. Mutual funds allowed for value to investor because it minimized the cost to entry
  • Index funds then brought new value to investors because it was able to outperform the average mutual fund while charging a lower management fee
  • Value hedge funds seeks to find the most undervalued stocks within the index to outperform to justify the management fee

Information Arbitrage

  • Information arbitrage is how you can gain an advantage when finding values in stocks
  • Getting PE for a set of stocks would have taken months in the past, but now is readily available to everyone
  • The more accessible the information becomes, the less valuable it becomes to making investment decisions

Issues with PE

  • Value investing isn’t about just investing in underpriced companies, but with the right risk profile. Example is that Nygren had an opportunity to invest in Netflix at $10, but talking to experts in the industry, there were substantial risks in the business model with the cost of programming in the future, and the lack of content. Risk profile was too high at the time, but Nygren did invest into Netflix at $200
  • The investment into Netflix at $200 was because of a new paradigm that companies can sacrifice current earnings for higher growth
  • There is a pocket of companies who trades over 100+ PE, but are missed by value investors because of the dated metric. The difficulty is in the valuation of these companies, but when done correctly can find the pocket of companies with tremendous value
  • Need to further research non-earning assets such as cash

High Level Investment Process

  • If you want risk free investment, government bonds will net you at 2% per year
  • To invest in equities, the return must be at 2% plus a premium (4% premium)
  • Want to sell at around 90% of what they think is fair, but only buy at a 33% discount

Other Note

  • Constant reference to the terminology “moat”. For more details on the definition of moats, watch this video
  • Influenced by: Warren Buffet, Benjamin Graham, John Templeton. Others include Paul Tudor Jones, Michael Steinhardt, George Soros.
  • Learnings include research on both the bullish as well as the bearish case in order to have a productive discussion
  • Typical day: Wake up at 6am, read Wall Street Journal, Chicago Tribune, CNBC Top stores of the day, Real Clear Markets top stores of the day before the going into the office for the day. Read important first call notes before the trading day starts. Most of the day is reading + researching the companies that firm is invested in or research paper from other firms. Sitting in a room with other analysts bouncing ideas from each other.
  • To earn an active management fee, you’ve got to be able to do something that a computer can’t do
  • You can’t understand how something is priced, then it’s better to not talk about it
  • Can be difficult to value whether if the market is in a bubble with just looking at historical PE because the companies that make up the large portion of the market changes over time. As an example, tech (FANG) is becoming a larger weight in the overall market and are trading in higher PE multiples because of both demand for the stocks and a choice to depress earnings for future growth
  • Was facing difficult times because in 97, 98, OAKLX refused to buy any technology stocks because no technology stocks fit their value criteria’s. Consequently, the hedge fund saw 80% outflows. But as hindsight, Nygren saw another firm that bought technology stocks outside of their core competence and ended up buying the ride down and put the firm out of business
  • Value investments require discipline to your investment process and cannot shotgun into a stock because of other popular opinions