October 29, 2024 • 38 mins
Financial stocks could see better earnings growth this quarter than analysts’ consensus, according to Bloomberg Intelligence’s macro model. In this episode of the Inside Active podcast, host David Cohne, BI mutual fund and active management analyst, along with co-host Gina Martin Adams, BI’s chief equity strategist, speak with Bill Nygren, chief investment officer, US equity, at Harris Associates and portfolio manager at the firm’s Oakmark Funds. They discuss Nygren’s views on bringing a private equity perspective to public equity investing, the need for a long-term view, why financials make up a large allocation in the Oakmark Fund (OAKMX) and the significance of management quality in investment decisions.
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Speaker 1 (00:12):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Gina Martin Adams, chief equity
strategist at Bloomberg Intelligence. Gina, thanks for joining me today.
Speaker 2 (00:34):
Thank you for having me, David.
Speaker 1 (00:36):
So, last week you and Mike Casper put out a
Q three earnings preview. What does the earnings outlook for
the different sectors of the S and P five hundred?
Speaker 2 (00:44):
Yeah, I think it's a really interesting quarter. So a
couple of things really came out of our research. The
first is analysts are pretty pessimistic head it into the
third quarter. They're anticipating just over four percent earnings growth. Remember,
the average annual earnings growth over the last several quarters
has been closed sort of eight. Last quarter we got
about fourteen percent earnings growth, so analysts seem pretty pessimistic.
(01:06):
Most of that pessimism is coming from the energy sector,
where analysts are anticipating yet another double digit decline in earnings.
A year over year for that space, and it's become
a very big drag on the index for the last
several consecutive quarters, So not a huge, huge surprise, but
nonetheless a continuous drag there. One of the most interesting
(01:28):
things that came out of our work is just the
divergence between what analysts are saying and what companies are
telling us is likely now. Naturally, we don't get every
company in the index giving us guidance on what to expect,
but of the companies that have given us guidance, our
guidance model implies we could get up to triple the
earnings growth rate in the index relative to consensus expectations.
(01:50):
One of the segments of the index where analysts do
appear to be inordinately pessimistic is actually financials, and our
macro model for financials as we could get better earnings
growth on financials than consensus is expecting. Also, I'm particularly
keen to discuss this topic with our guest, who does
have plenty of financials exposure in his portfolio. So excited
(02:14):
to dive right into this coming earning season and more
with you today, David, Thank you well.
Speaker 1 (02:19):
It's definitely a great time to introduce our guest. I'd
like to welcome Bill Nygren, who is Chief Investment Officer
of US at Harris Associates, vice president of Oakmark Funds,
and a manager of the Oakmark Select Fund, oak LX
and Oakmark Fund. Okay, excuse me, oh ak MX. Bill,
thank you for joining us today.
Speaker 3 (02:41):
Thank you, David. Great to be with you.
Speaker 1 (02:44):
So, Bill, let's get started by asking how you got
your start in investing.
Speaker 3 (02:49):
Well, it goes back to a childhood fascination. I was
always fascinated with gambling and that line between when your
expected value of a bet is negative and you call
that gambling, or when it's positive and we call that investing.
(03:09):
And combined that with being brought up, I would say
as a value consumer, I remember being dragged at grocery
stores with my mom and we'd buy grapes at one
store if they were on sale, and if the following
week grapes weren't on sale anymore, maybe we'd have a
(03:31):
lot of cherries in the house. But our purchases always
changed based on what the best opportunity was to make
your dollar go the farthest. So when I started reading
investing books when I was in high school, The value
approach is what really appealed to me because it's how
I was raised as a consumer, and I had decided
(03:55):
by the time I was in high school that I
wanted to pursue a career in investing, so I got
an accounting degree. I still think it's kind of odd
today how many kids you talk to who want to
be in finance but don't think it's worth studying accounting.
To me, that would be the equivalent of if I
said I wanted to spend my career in South America,
(04:17):
but not bother learning Spanish. It's the language of investing.
I think you need to know it in order to
succeed as an investor. I got my business school degree
from the University of Wisconsin. I was part of their
Applied Securities Analysis program, and then started working at investment firms.
(04:38):
In nineteen eighty three, joined Harris Associates, where forty one
years later, I'm still happily employed.
Speaker 1 (04:47):
Well, speaking of Harris Associates, how would you describe the
investment philosophy of the company.
Speaker 3 (04:54):
I used to say we were old fashioned value investors,
and that's still true, but there's so few of us
today that invest that way, that I feel like people
don't really even know what that means. So updating the language,
I would say we bring a private equity perspective to
public equity investing. And what I mean by that is
(05:17):
we look for companies that we believe other investors will
look at very differently five to seven years from now
than they view them today, and then we try to
align with management teams that we think have the same
vision of what the company could ultimately be worth. So
(05:38):
it has us looking at companies that are currently out
of favor. Could be because of recent poor earnings performance,
could be because there's a bad division inside the company
that's losing money that's kind of masking what's going on
at the other side of the company. When we make
(05:59):
an investment, we're not focused on what next quarter or
next year's earnings are going to be. We're looking out
to what we think the company is capable of earning
in a five to seven year period, and then we
want to buy at a large discount to our estimate
of business value. We want that value to grow, and
we want managements that think and act like owners.
Speaker 2 (06:22):
Can we talk a little bit about this idea that
you're one of few I think you're absolutely right, because
David and I have been doing this podcast together for
a few weeks going on months now, and you're the
first value focused investor that we've talked to. It's all
been growth, So this is very exciting. Maybe talk to
us about why you think that's happening. Why is your
(06:43):
process so different than the market itself. Is it really
just that investors are generally migrating to what's been working.
Is it about a time sort of horizon shrinkage where
they're really focused more on short term return prospects and
that's led them into grow. So what's your thesis as
to why you're one of few now?
Speaker 3 (07:04):
Well? I think there are a number of reasons, and
you hit on a couple of them. One is it's
very hard to train your clients to look out as
far into the future as we think you need to
look to make value investing successful today, and that's a
challenge that a lot of our peers or competitors don't
(07:29):
want to take on. And when they shorten the timeframe
that the client is looking at, it's natural that it
also shortens their own investment horizon. Secondly, you're right that
there is some performance chasing growth is outperformed value for
a little more than a decade now, and I think
(07:51):
you see both clients that move more toward growth because
they want to be in the area that's been most successful,
and then you see managers if their philosophies to what
has been working. For example, today, I think there are
very few investors who don't look for positive price momentum
in the stocks they consider purchasing. We're one of the
(08:13):
few that the cheaper the stock gets, the more attractive
it seems to us. And then the last thing, and
I think this has been going on for a generation
at least, is gap accounting that was kind of the
basis for value investing. You know, you just buy stocks
that look cheap on price to earnings or price to
(08:35):
book value kind of patiently wait for them to move
back to regress to the mean, and that's what value
investing was. But gap accounting was really made for an
industrial world, and today in tangibles are so much more important.
You know, the customer acquisition costs, R and D spending,
(08:59):
brand advertising to name just a few. I think there
are more companies today where gap accounting just doesn't do
justice to the business value that's being created. So the
value investors that were kind of stuck in that world
of thirty years ago of just buying the statistically cheat
(09:22):
pes and price to books on gap accounting, their performance
has not been very good for quite a while, and
I think they've just kind of naturally drifted out of
the business.
Speaker 1 (09:34):
Do you use any quantitative metrics to narrow your universe
of stocks to invest in?
Speaker 3 (09:40):
Well, we use a lot of them. First, we only
invest in big businesses, so we're looking at market cap
we want to be We think stock selection is the
skill we bring to the table, and we want to
be able to take meaningful positions in the companies we
think are attractive. We also think our investors want a
(10:03):
lower risk portfolio, and we think lower risk tends to
align with bigger businesses. So the first thing we do
to narrow down our universe is we only look at
big businesses for the Oakmark Fund, and by that we
don't mean the two hundred and fifty largest market cap.
We mean the two hundred and fifty largest on fundamental
(10:26):
metrics such as sales, earnings and shareholders' equity, because we
think it's those fundamentals that bring the lower risk as
opposed to a high market valuation bringing that risk, and
then when you move to individual stock selection, I think
(10:46):
the definition of value is always the present value of
the future cash flows out to infinity that a company
would earn. But for shortcuts, we look at pe ratios,
price to cash flow ratios, price to book value ratios,
really whatever metric we think business buyers in that specific
(11:10):
industry would use if they were acquiring an entire company.
So you know, for example, in the banking industry, price
to book might still be a perfectly good metric, or
for consumer durables, price to earnings ratio might still work
pretty well. But if we're in the healthcare space, we're
(11:31):
going to look at price to earnings before R and
D spending because we want to adjust for those income
statement of investments, the gap accounting doesn't give credit to.
Speaker 2 (11:44):
Can we go back to your early statement about how
you operate a lot like a private equity fund in
kind of determining the intrinsic value of a company, maybe
dig in for us a little bit on what makes
for intrinsic value? How do you determine intrinsic value? What's
your unique approach there?
Speaker 3 (12:00):
Sure? So, first, and importantly they're two or maybe three
really major differences between US and private equity firms. Number One,
we try to invest with managements that we think behave
like owners of a business, not as hired hands. Private
(12:22):
equity is typically investing in companies where they want to
replace management. Second is fee structure, where a fraction of
a percent like most of the mutual fund industry, not
the two and twenty that private equity firms charge. And
third is liquidity. Our fund investors have the option of
(12:42):
selling out our funds on any day. Our price quotes
are kept up daily, and clearly that doesn't happen with
private equity. But I think where the similarities are, and
these are important too, is private equity is looking for
companies that are selling well under what they think think
the business might be worth. And that often means looking
(13:03):
division by division at what you think the potential is
for each of those divisions. And in some cases that
might mean selling off a division where the company doesn't
have critical mass and that division might be worth more
to someone else who's already in the industry. It might
(13:25):
mean valuing separately two streams of income. You know, an example,
one of our large holdings. Alphabet makes a lot of
money on search, but they have reported losses for all
of their venture capital investing. Well, clearly you don't want
to value all of that at a negative number, which
is what would happen if you just slapped a PE
(13:48):
multiple on their reported earnings. So we go to the
trouble of separating out each of the income streams and
trying to figure out what that what that industry would
look like at its highest and best use, and what
it could potentially be worth. Will forecast out for seven
(14:08):
years present value those numbers, and then we look for
opportunities where we can purchase at two thirds or less
of that value. That's typically what a private equity firm
is doing, because then they'll go into the market and
pay a premium to acquire the whole business. So another
of the advantages of doing this in the public markets
(14:30):
is we don't have to pay that premium, the acquisition
premium that the PE firms are paying.
Speaker 2 (14:36):
Can I just follow up real quickly on that, Is
there any commonality sort of when you're looking across and
you're valuing these businesses, you're finding businesses that are worth
two thirds or less of what you think they're worth.
Is there any kind of commonality between those businesses? What
is the market usually missing? If we're to put it
(14:57):
at painted with one big brush.
Speaker 3 (14:59):
The good news is what's available in the market right
now is there's not a lot of commonality across industries.
We're finding these in financials, in media and healthcare, and
consumer durables in the energy space. But I think what
is typical is there's some big worry that the market has,
(15:21):
and maybe it's about what the industry will look like
a decade from now. Oil and gas and auto are
two examples of that. So the transition to less carbon
intensive fuels has people worried about what the future of
the oil industry will look like, or the transition to
evs what the future will look like for the ice
(15:45):
auto related businesses. We get comfortable that these companies are
generating so much cash in their current form that by
the time you get to seven to ten years from now,
you should have already received back your entire investment. So
we think the market is overly penalizing these businesses for
(16:07):
an uncertain future quite a way quite a ways out.
The other thing that I think is pretty typical is
depressed current results in one of the business segments. Oftentimes
the companies were invested in have a couple of different divisions.
Maybe they fall between the cracks for the industry specific analysts,
(16:34):
and one of the divisions might be cyclically out of favor,
and the analysts aren't going to the trouble of trying
to normalize that division when they compute what they think
the appropriate pe multiple for a business like that would
be today.
Speaker 2 (16:50):
And I have one last follow up because I think
this topic is really fascinating. I think that most of
us think the process starts with sort of a screen
of these are all the cheap stocks, these are all
the cheap multiples, and then look in that pile. Is
that not true? Are you thinking in a different way?
Is sort of where does your process start? Does it
(17:12):
start with a multiple or does it start with, you know,
all of the constituents of an index or a group
that you're looking at from a sector perspective. How do
you begin the process of search?
Speaker 3 (17:23):
So it could start with cheap names, and sometimes it does.
Thirty years ago, that was probably almost all of our ideas.
They look cheap on price to book or price to earnings,
and that's what ignited the excitement to research it more thoroughly.
At Harris Oakmark, there are three things we look for
(17:45):
in companies. We want them less than two thirds of
our estimated business value. So sometimes a cheap price is
what first intrigues us, and that often happens after a
company reports a disappointing quarter the stock all substantially. The
second thing we look for is businesses that will grow
(18:07):
or return dividends at least in total, at least what
we expect to the market. We're trying to avoid value
traps with that criteria, so that could ignite interests in
companies that are paying large dividends but aren't growing very
much so are out of favor. And then last, we
(18:27):
want to invest side by side with good management teams,
not only competent, but managements that understand we own the
business and are trying to maximize long term per share value.
So it could start with seeing a management team that
we're highly impressed with, and then you kind of hope
(18:48):
that the stock looks cheap enough. When you start the
other direction, you're starting with the stock you know is
cheap enough, and you hope it's well managed. There's no
reason the process can't be reversed. And you know, if
we see a management team move, maybe their company gets acquired,
the former CEO then goes to a new business. You
(19:10):
know that that triggers an interest for us, and then
UH that that will be the catalyst for us doing
more serious research.
Speaker 1 (19:18):
When you're conducting fundamental research, you know you're looking at
financial statements. Do you also look at outside or external
financial reports?
Speaker 3 (19:27):
Sure, we try. We try to look at any information
that that we think sheds light onto what the business
is actually worth. So it starts with the the information
the company puts out themselves.
Speaker 2 (19:40):
UH.
Speaker 3 (19:40):
Three financial statements that are all very important the balance sheet,
income statement, and statement of cash flow. UH, and our
analysts are looking at those historically and projecting those out
for the next several years, and then a growth rate
for the five years after that. We're also looking at competitors' statements,
(20:01):
trying to understand why one company may be performing better
than the other, and is one performing so well it
can't keep that up long term, or is one underperforming
maybe for reasons that can be addressed and that gap
can be eliminated. We read Wall Street reports. Our analysts
(20:24):
here are all generalists, they know we're looking for cheap,
well managed businesses, and they look across different industry sectors.
But we'll go to the Wall Street analysts who have
been industry specialists their entire career to learn what we
can from them about how an industry has evolved to
(20:48):
the state that it's in today, what they know about
the different management teams. So we're really trying to put
together information that we can find from whatever source is
out there.
Speaker 2 (21:03):
We haven't had a chance to talk really about macro.
Do you ever include sort of macro inputs in your process?
Are there macro considerations? You know, for instance, FEDS reducing
interest rates suddenly that clearly changes a discount rate potentially
longer term, maybe pushes you towards higher duration versus lower
duration assets. Or is it really pretty pretty specifically focused
(21:27):
on this intrinsic value calculation.
Speaker 3 (21:30):
It's very very much focused on a bottom up company
by company analysis. And I joke that we we do
have a macro overlay, but it's always the same, and
it's that the world will be normal seven years from now,
and to us, normal means an average GDP growth rate,
(21:51):
an interest rate that's a little bit higher than the
inflation rate, and normally it sounds like that's the same
as saying macro doesn't impact us, but at turning points
it can be really important. Coming out of the Great
Financial Crisis two thousand and eight, two thousand and nine,
(22:13):
the idea that the world would be returned to normal
within seven years was a pretty optimistic point of view.
In twenty twenty, the idea that travel would return back
to normal over the next five to seven years was
a wildly optimistic point of view. So normally the answer
is we don't have a macro overlay, but when we do,
(22:36):
it's because the idea that normal will be returning is
an outlier view.
Speaker 2 (22:42):
So when do you think about selling. We've talked a
lot about buying with a seven year time horizon, five
to seven year time horizon, we think longer term. When
do you think about shaving positions?
Speaker 3 (22:54):
Yeah, it's funny, Gina. The typical viewpoint out there is
it's really easy to buy stocks and very hard to
figure out when to sell them. I think people have
that backwards. If you put in the work when you
buy a company to really know why you own it,
then the sell decision becomes easy. And it's that one
(23:17):
of the important reasons that you bought the stock no
longer exists. So for us, we'll only buy a stock
if we think it's a selling at a large discount
to value, if it's growing and returning capital at a
combined pace at least as fast as the market, and
if it's managed by shareholder friendly management teams. We will
(23:39):
sell if any one of those three is no longer true.
So obviously our preferred reason to sell is we think
a business is worth one hundred. It's selling at sixty
and over a couple of years values grown to one
hundred and fifteen, and so is the stock price. We're
happy to move on, take profits and reinvest in something
(24:03):
that's selling at a large discount. Again, but we'll also
sell if we lose confidence in the business being able
to grow, because we want it to grow at least
as fast as the market. And if we see management
activity that we think is inconsistent with maximizing long term
per share value, will also sell. So maybe we've identified
(24:26):
this nicely cash generative company that's been returning a lot
of capital to shareholders, and suddenly they make a big acquisition,
they issue stock to do it, and we think they
paid too much for the business and it grew. The
size of the business might help management increase their own compensation,
(24:48):
but it decreased per share business value for us. We
would say we made a mistake in identifying high quality management,
and we would sell I wanted.
Speaker 1 (25:00):
To ask you. You know, Oakmark selects very concentrated, and
so I wanted to know if you have any type
of risk management process you know, due to that concentration
or any other risk you might think of.
Speaker 3 (25:14):
Well, I think part of risk management is helping investors
know what funds are appropriate for them, and so I
would say risk management starts there by explaining to an
investor that it's probably not appropriate for them to put
their entire net worth in a fund that has only
(25:34):
twenty names in it. So we manage Oakmark Select as
if the shareholders have already taken some of the responsibility
of risk management for their personal portfolio into their own
hands and have allocated an appropriate percentage to us. Beyond that,
(25:58):
the risk management for both Oakmark Fund and Oakmark Select
is very similar. We start with an investment approach with
the three criteria I've mentioned. Each criteria we believe lowers
risk and increases return if you buy at a discount
to value, if you're wrong, the stock usually loses less
(26:21):
than if you pay a premium to value and you're wrong.
If the business is growing, then as time goes by,
you're kind of growing your way out of a risky position.
And if management behaves in the shareholder's interest, they're likely
to take steps during the time you own the stock
that increase value beyond what you were able to model
(26:45):
the day you purchased it. So that's all important risk management.
I think how we position size is important. We think
we could be wrong on any one of our ideas,
so in the Oakmark Fund, we don't want to have
more than four percent in any single idea. In the
(27:06):
Select Fund, that number is more like a double digit
percentage investment that we would typically trim if the stocks
grew to the point that they were larger than that.
In our portfolio, we position size based on attractiveness of
the idea, not on market cap. So in the Oakmark Fund,
(27:30):
where we don't want to have more than four or
five percent in one name, there are three names in
the S and P five hundred we couldn't even market
weight if we like them because they have more than
five percent. We don't think that's appropriate for an individual investor,
So we position size based on how attractive we think
the risk return profile is. It's kind of funny our
(27:53):
two largest holdings and on any given day it can
get bounced back and forth between them at about three
percent of the Portfoliolio alphabet and five Serve alphabet is
it between eighty and ninety percent of the SMP waiting
five Serve is at fifteen times the SMP weighting. It's
(28:13):
because we think about risk is losing money, not tracking error,
not standard deviation. But if we're wrong, how much money
could we lose? And based on how attractive we think
those two stocks are, we think they merit three percent
each in the portfolio. It's just a very different way
(28:33):
of thinking about risk than most investors approach that topic today.
Speaker 2 (28:41):
That's really interesting. Can you talk to us a little
bit about your position in financials. I mentioned at the
forefront that you know, well, we're very short term thinking
really just about the third quarter coming, and financial seems
to be an opportunity. Your portfolio does tend to skew
toward financials from a sector allocation perspective. What are you
seeing there? What are some of the long term themes
(29:03):
maybe that you see in the financial sector relative to others.
Speaker 3 (29:08):
So first point I'd like to make. We do have
a large investment in financials. It's about forty percent of
the portfolio and the Oakmart Fund. But the way financials
as a sector is defined today, it's a very broad definition.
I think sometimes people hear forty percent in financials, they
think that means forty percent in banks, and less than
(29:31):
half of our financials waiting is in banks. But we
do have banks, and we like them a lot. But
we also have insurance companies, we have some of the
credit card processing companies, asset management businesses, exchanges data, financial
(29:52):
data companies. So across that forty percent, it's pretty widespread.
But I'll start with banks. Most of them are selling
at small premiums to book value, summer significant discounts, single
digit PE multiples. We think much better managed than they
were when we went into the GFC fifteen years ago,
(30:16):
and importantly, much more capital to support the assets that
they have on their balance sheet. That serves to significantly
lower the risk. We don't think other investors have lowered
their required returns as they would appropriately do, as these
companies have been de risked. Insurance businesses AIG Property and
(30:39):
Casualty Core Bridge Life Insurance both single digit pes, both
discounts to book value. Company like Charles Schwab that sells
in the upper sixties today, their earnings are depressed because
of investments in intermediate term bonds that they had purchased
(31:03):
several years ago. Those aren't the bonds that they purchased.
We're at a price where the yields are not as
high as what you can get in the market today.
But we're already a couple of years into rolling off
five years worth of bonds. There we think after those
are gone and they're replaced with current market yields, this
(31:23):
is a company that could be earning close to six
dollars a share, very financially advantaged relative to their asset
management peers. So you know, it's not a monolithic forty
percent of the portfolio. There are different reasons for each
of them, but the theme is the stocks are really
(31:44):
cheap relative to what we think the businesses are worth.
Speaker 2 (31:47):
Can you talk to us a little bit about why
this is something that I've struggled with in our models too.
Is it feels like the stocks are perpetually cheap in
financials right, And I can't help but wonder if they're
this permanent elevated risk premium that investors are requiring to
get into this space just as a reflection of a
(32:09):
very dated analysis of financials based upon the financial crisis
of two thousand and eight two thousand and nine, or
if there's something more that's just holding them back.
Speaker 3 (32:19):
So I think there are a couple things. One is,
there are absolutely a lot of value investors that were
overweight financials in two thousand and eight. We lost a
lot of money in financials at that point in time too.
I wish I could say we were smart enough to
have seen the financial crisis coming, but we weren't. And
(32:41):
I think a lot of those investors learned the wrong lesson.
Instead of saying, you don't want to go into a
real estate collapse with companies that are levered bets on
real estate loans, they said financial companies are too difficult
to understand, and I'm never going to purchase them again
the rest of my career. We think that, we think
(33:04):
they're making a mistake doing that. I think there are
other investors that fear over regulation of the sector, And
a question we often get asked is isn't it possible
that the banks could get regulated so far that they
almost become like electric utilities? And well, we think that's unlikely.
(33:28):
That's not such a scary outcome, given that electric utilities
sell at mid teens multiples and twice book value. The
financial bank stocks will go up a lot if they
got priced like electric utilities. And then, third, the question
you're asking specific to banks is being applied more broadly
(33:49):
today in a lot of academic circles with just value
stocks in general? Are there so few value investors out
there that the cheap stocks just keep under And that's
why it's so important to us that managements have the
mentality that they are only going to reinvest their earnings
(34:10):
in the business when they have great organic growth opportunities
where they're competitively advantaged, and if those don't exist, they're
going to give the capital back to shareholders, either as
dividends or share repurchase. We are very happy to invest
when management teams look at their stock and say there's
(34:31):
almost nothing we can invest in that will give us
as high a return as the stock will, So we're
radically reallocating capital to share repurchase. One of the names.
We've got a large position in General Motors. They've been
trying to diversify away from Ice Auto for probably the
(34:54):
past decade, and just this past year they kind of said,
screw it. If the market's not to value us at
even five times earnings, we're going to use all this
capital to buy back stock. They're buying back about twenty
five percent of the company this year and are committed
to continue doing that. So in four to five years,
(35:15):
either the market has to respond or they will have
repurchased all the shares except ours because we're not selling
at this price. And I think if more managements had
that mentality, that they view a cheap stock price as
an opportunity rather than the problem, you'd see this undervaluation
(35:36):
solving itself. They don't have to just be out there
in a giant pity party. They can solve this problem
on their own.
Speaker 1 (35:45):
I want to go back to something you said earlier.
You mentioned investment books, and so as our final question,
I'd love to know what your favorite investment books are.
Speaker 3 (35:55):
Well, you can't be a value investor and not have
your favorite book be one about war and Buffett, So
there are a lot of them written. I'm not going
to elevate one above the others, but I think anyone
who's intrigued with value investing needs to read a book
about Warren Buffett. But I think the mistake a lot
of value investors make is reading more and more and
(36:17):
more about Buffett is kind of like comfort food. It
makes you feel good, but it's not really good for you.
So I think it's good for investors to branch out.
And I like the books that have a chapter each
on lots of different successful investors from a lot of
different styles. There's a William Green book, Richard Wiser, Happier,
(36:44):
there are some older books market Wizards, New market Wizards,
And I find I learn as much reading about a
growth investor or, a macro investor, a commodity investor and
what has made them successful as I do reading another
book about another investor that does things like we do
(37:05):
at Oakmark. And I think you can broaden it and
look beyond investors, look at people who've been really successful
building businesses. I love the book New Rules Rule by
Read Hastings, the CEO of Netflix, which we've sold out of,
because it's become a market favorite again, but when it
was out of favor, it was an important holding for us.
(37:29):
I think you can read books about successful politicians, successful athletes,
you learn how they have had to make sacrifices throughout
their lives to achieve the greatness that they achieved in
their specific, their specific careers. And I think that's a
(37:49):
lesson that's really important to learn, especially as we have
a younger workforce today that at a young age seems
much more focused on work life balance than they ever
used to be. So you know, maybe maybe you know,
after forty years in this industry, I'm just becoming another
crotchety old man. But I don't think that change is
(38:12):
helpful for individuals that really want to try and rise
to the top of the pyramid in their profession.
Speaker 1 (38:19):
Oh, definitely makes sense.
Speaker 3 (38:21):
This is great, Bill, Thanks David, Thanks Gina.
Speaker 1 (38:24):
It was a pleasure, and Gina, thank you again for
joining today.
Speaker 2 (38:26):
Oh my pleasure. Thank you so much, David, and really
nice to meet you. Bill. Thanks so much for sharing
your journey and your process with us. We all learned
a lot.
Speaker 1 (38:34):
Until our next episode, This is David Cohne with Inside
Act
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Gina Martin Adams, chief equity
strategist at Bloomberg Intelligence. Gina, thanks for joining me today.
Speaker 2 (00:34):
Thank you for having me, David.
Speaker 1 (00:36):
So, last week you and Mike Casper put out a
Q three earnings preview. What does the earnings outlook for
the different sectors of the S and P five hundred?
Speaker 2 (00:44):
Yeah, I think it's a really interesting quarter. So a
couple of things really came out of our research. The
first is analysts are pretty pessimistic head it into the
third quarter. They're anticipating just over four percent earnings growth. Remember,
the average annual earnings growth over the last several quarters
has been closed sort of eight. Last quarter we got
about fourteen percent earnings growth, so analysts seem pretty pessimistic.
(01:06):
Most of that pessimism is coming from the energy sector,
where analysts are anticipating yet another double digit decline in earnings.
A year over year for that space, and it's become
a very big drag on the index for the last
several consecutive quarters, So not a huge, huge surprise, but
nonetheless a continuous drag there. One of the most interesting
(01:28):
things that came out of our work is just the
divergence between what analysts are saying and what companies are
telling us is likely now. Naturally, we don't get every
company in the index giving us guidance on what to expect,
but of the companies that have given us guidance, our
guidance model implies we could get up to triple the
earnings growth rate in the index relative to consensus expectations.
(01:50):
One of the segments of the index where analysts do
appear to be inordinately pessimistic is actually financials, and our
macro model for financials as we could get better earnings
growth on financials than consensus is expecting. Also, I'm particularly
keen to discuss this topic with our guest, who does
have plenty of financials exposure in his portfolio. So excited
(02:14):
to dive right into this coming earning season and more
with you today, David, Thank you well.
Speaker 1 (02:19):
It's definitely a great time to introduce our guest. I'd
like to welcome Bill Nygren, who is Chief Investment Officer
of US at Harris Associates, vice president of Oakmark Funds,
and a manager of the Oakmark Select Fund, oak LX
and Oakmark Fund. Okay, excuse me, oh ak MX. Bill,
thank you for joining us today.
Speaker 3 (02:41):
Thank you, David. Great to be with you.
Speaker 1 (02:44):
So, Bill, let's get started by asking how you got
your start in investing.
Speaker 3 (02:49):
Well, it goes back to a childhood fascination. I was
always fascinated with gambling and that line between when your
expected value of a bet is negative and you call
that gambling, or when it's positive and we call that investing.
(03:09):
And combined that with being brought up, I would say
as a value consumer, I remember being dragged at grocery
stores with my mom and we'd buy grapes at one
store if they were on sale, and if the following
week grapes weren't on sale anymore, maybe we'd have a
(03:31):
lot of cherries in the house. But our purchases always
changed based on what the best opportunity was to make
your dollar go the farthest. So when I started reading
investing books when I was in high school, The value
approach is what really appealed to me because it's how
I was raised as a consumer, and I had decided
(03:55):
by the time I was in high school that I
wanted to pursue a career in investing, so I got
an accounting degree. I still think it's kind of odd
today how many kids you talk to who want to
be in finance but don't think it's worth studying accounting.
To me, that would be the equivalent of if I
said I wanted to spend my career in South America,
(04:17):
but not bother learning Spanish. It's the language of investing.
I think you need to know it in order to
succeed as an investor. I got my business school degree
from the University of Wisconsin. I was part of their
Applied Securities Analysis program, and then started working at investment firms.
(04:38):
In nineteen eighty three, joined Harris Associates, where forty one
years later, I'm still happily employed.
Speaker 1 (04:47):
Well, speaking of Harris Associates, how would you describe the
investment philosophy of the company.
Speaker 3 (04:54):
I used to say we were old fashioned value investors,
and that's still true, but there's so few of us
today that invest that way, that I feel like people
don't really even know what that means. So updating the language,
I would say we bring a private equity perspective to
public equity investing. And what I mean by that is
(05:17):
we look for companies that we believe other investors will
look at very differently five to seven years from now
than they view them today, and then we try to
align with management teams that we think have the same
vision of what the company could ultimately be worth. So
(05:38):
it has us looking at companies that are currently out
of favor. Could be because of recent poor earnings performance,
could be because there's a bad division inside the company
that's losing money that's kind of masking what's going on
at the other side of the company. When we make
(05:59):
an investment, we're not focused on what next quarter or
next year's earnings are going to be. We're looking out
to what we think the company is capable of earning
in a five to seven year period, and then we
want to buy at a large discount to our estimate
of business value. We want that value to grow, and
we want managements that think and act like owners.
Speaker 2 (06:22):
Can we talk a little bit about this idea that
you're one of few I think you're absolutely right, because
David and I have been doing this podcast together for
a few weeks going on months now, and you're the
first value focused investor that we've talked to. It's all
been growth, So this is very exciting. Maybe talk to
us about why you think that's happening. Why is your
(06:43):
process so different than the market itself. Is it really
just that investors are generally migrating to what's been working.
Is it about a time sort of horizon shrinkage where
they're really focused more on short term return prospects and
that's led them into grow. So what's your thesis as
to why you're one of few now?
Speaker 3 (07:04):
Well? I think there are a number of reasons, and
you hit on a couple of them. One is it's
very hard to train your clients to look out as
far into the future as we think you need to
look to make value investing successful today, and that's a
challenge that a lot of our peers or competitors don't
(07:29):
want to take on. And when they shorten the timeframe
that the client is looking at, it's natural that it
also shortens their own investment horizon. Secondly, you're right that
there is some performance chasing growth is outperformed value for
a little more than a decade now, and I think
(07:51):
you see both clients that move more toward growth because
they want to be in the area that's been most successful,
and then you see managers if their philosophies to what
has been working. For example, today, I think there are
very few investors who don't look for positive price momentum
in the stocks they consider purchasing. We're one of the
(08:13):
few that the cheaper the stock gets, the more attractive
it seems to us. And then the last thing, and
I think this has been going on for a generation
at least, is gap accounting that was kind of the
basis for value investing. You know, you just buy stocks
that look cheap on price to earnings or price to
(08:35):
book value kind of patiently wait for them to move
back to regress to the mean, and that's what value
investing was. But gap accounting was really made for an
industrial world, and today in tangibles are so much more important.
You know, the customer acquisition costs, R and D spending,
(08:59):
brand advertising to name just a few. I think there
are more companies today where gap accounting just doesn't do
justice to the business value that's being created. So the
value investors that were kind of stuck in that world
of thirty years ago of just buying the statistically cheat
(09:22):
pes and price to books on gap accounting, their performance
has not been very good for quite a while, and
I think they've just kind of naturally drifted out of
the business.
Speaker 1 (09:34):
Do you use any quantitative metrics to narrow your universe
of stocks to invest in?
Speaker 3 (09:40):
Well, we use a lot of them. First, we only
invest in big businesses, so we're looking at market cap
we want to be We think stock selection is the
skill we bring to the table, and we want to
be able to take meaningful positions in the companies we
think are attractive. We also think our investors want a
(10:03):
lower risk portfolio, and we think lower risk tends to
align with bigger businesses. So the first thing we do
to narrow down our universe is we only look at
big businesses for the Oakmark Fund, and by that we
don't mean the two hundred and fifty largest market cap.
We mean the two hundred and fifty largest on fundamental
(10:26):
metrics such as sales, earnings and shareholders' equity, because we
think it's those fundamentals that bring the lower risk as
opposed to a high market valuation bringing that risk, and
then when you move to individual stock selection, I think
(10:46):
the definition of value is always the present value of
the future cash flows out to infinity that a company
would earn. But for shortcuts, we look at pe ratios,
price to cash flow ratios, price to book value ratios,
really whatever metric we think business buyers in that specific
(11:10):
industry would use if they were acquiring an entire company.
So you know, for example, in the banking industry, price
to book might still be a perfectly good metric, or
for consumer durables, price to earnings ratio might still work
pretty well. But if we're in the healthcare space, we're
(11:31):
going to look at price to earnings before R and
D spending because we want to adjust for those income
statement of investments, the gap accounting doesn't give credit to.
Speaker 2 (11:44):
Can we go back to your early statement about how
you operate a lot like a private equity fund in
kind of determining the intrinsic value of a company, maybe
dig in for us a little bit on what makes
for intrinsic value? How do you determine intrinsic value? What's
your unique approach there?
Speaker 3 (12:00):
Sure? So, first, and importantly they're two or maybe three
really major differences between US and private equity firms. Number One,
we try to invest with managements that we think behave
like owners of a business, not as hired hands. Private
(12:22):
equity is typically investing in companies where they want to
replace management. Second is fee structure, where a fraction of
a percent like most of the mutual fund industry, not
the two and twenty that private equity firms charge. And
third is liquidity. Our fund investors have the option of
(12:42):
selling out our funds on any day. Our price quotes
are kept up daily, and clearly that doesn't happen with
private equity. But I think where the similarities are, and
these are important too, is private equity is looking for
companies that are selling well under what they think think
the business might be worth. And that often means looking
(13:03):
division by division at what you think the potential is
for each of those divisions. And in some cases that
might mean selling off a division where the company doesn't
have critical mass and that division might be worth more
to someone else who's already in the industry. It might
(13:25):
mean valuing separately two streams of income. You know, an example,
one of our large holdings. Alphabet makes a lot of
money on search, but they have reported losses for all
of their venture capital investing. Well, clearly you don't want
to value all of that at a negative number, which
is what would happen if you just slapped a PE
(13:48):
multiple on their reported earnings. So we go to the
trouble of separating out each of the income streams and
trying to figure out what that what that industry would
look like at its highest and best use, and what
it could potentially be worth. Will forecast out for seven
(14:08):
years present value those numbers, and then we look for
opportunities where we can purchase at two thirds or less
of that value. That's typically what a private equity firm
is doing, because then they'll go into the market and
pay a premium to acquire the whole business. So another
of the advantages of doing this in the public markets
(14:30):
is we don't have to pay that premium, the acquisition
premium that the PE firms are paying.
Speaker 2 (14:36):
Can I just follow up real quickly on that, Is
there any commonality sort of when you're looking across and
you're valuing these businesses, you're finding businesses that are worth
two thirds or less of what you think they're worth.
Is there any kind of commonality between those businesses? What
is the market usually missing? If we're to put it
(14:57):
at painted with one big brush.
Speaker 3 (14:59):
The good news is what's available in the market right
now is there's not a lot of commonality across industries.
We're finding these in financials, in media and healthcare, and
consumer durables in the energy space. But I think what
is typical is there's some big worry that the market has,
(15:21):
and maybe it's about what the industry will look like
a decade from now. Oil and gas and auto are
two examples of that. So the transition to less carbon
intensive fuels has people worried about what the future of
the oil industry will look like, or the transition to
evs what the future will look like for the ice
(15:45):
auto related businesses. We get comfortable that these companies are
generating so much cash in their current form that by
the time you get to seven to ten years from now,
you should have already received back your entire investment. So
we think the market is overly penalizing these businesses for
(16:07):
an uncertain future quite a way quite a ways out.
The other thing that I think is pretty typical is
depressed current results in one of the business segments. Oftentimes
the companies were invested in have a couple of different divisions.
Maybe they fall between the cracks for the industry specific analysts,
(16:34):
and one of the divisions might be cyclically out of favor,
and the analysts aren't going to the trouble of trying
to normalize that division when they compute what they think
the appropriate pe multiple for a business like that would
be today.
Speaker 2 (16:50):
And I have one last follow up because I think
this topic is really fascinating. I think that most of
us think the process starts with sort of a screen
of these are all the cheap stocks, these are all
the cheap multiples, and then look in that pile. Is
that not true? Are you thinking in a different way?
Is sort of where does your process start? Does it
(17:12):
start with a multiple or does it start with, you know,
all of the constituents of an index or a group
that you're looking at from a sector perspective. How do
you begin the process of search?
Speaker 3 (17:23):
So it could start with cheap names, and sometimes it does.
Thirty years ago, that was probably almost all of our ideas.
They look cheap on price to book or price to earnings,
and that's what ignited the excitement to research it more thoroughly.
At Harris Oakmark, there are three things we look for
(17:45):
in companies. We want them less than two thirds of
our estimated business value. So sometimes a cheap price is
what first intrigues us, and that often happens after a
company reports a disappointing quarter the stock all substantially. The
second thing we look for is businesses that will grow
(18:07):
or return dividends at least in total, at least what
we expect to the market. We're trying to avoid value
traps with that criteria, so that could ignite interests in
companies that are paying large dividends but aren't growing very
much so are out of favor. And then last, we
(18:27):
want to invest side by side with good management teams,
not only competent, but managements that understand we own the
business and are trying to maximize long term per share value.
So it could start with seeing a management team that
we're highly impressed with, and then you kind of hope
(18:48):
that the stock looks cheap enough. When you start the
other direction, you're starting with the stock you know is
cheap enough, and you hope it's well managed. There's no
reason the process can't be reversed. And you know, if
we see a management team move, maybe their company gets acquired,
the former CEO then goes to a new business. You
(19:10):
know that that triggers an interest for us, and then
UH that that will be the catalyst for us doing
more serious research.
Speaker 1 (19:18):
When you're conducting fundamental research, you know you're looking at
financial statements. Do you also look at outside or external
financial reports?
Speaker 3 (19:27):
Sure, we try. We try to look at any information
that that we think sheds light onto what the business
is actually worth. So it starts with the the information
the company puts out themselves.
Speaker 2 (19:40):
UH.
Speaker 3 (19:40):
Three financial statements that are all very important the balance sheet,
income statement, and statement of cash flow. UH, and our
analysts are looking at those historically and projecting those out
for the next several years, and then a growth rate
for the five years after that. We're also looking at competitors' statements,
(20:01):
trying to understand why one company may be performing better
than the other, and is one performing so well it
can't keep that up long term, or is one underperforming
maybe for reasons that can be addressed and that gap
can be eliminated. We read Wall Street reports. Our analysts
(20:24):
here are all generalists, they know we're looking for cheap,
well managed businesses, and they look across different industry sectors.
But we'll go to the Wall Street analysts who have
been industry specialists their entire career to learn what we
can from them about how an industry has evolved to
(20:48):
the state that it's in today, what they know about
the different management teams. So we're really trying to put
together information that we can find from whatever source is
out there.
Speaker 2 (21:03):
We haven't had a chance to talk really about macro.
Do you ever include sort of macro inputs in your process?
Are there macro considerations? You know, for instance, FEDS reducing
interest rates suddenly that clearly changes a discount rate potentially
longer term, maybe pushes you towards higher duration versus lower
duration assets. Or is it really pretty pretty specifically focused
(21:27):
on this intrinsic value calculation.
Speaker 3 (21:30):
It's very very much focused on a bottom up company
by company analysis. And I joke that we we do
have a macro overlay, but it's always the same, and
it's that the world will be normal seven years from now,
and to us, normal means an average GDP growth rate,
(21:51):
an interest rate that's a little bit higher than the
inflation rate, and normally it sounds like that's the same
as saying macro doesn't impact us, but at turning points
it can be really important. Coming out of the Great
Financial Crisis two thousand and eight, two thousand and nine,
(22:13):
the idea that the world would be returned to normal
within seven years was a pretty optimistic point of view.
In twenty twenty, the idea that travel would return back
to normal over the next five to seven years was
a wildly optimistic point of view. So normally the answer
is we don't have a macro overlay, but when we do,
(22:36):
it's because the idea that normal will be returning is
an outlier view.
Speaker 2 (22:42):
So when do you think about selling. We've talked a
lot about buying with a seven year time horizon, five
to seven year time horizon, we think longer term. When
do you think about shaving positions?
Speaker 3 (22:54):
Yeah, it's funny, Gina. The typical viewpoint out there is
it's really easy to buy stocks and very hard to
figure out when to sell them. I think people have
that backwards. If you put in the work when you
buy a company to really know why you own it,
then the sell decision becomes easy. And it's that one
(23:17):
of the important reasons that you bought the stock no
longer exists. So for us, we'll only buy a stock
if we think it's a selling at a large discount
to value, if it's growing and returning capital at a
combined pace at least as fast as the market, and
if it's managed by shareholder friendly management teams. We will
(23:39):
sell if any one of those three is no longer true.
So obviously our preferred reason to sell is we think
a business is worth one hundred. It's selling at sixty
and over a couple of years values grown to one
hundred and fifteen, and so is the stock price. We're
happy to move on, take profits and reinvest in something
(24:03):
that's selling at a large discount. Again, but we'll also
sell if we lose confidence in the business being able
to grow, because we want it to grow at least
as fast as the market. And if we see management
activity that we think is inconsistent with maximizing long term
per share value, will also sell. So maybe we've identified
(24:26):
this nicely cash generative company that's been returning a lot
of capital to shareholders, and suddenly they make a big acquisition,
they issue stock to do it, and we think they
paid too much for the business and it grew. The
size of the business might help management increase their own compensation,
(24:48):
but it decreased per share business value for us. We
would say we made a mistake in identifying high quality management,
and we would sell I wanted.
Speaker 1 (25:00):
To ask you. You know, Oakmark selects very concentrated, and
so I wanted to know if you have any type
of risk management process you know, due to that concentration
or any other risk you might think of.
Speaker 3 (25:14):
Well, I think part of risk management is helping investors
know what funds are appropriate for them, and so I
would say risk management starts there by explaining to an
investor that it's probably not appropriate for them to put
their entire net worth in a fund that has only
(25:34):
twenty names in it. So we manage Oakmark Select as
if the shareholders have already taken some of the responsibility
of risk management for their personal portfolio into their own
hands and have allocated an appropriate percentage to us. Beyond that,
(25:58):
the risk management for both Oakmark Fund and Oakmark Select
is very similar. We start with an investment approach with
the three criteria I've mentioned. Each criteria we believe lowers
risk and increases return if you buy at a discount
to value, if you're wrong, the stock usually loses less
(26:21):
than if you pay a premium to value and you're wrong.
If the business is growing, then as time goes by,
you're kind of growing your way out of a risky position.
And if management behaves in the shareholder's interest, they're likely
to take steps during the time you own the stock
that increase value beyond what you were able to model
(26:45):
the day you purchased it. So that's all important risk management.
I think how we position size is important. We think
we could be wrong on any one of our ideas,
so in the Oakmark Fund, we don't want to have
more than four percent in any single idea. In the
(27:06):
Select Fund, that number is more like a double digit
percentage investment that we would typically trim if the stocks
grew to the point that they were larger than that.
In our portfolio, we position size based on attractiveness of
the idea, not on market cap. So in the Oakmark Fund,
(27:30):
where we don't want to have more than four or
five percent in one name, there are three names in
the S and P five hundred we couldn't even market
weight if we like them because they have more than
five percent. We don't think that's appropriate for an individual investor,
So we position size based on how attractive we think
the risk return profile is. It's kind of funny our
(27:53):
two largest holdings and on any given day it can
get bounced back and forth between them at about three
percent of the Portfoliolio alphabet and five Serve alphabet is
it between eighty and ninety percent of the SMP waiting
five Serve is at fifteen times the SMP weighting. It's
(28:13):
because we think about risk is losing money, not tracking error,
not standard deviation. But if we're wrong, how much money
could we lose? And based on how attractive we think
those two stocks are, we think they merit three percent
each in the portfolio. It's just a very different way
(28:33):
of thinking about risk than most investors approach that topic today.
Speaker 2 (28:41):
That's really interesting. Can you talk to us a little
bit about your position in financials. I mentioned at the
forefront that you know, well, we're very short term thinking
really just about the third quarter coming, and financial seems
to be an opportunity. Your portfolio does tend to skew
toward financials from a sector allocation perspective. What are you
seeing there? What are some of the long term themes
(29:03):
maybe that you see in the financial sector relative to others.
Speaker 3 (29:08):
So first point I'd like to make. We do have
a large investment in financials. It's about forty percent of
the portfolio and the Oakmart Fund. But the way financials
as a sector is defined today, it's a very broad definition.
I think sometimes people hear forty percent in financials, they
think that means forty percent in banks, and less than
(29:31):
half of our financials waiting is in banks. But we
do have banks, and we like them a lot. But
we also have insurance companies, we have some of the
credit card processing companies, asset management businesses, exchanges data, financial
(29:52):
data companies. So across that forty percent, it's pretty widespread.
But I'll start with banks. Most of them are selling
at small premiums to book value, summer significant discounts, single
digit PE multiples. We think much better managed than they
were when we went into the GFC fifteen years ago,
(30:16):
and importantly, much more capital to support the assets that
they have on their balance sheet. That serves to significantly
lower the risk. We don't think other investors have lowered
their required returns as they would appropriately do, as these
companies have been de risked. Insurance businesses AIG Property and
(30:39):
Casualty Core Bridge Life Insurance both single digit pes, both
discounts to book value. Company like Charles Schwab that sells
in the upper sixties today, their earnings are depressed because
of investments in intermediate term bonds that they had purchased
(31:03):
several years ago. Those aren't the bonds that they purchased.
We're at a price where the yields are not as
high as what you can get in the market today.
But we're already a couple of years into rolling off
five years worth of bonds. There we think after those
are gone and they're replaced with current market yields, this
(31:23):
is a company that could be earning close to six
dollars a share, very financially advantaged relative to their asset
management peers. So you know, it's not a monolithic forty
percent of the portfolio. There are different reasons for each
of them, but the theme is the stocks are really
(31:44):
cheap relative to what we think the businesses are worth.
Speaker 2 (31:47):
Can you talk to us a little bit about why
this is something that I've struggled with in our models too.
Is it feels like the stocks are perpetually cheap in
financials right, And I can't help but wonder if they're
this permanent elevated risk premium that investors are requiring to
get into this space just as a reflection of a
(32:09):
very dated analysis of financials based upon the financial crisis
of two thousand and eight two thousand and nine, or
if there's something more that's just holding them back.
Speaker 3 (32:19):
So I think there are a couple things. One is,
there are absolutely a lot of value investors that were
overweight financials in two thousand and eight. We lost a
lot of money in financials at that point in time too.
I wish I could say we were smart enough to
have seen the financial crisis coming, but we weren't. And
(32:41):
I think a lot of those investors learned the wrong lesson.
Instead of saying, you don't want to go into a
real estate collapse with companies that are levered bets on
real estate loans, they said financial companies are too difficult
to understand, and I'm never going to purchase them again
the rest of my career. We think that, we think
(33:04):
they're making a mistake doing that. I think there are
other investors that fear over regulation of the sector, And
a question we often get asked is isn't it possible
that the banks could get regulated so far that they
almost become like electric utilities? And well, we think that's unlikely.
(33:28):
That's not such a scary outcome, given that electric utilities
sell at mid teens multiples and twice book value. The
financial bank stocks will go up a lot if they
got priced like electric utilities. And then, third, the question
you're asking specific to banks is being applied more broadly
(33:49):
today in a lot of academic circles with just value
stocks in general? Are there so few value investors out
there that the cheap stocks just keep under And that's
why it's so important to us that managements have the
mentality that they are only going to reinvest their earnings
(34:10):
in the business when they have great organic growth opportunities
where they're competitively advantaged, and if those don't exist, they're
going to give the capital back to shareholders, either as
dividends or share repurchase. We are very happy to invest
when management teams look at their stock and say there's
(34:31):
almost nothing we can invest in that will give us
as high a return as the stock will, So we're
radically reallocating capital to share repurchase. One of the names.
We've got a large position in General Motors. They've been
trying to diversify away from Ice Auto for probably the
(34:54):
past decade, and just this past year they kind of said,
screw it. If the market's not to value us at
even five times earnings, we're going to use all this
capital to buy back stock. They're buying back about twenty
five percent of the company this year and are committed
to continue doing that. So in four to five years,
(35:15):
either the market has to respond or they will have
repurchased all the shares except ours because we're not selling
at this price. And I think if more managements had
that mentality, that they view a cheap stock price as
an opportunity rather than the problem, you'd see this undervaluation
(35:36):
solving itself. They don't have to just be out there
in a giant pity party. They can solve this problem
on their own.
Speaker 1 (35:45):
I want to go back to something you said earlier.
You mentioned investment books, and so as our final question,
I'd love to know what your favorite investment books are.
Speaker 3 (35:55):
Well, you can't be a value investor and not have
your favorite book be one about war and Buffett, So
there are a lot of them written. I'm not going
to elevate one above the others, but I think anyone
who's intrigued with value investing needs to read a book
about Warren Buffett. But I think the mistake a lot
of value investors make is reading more and more and
(36:17):
more about Buffett is kind of like comfort food. It
makes you feel good, but it's not really good for you.
So I think it's good for investors to branch out.
And I like the books that have a chapter each
on lots of different successful investors from a lot of
different styles. There's a William Green book, Richard Wiser, Happier,
(36:44):
there are some older books market Wizards, New market Wizards,
And I find I learn as much reading about a
growth investor or, a macro investor, a commodity investor and
what has made them successful as I do reading another
book about another investor that does things like we do
(37:05):
at Oakmark. And I think you can broaden it and
look beyond investors, look at people who've been really successful
building businesses. I love the book New Rules Rule by
Read Hastings, the CEO of Netflix, which we've sold out of,
because it's become a market favorite again, but when it
was out of favor, it was an important holding for us.
(37:29):
I think you can read books about successful politicians, successful athletes,
you learn how they have had to make sacrifices throughout
their lives to achieve the greatness that they achieved in
their specific, their specific careers. And I think that's a
(37:49):
lesson that's really important to learn, especially as we have
a younger workforce today that at a young age seems
much more focused on work life balance than they ever
used to be. So you know, maybe maybe you know,
after forty years in this industry, I'm just becoming another
crotchety old man. But I don't think that change is
(38:12):
helpful for individuals that really want to try and rise
to the top of the pyramid in their profession.
Speaker 1 (38:19):
Oh, definitely makes sense.
Speaker 3 (38:21):
This is great, Bill, Thanks David, Thanks Gina.
Speaker 1 (38:24):
It was a pleasure, and Gina, thank you again for
joining today.
Speaker 2 (38:26):
Oh my pleasure. Thank you so much, David, and really
nice to meet you. Bill. Thanks so much for sharing
your journey and your process with us. We all learned
a lot.
Speaker 1 (38:34):
Until our next episode, This is David Cohne with Inside
Act
Host
Gina Martin Adams
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