The Hindu Business Line : Investment Nuggets

Considered as one of the top money managers in the US, Bill Nygren, Portfolio Manager of the Oakmark family of funds is famous for his `simple' value investing philosophy. His investing secret sauce is said to be the relentless focus on the basics of identifying companies that meet the fund's value criteria. In the two-and-a-half decades with Harris Associates (the firm that launched Oakmark Fund in 1991), Bill Nygren has worked his way up from being an investment analyst to become the firm's Director of Research from 1990 to 1998. He was recently featured as one of the money managers in the book 5 Key Lessons from Top Money Managers by Scott Kays in 2005.

We employ an intensive, in-house research process to identify companies that meet our value criteria. While some value investors may search only for stocks with low price-earnings ratios irrespective of the companies' underlying worth, Oakmark takes a more in-depth approach. In evaluating potential investments, we focus on the following characteristics:

A company's stock price and whether it is a significant discount to our estimate of underlying business value;

Free cash flows and intelligent investment of excess cash;

High level of manager ownership.

— Oakmark Funds investment philosophy and process

"As a value investor you are always trying to identify good companies, but typically you can't see the future clearly enough to justify paying the premium that the market is asking. I don't think in our history we have ever paid two or three times the market multiple for a business we thought was outstanding. But today the market is making you answer a very different question. The basic question on a Wal-Mart, Home Depot or Dell is if this company is average or not. The P/E is average, so if fundamental performance, say the next five years' growth, is merely average, that should be enough for the stock to have average performance. If the businesses grow faster than average, as we think they will, then not only should they be deserving of a higher P/E, but the growth in earnings should be better than the average business, so you win on earnings growth and on P/E expansion."

"To speak of day traders in any investment context is silly. These people are fulfilling a need for entertainment and are using the stock market for that."

"(Analysts themselves are getting back to basics, digging further into the numbers behind the numbers found in annual reports and other corporate filings.) It is amazing how fast the invisible hand of competitive marketplaces is correcting these problems. Two years ago you saw almost no new research come out after the annual 10-K filing. Now when a company comes out with its 10-K, you see half a dozen analysts immediately coming out with a report analysing all the details."

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