Bill Nygren: The Oakmark Formula For Market Beating Returns

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The Acquirer's Multiple
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Chuck Royce

During his CSIMA Guest Speakers Series, Bill Nygren discussed the three key features he looks for in his potential investments. Nygren invests in companies with these three key features:

  1. Significant discount: He buys stocks at a price significantly below their estimated business value, typically around 60% of that value. The discount is higher for riskier investments

  2. Market-matching return: The company’s expected growth and dividend yield should combine to at least match the overall market return. This ensures a decent return even if it takes time for the market to recognize the company’s true value

  3. Shareholder-aligned management: The company’s management should be focused on maximizing long-term value for shareholders, not just short-term profits

By investing in companies with these characteristics, Nygren aims to achieve high returns over the long term. Even if the market takes time to recognize a company’s true value, they can still benefit significantly as the gap between price and value closes. Here’s an excerpt from the presentation:

Nygren: There are three things that we look for at Oakmark in companies that we want to invest in.

Number one is a significant discount to business value. We target buying at ballpark 60% of business value, selling ballpark 90%, it can vary a little bit based on the liquidity of the investment or the risk profile of the investment.

Obviously the bigger the risk the larger discount we want. I’ll get into how we define business value in a minute.

Secondly we want the combination of expected per share business value growth and dividend yield to match what we expect from the market.

So S&P today might say has maybe six or seven percent expected earnings growth, 2% dividend yield.

So something like an eight or nine percent total return. We don’t care whether it’s got a dividend of 9% and no growth, or 9% growth and no dividend, but that combination we want to at least match the market.

Because if it’s not then time kind of becomes your enemy. The longer it takes for value recognition the less your return is going to be.

And if the business value and dividend is at least matching the market then you get the luxury of of a long time horizon.

Where you think the business is worth a 100 today, it’s 109 a year from now, 118 and if it takes five years for that gap to close that’s just fine.

The third thing we look for is managements that are aligned with the outside shareholders. Obviously in corporate America there can be an agency problem where you own stock but you don’t get to run the business, so it’s different than a single proprietorship.

You’ve got a board of directors that you get to elect as shareholders and the board of directors chooses the CEO of the company. It’s really important to us that that board of directors looks at their job as hiring a CEO that they think is most capable of maximizing long-term business value.

When we’ve got all three of those, you got the large discount to start with, the growth that’s at least matching the market, and a management that is aligned with outside shareholders then you get the luxury of the long-term time horizon.

And the longer it takes for the market to recognize business value the greater our eventual return will be.

You can watch the entire presentation here:

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Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds®. The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.