Inside William Nygren's investing principles

William Nygren is an acclaimed value investor. He is currently a partner and the chief investment officer at the Oakmark Fund, which manages an AUM of around $108 billion. Nygren is easily counted among the best-performing fund managers with a stellar track record. Since its inception in 1991, the fund he manages has generated annual returns of 12.7 per cent (as of December 2023) compared to the benchmark return of 9 per cent.

We recently came across one of his old interviews where he spoke about value investing and his stock selection process, among other things. We lay out some of the key takeaways from the chat.

Value investing through a consumer lens

The investing discipline fascinated Nygren from a very young age. But he found himself particularly drawn to 'value investing', which essentially reflected the mindset of an everyday consumer.

He says, "I grew up in a middle-class family, running shopping errands with my mom. If grapes were on sale, we'd buy more than we usually would. And if cherries weren't on sale, we'd wait until they went on sale. So this idea that as a consumer, you could get more for your money if you paid attention to price was something that was very appealing to me. And of course, that's what value investing is - being patient and wanting to make sure that you're getting more value than you're expending to make a purchase."

Finding the risk-reward balance

Nygren does not regret missing the opportunity to invest in several multi-bagger stocks in their early stages of growth. This is because he always prioritises evaluating the potential risk involved and the reward that the company may offer. Few high-growth companies may not really present an attractive risk-reward scenario, he believes. His fund's philosophy, hence, strictly seeks a balance between the two.

In Nygren's words, "One can't go into a high-risk situation for a small reward...a lot of people would say this stock went up 10x or 20x, maybe not buying it was a big mistake. Well, it didn't meet our criteria. When we researched it thoroughly, it didn't have the risk return profile that we were looking for."

Against the bullish case

On how his fund strives to ensure a fair assessment of a company by eliminating pre-existing biases, Nygren lays out the open debate process that his fund follows.

"Whenever somebody is presenting a new idea to us, we assign a task to someone to come into the room and explain why this person is wrong. And we want you to argue to the best of your ability to prevent us from making this investment. Hearing the two sides argue with each other is a much more productive atmosphere for learning about an investment than just hearing the bullish case."

Focus on 'fundamental momentum'

Nygren firmly believes that continuous financial stability and growth tend to hold itself better and vice-versa. This, he believes, is essential when it comes to identifying poor performers.

Nygren says, "I get teased about this. We're not momentum investors in any way, shape, or form. But I do believe there is such a thing as fundamental momentum, that companies that are performing well are more likely to continue performing well, and those that are performing poorly are more likely to continue poorly...one of the most productive ways we can add to our performance is to get rid of our losers earlier."

The need to continuously evolve

The art of investing is an ever-evolving phenomenon. A specific strategy that may have worked at a time cannot guarantee returns forever. Nygren, hence, emphasises on how continuous learning and evolving are prerequisites to staying a step ahead of the market.

He says, "I think one of the frustrations you hear with a lot of value managers today is, what I did 20 years ago isn't working anymore. I think that's always been the case. What worked 20 years ago very rarely still works today. 20 years ago you could just buy low P/E, low price-to-book value stocks. And that was enough to be attractive. Now, you can do that for almost no fee and the computers have gotten smarter about combining low P/E, low price to book with some positive characteristics, book value growth, earnings growth. So the simple, obvious stocks that look cheap generally deserve to be cheap."

The above are the more rewarding snippets from the interview. However, we urge our readers to view the entire interview. Click here to access it.

Also read: A deep dive into value investing with Joel Greenblatt