11 Aug 2010 Bill Nygren: Growing Macro Focus Creates Micro Opportunities
The competition has definitely decreased for those of us who make long-term investments based on a company's internal dynamics. More trading by others wouldn't necessarily change things for us, but with most traders wanting short-term price momentum on their side, it has led to more extreme price swings.

With the majority focused on momentum instead of value, more stocks are selling at either abnormally large discounts or premiums to long-term value. It gives us more cheap stocks to choose from but hasn't really altered how we build or exit positions...

16 Jul 2010 Oakmark - Q2 2010 Commentary
The S&P 500 fell 11% in the quarter, despite the continuing recovery in corporate earnings. The S&P now stands at about 11 times next year’s $93 consensus estimate of net income from operations, and it yields 2.2%. At the Morningstar conference last month, I kept telling skeptical attendees that I was bullish because it is so rare to be able to buy the S&P at three-quarters of its long-term average P/E and with a yield that is more than a five-year government bond. Their responses were always the same, “But what if the pessimists are right, and we enter a long period of no real growth in GDP?”

I don’t for a minute concede that we are condemned to that future, but for kicks let’s run the math. If annual inflation is 1.5% and real growth is zero, then corporate sales and profits probably average that same 1.5% growth rate. In a no-real growth mode, companies won’t need to spend much more than depreciation, which leaves them with an after-dividend free cash flow yield of about 6%. With corporate balance sheets already cash heavy, let’s assume excess cash is simply used to reduce shares outstanding.

Where does that put us in five years? Corporate earnings would be up 8%, common shares outstanding would be down 27%, and EPS would be 47% higher. If the P/E rose to its long-term average of 15 times, the S&P would just about double in five years and would have provided more dividend income over that time than the interest income from a five-year Treasury. That’s not too shabby for an economic backdrop that I believe is much too pessimistic. Of course, things could always get worse, but with stock prices appearing so depressed, the bears need to come up with more imagination than that.

14 Apr 2010 Oakmark Funds - President's Letter
World stock markets have rebounded strongly from their lows of a year ago. While the valuation gap has narrowed from the extreme levels at the height of the market panic, we believe that stocks are still undervalued. Bonds--and U.S. government bonds in particular--present a different case, however. The Federal Reserve has provided immense amounts of liquidity to the markets over the past two years to support the economy. With the economy steadily regaining its health, the need for aggressive stimulus is receding. In fact, we believe the Fed will ultimately need to tighten monetary policy in order to prevent the economy from overheating and to avoid triggering inflation. The combination of: 1) the massive borrowings needed to fund the growing federal deficit; 2) the typical rebound in corporate and individual borrowings in an economic recovery; and 3) tighter monetary policy suggest to us that interest rates will rise over the next few years. Because bond prices fall when interest rates rise, we believe that U.S. government bonds hold significant risk today. Since stocks currently offer healthy dividend yields and will benefit from a stronger economy, we also believe that the typical risk hierarchy has been reversed and that stocks are actually less risky than bonds in today’s market.

Many investors decreased their equity holdings after last year’s stock market decline, choosing instead the “safety” of bonds. While we see the attraction of safety after the roller coaster ride equity investors have experienced over the last few years, we believe that chasing what has “worked” (high quality bonds) is a mistake. With this in mind, we take the opportunity to remind investors of the value of adopting and adhering to a long-term investment plan, which includes target asset weightings. We believe emotions can often lead investors in the wrong direction, but sticking to a long-term plan can ensure that you maintain your exposure to equities, especially when they are attractively valued, as we believe they are now.

14 Apr 2010 Oakmark Funds - Q1 2010 Commentary
At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close...

06 Apr 2010 Bill Nygren Thinks Stocks Are Still Cheap
"Although it feels like we are in a different world from a year ago, investor pessimism is as strong as it was then," says the well-respected value investor. "Yet if you take away financials, the yields in the stock market are unusually high compared to the bond market." Equities, he notes, tend to outperform bonds over time, and that hasn't changed...

02 Mar 2010 Video: Bill Nygren of Oakmark Funds on CNBC

15 Jan 2010 Bill Nygren Q4 2009 Commentary
We have frequently said that short-term performance numbers are more influenced by luck than by skill, and we have advised that investors shouldn’t read too much into numbers that are less than a decade in duration. We won’t alter that advice now that we have a good one-year number, but we also don’t want to allow the end of a decade to pass without commenting on our long-term results. Despite many mistakes for which we are still kicking ourselves, for the decade of the ‘00s the Oakmark Select Fund achieved a total return of 96% while the S&P500 lost 9%. That performance is the result of the talent and hard work of our entire investment team.

08 Dec 2009 Video: Bill Nygren on CNBC
Bill Nygren of Oakmark Funds is optimistic about the economy and the stock market - Likes H&R Block, Medtronic, DirectTV...

13 Oct 2009 Oakmark Funds - Q3 2009 Commentary
If you were just awakening from a year-long snooze and you looked at the one-year performance numbers presented in this report for our seven Oakmark Funds, you’d probably conclude that fiscal 2009 was a decent, though pretty mundane, year. But since you weren’t napping, you know that there was rarely a dull day.

Unprecedented volatility created great opportunity for observers to play games with statistics. My favorite storyline, which started after the market had rallied about 10% from March 9, was that stock prices were moving up faster than the economy and therefore investors should be cautious. Though it is true that the S&P 500 is now 58% higher than it was at the bottom (and the economy isn’t), the problem with that comparison is that it implies that the price at the bottom was rational. One could just as easily say that the S&P, without including dividends, is down 31% from two years ago, down 5% from five years ago, and down 18% from ten years ago. Given that many indicators suggest we are already recovering from the recession, those declines over longer time periods seem excessive. More important than where stock prices have been is where earnings will be in the future. It is true that the S&P 500 price-to-earnings ratio no longer appears low relative to expected 2009 earnings. However, we believe that 2009 was heavily affected by unusual loan losses and unsustainable inventory reductions. If you eliminate those, then the price-to-earnings ratio looks pretty reasonable. If you add in some rebound in end demand, then that ratio is meaningfully below historical averages. As the market has risen, the magnitude of undervaluation has lessened, but we continue to believe that stocks remain fundamentally undervalued.

14 Jul 2009 Bill Nygren - Oakmark Funds - Q2 2009 Commentary
...remember that S&P earnings back in 2006 were nearly $90 and that typically when a recession ends, earnings recover much more rapidly than would be implied by normal earnings growth. In our view, the biggest question concerning earnings is when they will recover, not if.

Recently, we’ve been interested in a statistic that measures the ratio of money market fund assets to the total market value of the S&P 500. Before the 2008 bear market, that ratio had averaged about 18% since 1980, meaning that there was typically enough cash in money market funds to buy 18% of the S&P 500. In March 2009 it peaked at 65%, more than three times its long-term average and more than twice its prior peaks (1982, 2002). The subsequent stock market rally has resulted in a small reduction in assets in money market funds and a larger increase in the value of the S&P 500. The ratio has fallen from 65% to 46%. It no longer is as extreme as it was at the March bottom, but it is still much higher than the peak level prior to 2008. We conclude that there is still plenty of fire power waiting to invest in stocks.

As value managers, we’re used to having people disagree with us. In fact, we prefer it that way. The consensus opinion, almost by definition, is usually reflected in current prices. So when we differ from consensus, we’re excited by the opportunity.

13 Jul 2009 Oakmark Funds - President's Letter - Q2 2009
Robert J. Hastings once noted that, “It isn’t the burdens of today that drive men mad. Rather it is regret over yesterday and fear of tomorrow.” Although Mr. Hastings was a theologian, his observation applies surprisingly well to investing. Fear, greed and regret are natural emotional responses to recent events that have exaggerated the swings in the market. Unfortunately, they have also led investors, particularly individual investors, to make bad decisions that cost them quite dearly. Cognitive psychologists who study investor behavior have demonstrated how behaviors like anchoring, regret aversion and rationalization can plague both professional and individual investors alike and can significantly detract from investment returns.

We have often discussed how adhering to an investment discipline can remove emotion from the investment process and improve results. As value investors we look for companies selling at large discounts to business value. While large stock market declines may trigger investor fear about further losses, our discipline actually makes us more enthusiastic about such events because they allow us to buy good businesses at more attractive prices. Our investment training tells us that the larger the discount to value gets, the better our returns can become.

28 May 2009 Video: Bill Nygren on CNBC
Discussing investment opportunities and financial regulation, with Bill Nygren, The Oakmark Fund portfolio manager...

23 Apr 2009 Video: Bill Nygren of Oakmark Funds
Bill Nygren interviewed on CNBC, shares some of his stock picks:

American Express (AXP)
Encana (ECA)
Apple (AAPL)
State Street Corp. (STT)
Liberty Media Capital (LCAPA)

09 Apr 2009 Oakmark Funds commentary
“How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?”

Investors are always faced with the choice of investing for safety or of assuming risk in exchange for the higher returns that typically come from owning businesses. Over the past eighty years, owners of stocks have been well rewarded for taking that risk. The annualized return from owning the S&P 500 has averaged 9% since 1928, compared to only 4% from owning short-term government bonds. And that return advantage has come despite three periods during which stocks drastically underperformed risk-free assets.

As investors try to decide what to do now, I think it is useful to contrast two options. Let’s assume investors are making their decisions for a five-year time horizon. Were the time horizon any shorter, we would say stocks shouldn’t even be considered because short-term results can be too random. One option for an investor is to say “no” to any risk, and invest in a five-year government bond. Many investors, stinging from recent losses, are making that very choice. The annual yield for that bond today is 1.8%. So, at the end of five years, that investor could be certain to have a 9% return (not considering either taxes or inflation). The other choice is to buy equities, anticipating a higher return in exchange for accepting uncertainty. Can history give us any guide as to what that return might be? One approach would be to assume that returns would simply match the historical average of 9% per year, or 54% compounded over a five-year period. That answer, however, ignores the effect of the starting price. I think the following is more useful.

First, the dividend yield of the S&P 500 is now about 3%, so over five years the equity investor should receive a 15% return plus or minus price change. We can estimate the S&P price five years from now by estimating both its earnings level and its P/E ratio. Over the past 80 years the median P/E ratio for the S&P 500 has been 15 times. I could argue that today’s very low rates on government bonds suggest future P/Es should be higher, but let’s not bother with that complexity. Earnings are trickier to forecast. Operating earnings for the S&P 500 peaked at $88 in 2006 but the consensus forecasts a trough at about $62 this year. Extrapolating either peak or trough earnings is not likely to be productive. Instead, let’s look back over the past thirty years. A regression analysis of the past thirty years shows that trend earnings for 2009 are about $84, or 5% below the peak achieved three years earlier. Further, that same regression analysis calculates that earnings growth has averaged between 6 and 7% per year. Extrapolating based on those numbers puts trend line earnings for 2014 at about $115. Multiplying $115 in earnings by a P/E of 15 produces a 2014 expected price for the S&P 500 of 1725, 116% higher than today’s price of 798. Were that to happen, the annualized return for the next five years would be about 20%, a little more than twice the historical average, and more than ten times the bond return.

What about the downside? By 2014, the S&P could fall to about 750 and still match the return on a five-year bond because the current dividend yield exceeds the bond’s interest rate!

25 Feb 2009 Oakmark Funds - Q4 2008 commentary
One of the most striking aspects of today's markets is the valuation of risk. The safest and most liquid securities, such as Treasury Bills, currently offer close to record low (and even briefly offered negative) yields. At the same time, stocks and corporate debt are priced at historically wide discounts to value.

We encourage our investors to adopt an investment plan and stick to it. As value investors, we believe that buying stocks at a significant discount to business value provides attractive investment opportunities, and we believe that buying at today's historically wide discounts to value provides a tremendous opportunity. While the depth of the current economic difficulties makes it impossible to predict when the market will hit bottom, the deep valuation discounts suggest to us that disciplined investors who buy stocks today will be richly rewarded over a two-to-three year investment horizon.

Bad news sells more newspapers, and creates more TV news viewers. More investors than ever are utilizing short selling to position themselves to benefit from bad news, and those investors are as anxious to share their negative views as the traditional managers are to share their positive views. Investors have learned to approach positive news with a healthy dose of skepticism and correctly judge much of what they hear as "too good to be true." But I believe investors have been slow to apply that thinking to the negative, and should also consider the possibility that what they hear is "too bad to be true."

The news in the quarter wasn't all bad. Commodity prices came down sharply. Fears that $150 oil would mean that homes couldn't be heated, cars couldn't be driven, and discretionary income would be non-existent faded away as oil prices fell by over two-thirds, giving consumers a $300 billion price cut. It was entertaining to hear those pundits who claimed that speculators had played very little role in driving up commodity prices now claim that commodity price declines were an expected outcome of hedge-fund deleveraging. In addition to lower commodity prices, the dollar strengthened, Christmas sales were almost as high as last year (but instead were reported as the first decline in holiday sales).

Investors are now faced with record low returns on the safest, most liquid assets, such as the short-term Treasury market, where yields briefly turned negative. But investors also have the opportunity to obtain unusually high returns for taking liquidity risk or valuation risk in both debt and equity markets. There is certainly a camp of investors who believe we are on the verge of a severe depression, and if they are right, zero might be a pretty good relative return. But with that view so widely broadcast, I think the contrary position looks very attractive. Stocks declined 52% from their prior all-time high. That's only happened one other time since 1923, which is when the S&P 500 Index4 began daily quotes. Using earlier Dow Jones5 data, it has still only happened once since the Dow was created in 1896. The S&P 500 yield now exceeds the yield on 10-year Treasury Bonds by over a full percentage point, 3.3% vs. 2.1%. Prior to 2008, the last time that stock yields exceeded Treasury Bond yields was over fifty years ago. P/E multiples on trailing earnings (which I don't think will be markedly different from recovery-level earnings) are mostly in the single digits, compared to a long-term average in the mid-teens.

27 Jan 2009 Video: Bill Nygren
A rough year for mutual funds dragged down more than a few traditionally strong performers, with Bill Nygren of Oakmark Fund...