WEBVTT - Oakmark’s Nygren Takes Private Equity Perspective 0:00:12.440 --> 0:00:15.640 Welcome to Inside Active, a podcast about active managers that 0:00:15.720 --> 0:00:18.759 goes beyond sound bites and headlines and looks deeper into 0:00:18.800 --> 0:00:24.280 the processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:24.320 --> 0:00:27.400 i lead mutual fund and active research at Bloomberg Intelligence. 0:00:27.720 --> 0:00:30.880 Today my co host is Gina Martin Adams, chief equity 0:00:30.920 --> 0:00:34.440 strategist at Bloomberg Intelligence. Gina, thanks for joining me today. 0:00:34.680 --> 0:00:35.840 Thank you for having me, David. 0:00:36.000 --> 0:00:38.400 So, last week you and Mike Casper put out a 0:00:38.520 --> 0:00:42.040 Q three earnings preview. What does the earnings outlook for 0:00:42.120 --> 0:00:44.320 the different sectors of the S and P five hundred? 0:00:44.560 --> 0:00:47.479 Yeah, I think it's a really interesting quarter. So a 0:00:47.520 --> 0:00:49.680 couple of things really came out of our research. The 0:00:49.720 --> 0:00:52.680 first is analysts are pretty pessimistic head it into the 0:00:52.680 --> 0:00:57.160 third quarter. They're anticipating just over four percent earnings growth. Remember, 0:00:57.200 --> 0:00:59.520 the average annual earnings growth over the last several quarters 0:00:59.560 --> 0:01:01.880 has been closed sort of eight. Last quarter we got 0:01:01.880 --> 0:01:06.399 about fourteen percent earnings growth, so analysts seem pretty pessimistic. 0:01:06.480 --> 0:01:09.280 Most of that pessimism is coming from the energy sector, 0:01:09.360 --> 0:01:14.319 where analysts are anticipating yet another double digit decline in earnings. 0:01:14.400 --> 0:01:17.120 A year over year for that space, and it's become 0:01:17.160 --> 0:01:19.000 a very big drag on the index for the last 0:01:19.000 --> 0:01:23.960 several consecutive quarters, So not a huge, huge surprise, but 0:01:24.040 --> 0:01:27.959 nonetheless a continuous drag there. One of the most interesting 0:01:28.000 --> 0:01:29.560 things that came out of our work is just the 0:01:29.560 --> 0:01:33.840 divergence between what analysts are saying and what companies are 0:01:33.880 --> 0:01:36.520 telling us is likely now. Naturally, we don't get every 0:01:36.560 --> 0:01:39.240 company in the index giving us guidance on what to expect, 0:01:39.280 --> 0:01:43.280 but of the companies that have given us guidance, our 0:01:43.280 --> 0:01:45.960 guidance model implies we could get up to triple the 0:01:46.000 --> 0:01:49.920 earnings growth rate in the index relative to consensus expectations. 0:01:50.560 --> 0:01:53.560 One of the segments of the index where analysts do 0:01:53.640 --> 0:01:58.560 appear to be inordinately pessimistic is actually financials, and our 0:01:58.600 --> 0:02:01.360 macro model for financials as we could get better earnings 0:02:01.400 --> 0:02:05.960 growth on financials than consensus is expecting. Also, I'm particularly 0:02:06.080 --> 0:02:09.760 keen to discuss this topic with our guest, who does 0:02:09.840 --> 0:02:14.079 have plenty of financials exposure in his portfolio. So excited 0:02:14.080 --> 0:02:16.480 to dive right into this coming earning season and more 0:02:16.520 --> 0:02:19.200 with you today, David, Thank you well. 0:02:19.240 --> 0:02:22.200 It's definitely a great time to introduce our guest. I'd 0:02:22.200 --> 0:02:25.600 like to welcome Bill Nygren, who is Chief Investment Officer 0:02:25.840 --> 0:02:30.000 of US at Harris Associates, vice president of Oakmark Funds, 0:02:30.040 --> 0:02:34.400 and a manager of the Oakmark Select Fund, oak LX 0:02:34.520 --> 0:02:39.200 and Oakmark Fund. Okay, excuse me, oh ak MX. Bill, 0:02:39.240 --> 0:02:40.480 thank you for joining us today. 0:02:41.400 --> 0:02:43.000 Thank you, David. Great to be with you. 0:02:44.160 --> 0:02:47.160 So, Bill, let's get started by asking how you got 0:02:47.240 --> 0:02:48.320 your start in investing. 0:02:49.520 --> 0:02:55.320 Well, it goes back to a childhood fascination. I was 0:02:55.360 --> 0:03:01.480 always fascinated with gambling and that line between when your 0:03:01.520 --> 0:03:05.239 expected value of a bet is negative and you call 0:03:05.280 --> 0:03:08.960 that gambling, or when it's positive and we call that investing. 0:03:09.880 --> 0:03:15.560 And combined that with being brought up, I would say 0:03:15.600 --> 0:03:20.160 as a value consumer, I remember being dragged at grocery 0:03:20.240 --> 0:03:24.600 stores with my mom and we'd buy grapes at one 0:03:24.680 --> 0:03:28.480 store if they were on sale, and if the following 0:03:28.520 --> 0:03:31.400 week grapes weren't on sale anymore, maybe we'd have a 0:03:31.440 --> 0:03:36.320 lot of cherries in the house. But our purchases always 0:03:36.440 --> 0:03:41.200 changed based on what the best opportunity was to make 0:03:41.240 --> 0:03:44.520 your dollar go the farthest. So when I started reading 0:03:44.600 --> 0:03:48.040 investing books when I was in high school, The value 0:03:48.080 --> 0:03:51.120 approach is what really appealed to me because it's how 0:03:51.160 --> 0:03:55.200 I was raised as a consumer, and I had decided 0:03:55.240 --> 0:03:57.320 by the time I was in high school that I 0:03:57.360 --> 0:04:01.520 wanted to pursue a career in investing, so I got 0:04:01.560 --> 0:04:04.680 an accounting degree. I still think it's kind of odd 0:04:04.680 --> 0:04:07.440 today how many kids you talk to who want to 0:04:07.440 --> 0:04:10.480 be in finance but don't think it's worth studying accounting. 0:04:11.560 --> 0:04:14.440 To me, that would be the equivalent of if I 0:04:14.480 --> 0:04:17.279 said I wanted to spend my career in South America, 0:04:17.400 --> 0:04:21.280 but not bother learning Spanish. It's the language of investing. 0:04:21.400 --> 0:04:23.880 I think you need to know it in order to 0:04:23.920 --> 0:04:29.200 succeed as an investor. I got my business school degree 0:04:29.240 --> 0:04:31.440 from the University of Wisconsin. I was part of their 0:04:31.440 --> 0:04:38.320 Applied Securities Analysis program, and then started working at investment firms. 0:04:38.839 --> 0:04:44.480 In nineteen eighty three, joined Harris Associates, where forty one 0:04:44.560 --> 0:04:46.560 years later, I'm still happily employed. 0:04:47.880 --> 0:04:51.080 Well, speaking of Harris Associates, how would you describe the 0:04:51.120 --> 0:04:52.839 investment philosophy of the company. 0:04:54.839 --> 0:04:58.520 I used to say we were old fashioned value investors, 0:04:58.680 --> 0:05:01.559 and that's still true, but there's so few of us 0:05:01.600 --> 0:05:05.159 today that invest that way, that I feel like people 0:05:05.160 --> 0:05:09.680 don't really even know what that means. So updating the language, 0:05:10.240 --> 0:05:13.640 I would say we bring a private equity perspective to 0:05:13.720 --> 0:05:17.919 public equity investing. And what I mean by that is 0:05:17.960 --> 0:05:23.360 we look for companies that we believe other investors will 0:05:23.360 --> 0:05:26.479 look at very differently five to seven years from now 0:05:26.520 --> 0:05:29.520 than they view them today, and then we try to 0:05:29.560 --> 0:05:33.640 align with management teams that we think have the same 0:05:33.760 --> 0:05:38.320 vision of what the company could ultimately be worth. So 0:05:38.920 --> 0:05:42.200 it has us looking at companies that are currently out 0:05:42.240 --> 0:05:47.440 of favor. Could be because of recent poor earnings performance, 0:05:48.680 --> 0:05:52.279 could be because there's a bad division inside the company 0:05:52.320 --> 0:05:56.000 that's losing money that's kind of masking what's going on 0:05:56.680 --> 0:05:59.720 at the other side of the company. When we make 0:05:59.720 --> 0:06:03.440 an investment, we're not focused on what next quarter or 0:06:03.480 --> 0:06:06.560 next year's earnings are going to be. We're looking out 0:06:06.680 --> 0:06:09.120 to what we think the company is capable of earning 0:06:09.240 --> 0:06:12.320 in a five to seven year period, and then we 0:06:12.360 --> 0:06:15.040 want to buy at a large discount to our estimate 0:06:15.040 --> 0:06:18.280 of business value. We want that value to grow, and 0:06:18.320 --> 0:06:21.960 we want managements that think and act like owners. 0:06:22.320 --> 0:06:24.600 Can we talk a little bit about this idea that 0:06:25.160 --> 0:06:28.080 you're one of few I think you're absolutely right, because 0:06:28.400 --> 0:06:30.359 David and I have been doing this podcast together for 0:06:30.400 --> 0:06:33.000 a few weeks going on months now, and you're the 0:06:33.040 --> 0:06:36.200 first value focused investor that we've talked to. It's all 0:06:36.240 --> 0:06:40.159 been growth, So this is very exciting. Maybe talk to 0:06:40.240 --> 0:06:43.880 us about why you think that's happening. Why is your 0:06:43.960 --> 0:06:47.640 process so different than the market itself. Is it really 0:06:47.920 --> 0:06:51.000 just that investors are generally migrating to what's been working. 0:06:51.360 --> 0:06:55.240 Is it about a time sort of horizon shrinkage where 0:06:55.279 --> 0:06:58.640 they're really focused more on short term return prospects and 0:06:58.680 --> 0:07:02.039 that's led them into grow. So what's your thesis as 0:07:02.080 --> 0:07:04.480 to why you're one of few now? 0:07:04.880 --> 0:07:07.000 Well? I think there are a number of reasons, and 0:07:07.040 --> 0:07:11.320 you hit on a couple of them. One is it's 0:07:11.600 --> 0:07:15.720 very hard to train your clients to look out as 0:07:15.800 --> 0:07:18.680 far into the future as we think you need to 0:07:18.720 --> 0:07:23.720 look to make value investing successful today, and that's a 0:07:23.840 --> 0:07:29.000 challenge that a lot of our peers or competitors don't 0:07:29.040 --> 0:07:32.960 want to take on. And when they shorten the timeframe 0:07:33.320 --> 0:07:36.400 that the client is looking at, it's natural that it 0:07:36.440 --> 0:07:40.960 also shortens their own investment horizon. Secondly, you're right that 0:07:41.040 --> 0:07:46.520 there is some performance chasing growth is outperformed value for 0:07:46.560 --> 0:07:50.840 a little more than a decade now, and I think 0:07:51.080 --> 0:07:55.360 you see both clients that move more toward growth because 0:07:55.400 --> 0:07:58.000 they want to be in the area that's been most successful, 0:07:58.600 --> 0:08:01.680 and then you see managers if their philosophies to what 0:08:01.760 --> 0:08:05.400 has been working. For example, today, I think there are 0:08:05.520 --> 0:08:09.880 very few investors who don't look for positive price momentum 0:08:09.960 --> 0:08:13.280 in the stocks they consider purchasing. We're one of the 0:08:13.320 --> 0:08:17.320 few that the cheaper the stock gets, the more attractive 0:08:17.360 --> 0:08:21.160 it seems to us. And then the last thing, and 0:08:21.240 --> 0:08:23.960 I think this has been going on for a generation 0:08:24.360 --> 0:08:28.880 at least, is gap accounting that was kind of the 0:08:28.960 --> 0:08:32.920 basis for value investing. You know, you just buy stocks 0:08:32.920 --> 0:08:35.720 that look cheap on price to earnings or price to 0:08:35.720 --> 0:08:41.040 book value kind of patiently wait for them to move 0:08:41.120 --> 0:08:44.920 back to regress to the mean, and that's what value 0:08:44.920 --> 0:08:49.800 investing was. But gap accounting was really made for an 0:08:49.800 --> 0:08:54.719 industrial world, and today in tangibles are so much more important. 0:08:55.400 --> 0:08:58.840 You know, the customer acquisition costs, R and D spending, 0:08:59.559 --> 0:09:05.000 brand advertising to name just a few. I think there 0:09:05.040 --> 0:09:09.480 are more companies today where gap accounting just doesn't do 0:09:10.000 --> 0:09:13.840 justice to the business value that's being created. So the 0:09:13.920 --> 0:09:16.840 value investors that were kind of stuck in that world 0:09:16.840 --> 0:09:21.439 of thirty years ago of just buying the statistically cheat 0:09:22.040 --> 0:09:27.160 pes and price to books on gap accounting, their performance 0:09:27.200 --> 0:09:30.160 has not been very good for quite a while, and 0:09:30.240 --> 0:09:33.800 I think they've just kind of naturally drifted out of 0:09:33.840 --> 0:09:34.640 the business. 0:09:34.960 --> 0:09:39.200 Do you use any quantitative metrics to narrow your universe 0:09:39.280 --> 0:09:40.480 of stocks to invest in? 0:09:40.880 --> 0:09:44.960 Well, we use a lot of them. First, we only 0:09:45.000 --> 0:09:49.080 invest in big businesses, so we're looking at market cap 0:09:49.240 --> 0:09:51.640 we want to be We think stock selection is the 0:09:51.679 --> 0:09:55.080 skill we bring to the table, and we want to 0:09:55.120 --> 0:09:58.679 be able to take meaningful positions in the companies we 0:09:58.720 --> 0:10:03.360 think are attractive. We also think our investors want a 0:10:03.440 --> 0:10:07.840 lower risk portfolio, and we think lower risk tends to 0:10:07.880 --> 0:10:12.400 align with bigger businesses. So the first thing we do 0:10:12.520 --> 0:10:15.360 to narrow down our universe is we only look at 0:10:15.400 --> 0:10:19.440 big businesses for the Oakmark Fund, and by that we 0:10:19.480 --> 0:10:22.240 don't mean the two hundred and fifty largest market cap. 0:10:22.679 --> 0:10:26.200 We mean the two hundred and fifty largest on fundamental 0:10:26.320 --> 0:10:31.960 metrics such as sales, earnings and shareholders' equity, because we 0:10:32.040 --> 0:10:36.640 think it's those fundamentals that bring the lower risk as 0:10:36.640 --> 0:10:40.960 opposed to a high market valuation bringing that risk, and 0:10:41.000 --> 0:10:46.240 then when you move to individual stock selection, I think 0:10:46.400 --> 0:10:50.920 the definition of value is always the present value of 0:10:50.960 --> 0:10:54.880 the future cash flows out to infinity that a company 0:10:54.920 --> 0:11:00.560 would earn. But for shortcuts, we look at pe ratios, 0:11:00.600 --> 0:11:05.560 price to cash flow ratios, price to book value ratios, 0:11:05.880 --> 0:11:10.800 really whatever metric we think business buyers in that specific 0:11:10.880 --> 0:11:14.240 industry would use if they were acquiring an entire company. 0:11:16.280 --> 0:11:19.960 So you know, for example, in the banking industry, price 0:11:20.000 --> 0:11:24.200 to book might still be a perfectly good metric, or 0:11:24.240 --> 0:11:27.800 for consumer durables, price to earnings ratio might still work 0:11:27.840 --> 0:11:31.280 pretty well. But if we're in the healthcare space, we're 0:11:31.280 --> 0:11:34.719 going to look at price to earnings before R and 0:11:34.840 --> 0:11:37.960 D spending because we want to adjust for those income 0:11:38.000 --> 0:11:41.800 statement of investments, the gap accounting doesn't give credit to. 0:11:44.440 --> 0:11:47.360 Can we go back to your early statement about how 0:11:47.400 --> 0:11:50.640 you operate a lot like a private equity fund in 0:11:50.840 --> 0:11:53.559 kind of determining the intrinsic value of a company, maybe 0:11:53.559 --> 0:11:55.480 dig in for us a little bit on what makes 0:11:55.520 --> 0:11:58.680 for intrinsic value? How do you determine intrinsic value? What's 0:11:58.679 --> 0:11:59.760 your unique approach there? 0:12:00.800 --> 0:12:06.480 Sure? So, first, and importantly they're two or maybe three 0:12:06.880 --> 0:12:12.559 really major differences between US and private equity firms. Number One, 0:12:12.840 --> 0:12:17.040 we try to invest with managements that we think behave 0:12:17.240 --> 0:12:22.080 like owners of a business, not as hired hands. Private 0:12:22.080 --> 0:12:24.839 equity is typically investing in companies where they want to 0:12:24.880 --> 0:12:30.080 replace management. Second is fee structure, where a fraction of 0:12:30.120 --> 0:12:32.920 a percent like most of the mutual fund industry, not 0:12:33.080 --> 0:12:37.160 the two and twenty that private equity firms charge. And 0:12:37.240 --> 0:12:42.120 third is liquidity. Our fund investors have the option of 0:12:42.240 --> 0:12:45.280 selling out our funds on any day. Our price quotes 0:12:45.880 --> 0:12:48.800 are kept up daily, and clearly that doesn't happen with 0:12:48.920 --> 0:12:53.000 private equity. But I think where the similarities are, and 0:12:53.040 --> 0:12:56.960 these are important too, is private equity is looking for 0:12:57.040 --> 0:13:00.200 companies that are selling well under what they think think 0:13:00.200 --> 0:13:03.680 the business might be worth. And that often means looking 0:13:03.920 --> 0:13:08.240 division by division at what you think the potential is 0:13:08.640 --> 0:13:12.400 for each of those divisions. And in some cases that 0:13:12.520 --> 0:13:17.920 might mean selling off a division where the company doesn't 0:13:17.960 --> 0:13:21.640 have critical mass and that division might be worth more 0:13:21.720 --> 0:13:25.840 to someone else who's already in the industry. It might 0:13:25.920 --> 0:13:31.880 mean valuing separately two streams of income. You know, an example, 0:13:32.000 --> 0:13:35.000 one of our large holdings. Alphabet makes a lot of 0:13:35.040 --> 0:13:39.400 money on search, but they have reported losses for all 0:13:39.440 --> 0:13:43.160 of their venture capital investing. Well, clearly you don't want 0:13:43.200 --> 0:13:45.559 to value all of that at a negative number, which 0:13:45.640 --> 0:13:48.160 is what would happen if you just slapped a PE 0:13:48.280 --> 0:13:52.640 multiple on their reported earnings. So we go to the 0:13:52.679 --> 0:13:56.600 trouble of separating out each of the income streams and 0:13:56.640 --> 0:14:01.040 trying to figure out what that what that industry would 0:14:01.040 --> 0:14:03.960 look like at its highest and best use, and what 0:14:04.000 --> 0:14:08.760 it could potentially be worth. Will forecast out for seven 0:14:08.840 --> 0:14:12.840 years present value those numbers, and then we look for 0:14:12.960 --> 0:14:16.560 opportunities where we can purchase at two thirds or less 0:14:16.600 --> 0:14:20.400 of that value. That's typically what a private equity firm 0:14:20.480 --> 0:14:23.280 is doing, because then they'll go into the market and 0:14:23.320 --> 0:14:26.800 pay a premium to acquire the whole business. So another 0:14:26.880 --> 0:14:30.040 of the advantages of doing this in the public markets 0:14:30.480 --> 0:14:33.640 is we don't have to pay that premium, the acquisition 0:14:33.760 --> 0:14:35.760 premium that the PE firms are paying. 0:14:36.080 --> 0:14:38.520 Can I just follow up real quickly on that, Is 0:14:38.560 --> 0:14:42.080 there any commonality sort of when you're looking across and 0:14:42.120 --> 0:14:46.920 you're valuing these businesses, you're finding businesses that are worth 0:14:47.080 --> 0:14:49.600 two thirds or less of what you think they're worth. 0:14:50.640 --> 0:14:53.680 Is there any kind of commonality between those businesses? What 0:14:53.800 --> 0:14:57.440 is the market usually missing? If we're to put it 0:14:57.520 --> 0:14:59.200 at painted with one big brush. 0:14:59.320 --> 0:15:01.720 The good news is what's available in the market right 0:15:01.760 --> 0:15:05.200 now is there's not a lot of commonality across industries. 0:15:05.280 --> 0:15:09.560 We're finding these in financials, in media and healthcare, and 0:15:09.680 --> 0:15:14.840 consumer durables in the energy space. But I think what 0:15:16.040 --> 0:15:21.000 is typical is there's some big worry that the market has, 0:15:21.880 --> 0:15:25.320 and maybe it's about what the industry will look like 0:15:25.400 --> 0:15:29.280 a decade from now. Oil and gas and auto are 0:15:29.280 --> 0:15:33.760 two examples of that. So the transition to less carbon 0:15:33.800 --> 0:15:38.400 intensive fuels has people worried about what the future of 0:15:38.440 --> 0:15:41.520 the oil industry will look like, or the transition to 0:15:41.600 --> 0:15:45.440 evs what the future will look like for the ice 0:15:45.840 --> 0:15:51.360 auto related businesses. We get comfortable that these companies are 0:15:51.400 --> 0:15:55.160 generating so much cash in their current form that by 0:15:55.200 --> 0:15:58.120 the time you get to seven to ten years from now, 0:15:59.080 --> 0:16:03.080 you should have already received back your entire investment. So 0:16:03.440 --> 0:16:07.800 we think the market is overly penalizing these businesses for 0:16:07.960 --> 0:16:12.440 an uncertain future quite a way quite a ways out. 0:16:13.440 --> 0:16:16.600 The other thing that I think is pretty typical is 0:16:16.720 --> 0:16:22.480 depressed current results in one of the business segments. Oftentimes 0:16:23.080 --> 0:16:26.479 the companies were invested in have a couple of different divisions. 0:16:27.000 --> 0:16:33.240 Maybe they fall between the cracks for the industry specific analysts, 0:16:34.000 --> 0:16:37.800 and one of the divisions might be cyclically out of favor, 0:16:38.600 --> 0:16:41.520 and the analysts aren't going to the trouble of trying 0:16:41.520 --> 0:16:46.560 to normalize that division when they compute what they think 0:16:46.600 --> 0:16:49.680 the appropriate pe multiple for a business like that would 0:16:49.680 --> 0:16:50.240 be today. 0:16:50.520 --> 0:16:52.280 And I have one last follow up because I think 0:16:52.280 --> 0:16:55.080 this topic is really fascinating. I think that most of 0:16:55.160 --> 0:16:59.120 us think the process starts with sort of a screen 0:16:59.240 --> 0:17:02.320 of these are all the cheap stocks, these are all 0:17:02.360 --> 0:17:06.399 the cheap multiples, and then look in that pile. Is 0:17:06.440 --> 0:17:09.680 that not true? Are you thinking in a different way? 0:17:09.840 --> 0:17:12.719 Is sort of where does your process start? Does it 0:17:12.760 --> 0:17:15.399 start with a multiple or does it start with, you know, 0:17:16.000 --> 0:17:18.439 all of the constituents of an index or a group 0:17:18.480 --> 0:17:20.760 that you're looking at from a sector perspective. How do 0:17:20.800 --> 0:17:22.439 you begin the process of search? 0:17:23.280 --> 0:17:26.760 So it could start with cheap names, and sometimes it does. 0:17:27.320 --> 0:17:31.320 Thirty years ago, that was probably almost all of our ideas. 0:17:31.720 --> 0:17:34.639 They look cheap on price to book or price to earnings, 0:17:35.200 --> 0:17:40.160 and that's what ignited the excitement to research it more thoroughly. 0:17:42.400 --> 0:17:45.600 At Harris Oakmark, there are three things we look for 0:17:45.640 --> 0:17:48.720 in companies. We want them less than two thirds of 0:17:48.760 --> 0:17:53.439 our estimated business value. So sometimes a cheap price is 0:17:53.480 --> 0:17:56.879 what first intrigues us, and that often happens after a 0:17:56.920 --> 0:18:02.560 company reports a disappointing quarter the stock all substantially. The 0:18:02.600 --> 0:18:06.520 second thing we look for is businesses that will grow 0:18:07.080 --> 0:18:10.639 or return dividends at least in total, at least what 0:18:10.640 --> 0:18:14.480 we expect to the market. We're trying to avoid value 0:18:14.520 --> 0:18:21.280 traps with that criteria, so that could ignite interests in 0:18:21.640 --> 0:18:24.439 companies that are paying large dividends but aren't growing very 0:18:24.560 --> 0:18:27.399 much so are out of favor. And then last, we 0:18:27.480 --> 0:18:31.240 want to invest side by side with good management teams, 0:18:32.000 --> 0:18:36.320 not only competent, but managements that understand we own the 0:18:36.359 --> 0:18:40.919 business and are trying to maximize long term per share value. 0:18:41.480 --> 0:18:44.959 So it could start with seeing a management team that 0:18:45.000 --> 0:18:48.480 we're highly impressed with, and then you kind of hope 0:18:48.480 --> 0:18:50.919 that the stock looks cheap enough. When you start the 0:18:50.960 --> 0:18:53.879 other direction, you're starting with the stock you know is 0:18:53.960 --> 0:18:57.919 cheap enough, and you hope it's well managed. There's no 0:18:58.040 --> 0:19:01.560 reason the process can't be reversed. And you know, if 0:19:01.560 --> 0:19:05.879 we see a management team move, maybe their company gets acquired, 0:19:06.080 --> 0:19:10.200 the former CEO then goes to a new business. You 0:19:10.240 --> 0:19:13.119 know that that triggers an interest for us, and then 0:19:13.440 --> 0:19:16.440 UH that that will be the catalyst for us doing 0:19:16.480 --> 0:19:17.680 more serious research. 0:19:18.280 --> 0:19:21.840 When you're conducting fundamental research, you know you're looking at 0:19:21.920 --> 0:19:26.040 financial statements. Do you also look at outside or external 0:19:26.080 --> 0:19:27.120 financial reports? 0:19:27.359 --> 0:19:29.679 Sure, we try. We try to look at any information 0:19:30.000 --> 0:19:33.480 that that we think sheds light onto what the business 0:19:33.560 --> 0:19:37.639 is actually worth. So it starts with the the information 0:19:37.720 --> 0:19:39.440 the company puts out themselves. 0:19:40.119 --> 0:19:40.439 UH. 0:19:40.800 --> 0:19:44.480 Three financial statements that are all very important the balance sheet, 0:19:44.560 --> 0:19:48.520 income statement, and statement of cash flow. UH, and our 0:19:48.560 --> 0:19:53.120 analysts are looking at those historically and projecting those out 0:19:53.200 --> 0:19:56.120 for the next several years, and then a growth rate 0:19:56.200 --> 0:20:01.600 for the five years after that. We're also looking at competitors' statements, 0:20:01.640 --> 0:20:05.879 trying to understand why one company may be performing better 0:20:05.960 --> 0:20:10.520 than the other, and is one performing so well it 0:20:10.560 --> 0:20:14.000 can't keep that up long term, or is one underperforming 0:20:14.480 --> 0:20:18.680 maybe for reasons that can be addressed and that gap 0:20:18.720 --> 0:20:24.560 can be eliminated. We read Wall Street reports. Our analysts 0:20:24.600 --> 0:20:28.320 here are all generalists, they know we're looking for cheap, 0:20:28.400 --> 0:20:33.399 well managed businesses, and they look across different industry sectors. 0:20:35.040 --> 0:20:38.199 But we'll go to the Wall Street analysts who have 0:20:38.320 --> 0:20:43.560 been industry specialists their entire career to learn what we 0:20:43.640 --> 0:20:47.960 can from them about how an industry has evolved to 0:20:48.040 --> 0:20:50.879 the state that it's in today, what they know about 0:20:50.880 --> 0:20:55.280 the different management teams. So we're really trying to put 0:20:55.359 --> 0:21:01.080 together information that we can find from whatever source is 0:21:01.119 --> 0:21:01.679 out there. 0:21:03.560 --> 0:21:05.760 We haven't had a chance to talk really about macro. 0:21:05.920 --> 0:21:09.680 Do you ever include sort of macro inputs in your process? 0:21:09.760 --> 0:21:13.880 Are there macro considerations? You know, for instance, FEDS reducing 0:21:13.920 --> 0:21:17.719 interest rates suddenly that clearly changes a discount rate potentially 0:21:17.800 --> 0:21:21.920 longer term, maybe pushes you towards higher duration versus lower 0:21:22.000 --> 0:21:27.240 duration assets. Or is it really pretty pretty specifically focused 0:21:27.280 --> 0:21:28.960 on this intrinsic value calculation. 0:21:30.440 --> 0:21:35.240 It's very very much focused on a bottom up company 0:21:35.280 --> 0:21:39.680 by company analysis. And I joke that we we do 0:21:39.760 --> 0:21:43.560 have a macro overlay, but it's always the same, and 0:21:43.640 --> 0:21:46.600 it's that the world will be normal seven years from now, 0:21:47.119 --> 0:21:50.879 and to us, normal means an average GDP growth rate, 0:21:51.359 --> 0:21:53.720 an interest rate that's a little bit higher than the 0:21:53.800 --> 0:22:01.359 inflation rate, and normally it sounds like that's the same 0:22:01.400 --> 0:22:06.119 as saying macro doesn't impact us, but at turning points 0:22:06.119 --> 0:22:09.800 it can be really important. Coming out of the Great 0:22:09.800 --> 0:22:12.920 Financial Crisis two thousand and eight, two thousand and nine, 0:22:13.800 --> 0:22:16.159 the idea that the world would be returned to normal 0:22:16.240 --> 0:22:19.200 within seven years was a pretty optimistic point of view. 0:22:19.760 --> 0:22:23.440 In twenty twenty, the idea that travel would return back 0:22:23.480 --> 0:22:26.760 to normal over the next five to seven years was 0:22:26.800 --> 0:22:32.200 a wildly optimistic point of view. So normally the answer 0:22:32.520 --> 0:22:36.160 is we don't have a macro overlay, but when we do, 0:22:36.920 --> 0:22:41.080 it's because the idea that normal will be returning is 0:22:41.119 --> 0:22:42.160 an outlier view. 0:22:42.680 --> 0:22:45.320 So when do you think about selling. We've talked a 0:22:45.320 --> 0:22:48.120 lot about buying with a seven year time horizon, five 0:22:48.160 --> 0:22:51.440 to seven year time horizon, we think longer term. When 0:22:51.480 --> 0:22:53.840 do you think about shaving positions? 0:22:54.359 --> 0:22:58.800 Yeah, it's funny, Gina. The typical viewpoint out there is 0:22:58.840 --> 0:23:01.800 it's really easy to buy stocks and very hard to 0:23:01.800 --> 0:23:06.040 figure out when to sell them. I think people have 0:23:06.119 --> 0:23:09.760 that backwards. If you put in the work when you 0:23:09.880 --> 0:23:12.600 buy a company to really know why you own it, 0:23:13.440 --> 0:23:17.400 then the sell decision becomes easy. And it's that one 0:23:17.440 --> 0:23:20.199 of the important reasons that you bought the stock no 0:23:20.280 --> 0:23:24.560 longer exists. So for us, we'll only buy a stock 0:23:24.960 --> 0:23:27.359 if we think it's a selling at a large discount 0:23:27.359 --> 0:23:32.320 to value, if it's growing and returning capital at a 0:23:32.359 --> 0:23:35.359 combined pace at least as fast as the market, and 0:23:35.400 --> 0:23:39.760 if it's managed by shareholder friendly management teams. We will 0:23:39.800 --> 0:23:42.679 sell if any one of those three is no longer true. 0:23:43.359 --> 0:23:47.960 So obviously our preferred reason to sell is we think 0:23:47.960 --> 0:23:50.600 a business is worth one hundred. It's selling at sixty 0:23:51.080 --> 0:23:53.919 and over a couple of years values grown to one 0:23:54.000 --> 0:23:57.000 hundred and fifteen, and so is the stock price. We're 0:23:57.040 --> 0:24:03.040 happy to move on, take profits and reinvest in something 0:24:03.080 --> 0:24:06.359 that's selling at a large discount. Again, but we'll also 0:24:06.600 --> 0:24:10.160 sell if we lose confidence in the business being able 0:24:10.200 --> 0:24:12.680 to grow, because we want it to grow at least 0:24:12.720 --> 0:24:15.960 as fast as the market. And if we see management 0:24:16.080 --> 0:24:20.200 activity that we think is inconsistent with maximizing long term 0:24:20.200 --> 0:24:26.840 per share value, will also sell. So maybe we've identified 0:24:26.840 --> 0:24:31.040 this nicely cash generative company that's been returning a lot 0:24:31.040 --> 0:24:35.280 of capital to shareholders, and suddenly they make a big acquisition, 0:24:35.480 --> 0:24:38.720 they issue stock to do it, and we think they 0:24:38.760 --> 0:24:43.239 paid too much for the business and it grew. The 0:24:43.280 --> 0:24:47.480 size of the business might help management increase their own compensation, 0:24:48.240 --> 0:24:52.000 but it decreased per share business value for us. We 0:24:52.000 --> 0:24:56.080 would say we made a mistake in identifying high quality management, 0:24:56.520 --> 0:25:00.919 and we would sell I wanted. 0:25:00.640 --> 0:25:04.399 To ask you. You know, Oakmark selects very concentrated, and 0:25:04.440 --> 0:25:06.440 so I wanted to know if you have any type 0:25:06.480 --> 0:25:10.240 of risk management process you know, due to that concentration 0:25:10.480 --> 0:25:13.399 or any other risk you might think of. 0:25:14.400 --> 0:25:19.600 Well, I think part of risk management is helping investors 0:25:19.720 --> 0:25:23.800 know what funds are appropriate for them, and so I 0:25:23.800 --> 0:25:27.720 would say risk management starts there by explaining to an 0:25:27.720 --> 0:25:31.720 investor that it's probably not appropriate for them to put 0:25:31.720 --> 0:25:34.880 their entire net worth in a fund that has only 0:25:34.960 --> 0:25:41.080 twenty names in it. So we manage Oakmark Select as 0:25:41.240 --> 0:25:47.479 if the shareholders have already taken some of the responsibility 0:25:47.680 --> 0:25:51.760 of risk management for their personal portfolio into their own 0:25:51.840 --> 0:25:57.199