Understanding accounting and having a broad industry perspective is crucial for a generalist analyst in the asset management industry.
Harris Associates focuses on idea generation by looking for undervalued stocks that have been out of favor, assessing factors such as performance and insights from industry professionals.
The banking industry, particularly retail banking, offers attractive investment opportunities, with Capital One standing out as an exciting stock due to its strong competitive advantage and rational capital allocation.
Deep dives
Bill Nygren's Path to Asset Management and Value Investing
In this podcast episode, Bill Nygren, Chief Investment Officer at Harris Associates, shares his journey into the asset management industry and his passion for value investing. He explains how his childhood interests in numbers, stocks, and gambling shaped his investment philosophy. Nygren emphasizes the importance of understanding accounting and having a broad industry perspective as a generalist analyst. He discusses Harris Associates' team-oriented approach to analyzing potential investments, involving rigorous debates and questioning during meetings. Nygren also highlights the criteria they look for in stocks, such as a significant discount to intrinsic value, favorable business outlook, and management alignment with shareholders.
Process of Identifying Investment Opportunities
Nygren explains that Harris Associates' idea generation revolves around stocks that have been out of favor or undervalued. They consider factors such as stocks' performance, presence of new management with prior success, and insights from respected industry professionals. The investment team focuses on qualitative reasoning when assessing potential investments, evaluating competition, industry structure, and capital allocation strategies. For the valuation process, they use multiple approaches, including discounted cash flow models, premium assessments for deposit franchises and securitized asset categories. Nygren also discusses the team's approach to managing risk, portfolio construction, and industry concentration. They aim for higher weightings in stocks they believe in and consider exposure to macroeconomic factors.
Opportunity in Banking Stocks, Highlighted by Capital One
Nygren identifies the energy and auto-related sectors as attractive investment opportunities. However, he particularly emphasizes the banking industry, specifically retail banking, which he believes has been unfairly punished by recent events. He singles out Capital One as a stock he finds exciting at current levels. Despite concerns about economic recessions and interest rate fluctuations, Nygren sees Capital One as offering significant value. He highlights the company's strong competitive advantage, rational capital allocation, and a history of serving the same customer segment successfully. Nygren explains their evaluation of Capital One's worth using various models, including assessing the value of its deposit franchise and the premiums associated with securitized assets. He also addresses potential impacts of interest rate changes on the company.
Valuing Companies: Metrics and Models
When valuing companies, it is important to consider various metrics and models. Acquirers may use different criteria, such as multiples of EBITDA or focusing on sales base, to determine value. The seven-year discounted cash flow model is also commonly used, where a target multiple is set based on business quality and risk levels. Public market comparables are considered to ensure a company is attractively valued. Additionally, evaluating management's capital allocation and business structure is crucial for successful investments.
Monitoring Investments and Accounting Anomalies
To monitor investments, quarterly results and updates from management are assessed, alongside annual in-person meetings with management teams. Buy and sell targets are adjusted based on any new information that affects intrinsic value. Regarding accounting anomalies, adjustments are made to ensure gap accounting accurately reflects value creation. For instance, considering customer acquisition costs, R&D expenses, and brand spending allows for a more comprehensive assessment of a company's true value. The portfolio presents a mix of traditional value names and software companies, incorporating creativity and alternative accounting principles.
With the constant evolution of the asset management industry, investors need to stay a step ahead to justify earning an active management fee. With over 40 years of experience in the industry, this is a lesson that today’s guest, Bill Nygren of Harris Associates, instills in the younger analysts he mentors.
Bill is a true legend of value investing and an investor you can turn to whenever the market is uncertain. He radiates fundamental ideas and has an expansive perspective on the comings and goings of the market and the economy at large.
Bill is the Chief Investment Officer for US equities at Harris Associates, which he joined in 1983, and a vice president of the Oakmark Funds. He has been a manager of the Oakmark Select Fund since 1996, Oakmark Fund since 2000, and the Oakmark Global Select Fund since 2006. Bill served as the firm’s director of research from 1990 to 1998. He has received many accolades during his investment career, including being named Morningstar’s Domestic Stock Manager of the Year for 2001, and he holds an M.S. in Finance from the University of Wisconsin’s Applied Security Analysis Program (1981) and a B.S. in accounting from the University of Minnesota (1980).
In this episode, Bill, Michael, and I discuss why Bill was drawn to value investing, why generalist analysts transition more easily to portfolio manager than specialists, his approach to idea generation and portfolio construction, pivoting in times of crisis and great distress, recession insights from over 40 years of experience, and so much more!
Key Topics:
Welcome Bill to the show (1:09)
Bill’s lifelong fascination with the line between gambling and investing (2:17)
Why Bill was drawn to value investing (4:51)
The importance of working at a firm that shares your investment philosophy (6:26)
Why generalist analysts transition more easily to portfolio manager than industry specialists (9:36)
Dealing with industry intricacies as a generalist analyst (14:05)
Harris Associates’ approach to idea generation (15:55)
What it’s like to be an analyst at Harris Associates (18:31)
Why Harris uses multiple techniques to define value (24:25)
Looking at management’s attitude towards capital redeployment (26:33)
Harris’ maintenance process and error recognition methods (30:08)
Bill’s thoughts on the news of Microsoft’s massive investment into OpenAI(32:53)
Pivoting in times of crisis and great distress (36:38)
Capital One as a case study of a stock that represents a good investment opportunity today (41:25)
Recession insights from over 40 years of industry experience (44:02)
Thinking about the effect of the current interest rate environment (48:35)
Criteria for portfolio construction and position sizing (49:52)
The evolving opportunity set (53:21)
Identifying anomalies in GAAP accounting (55:44)
The things that keep Bill up at night and excited about the future (59:31)
