Bill Nygren – How To Apply A Private-Equity Approach To Public-Equity Investing

Bill Nygren – How To Apply A Private-Equity Approach To Public-Equity Investing

Great interview with Bill Nygren and Win Murray from Oakmark Capital in last month’s Value Investor Insight Newsletter. On the subject of passive vs active investing Nygren says,  “I think it’s ironic that an increase in the number of dollars invested without thought as to where value is and isn’t would make the game impossibly difficult for those of us who do think about these things.”

What’s also notable is Nygren’s private-equity approach to valuing public-equity investments.

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Here’s an excerpt from that article:

VII: We’re assuming what you’re looking for – stocks trading at discounts to your estimate of value, management teams aligned with shareholders, and value that grows over time – hasn’t changed. True?

Bill Nygren: There hasn’t been any significant change. From the time we started Oakmark Fund more than 25 years ago those have been the criteria we’ve used to find companies in which to invest. We still believe they’re the three most important things on which to focus.

If you’re missing any of those, you start to struggle with the investment idea. If the name isn’t cheap, it doesn’t even qualify as a value investment. If the value isn’t growing, then you’ve got a clock that’s ticking against you. And if management isn’t focused on maximizing long-term per-share value, then no matter how good your analysis is of the business, the decisions being made can disrupt the rising path of value you’d otherwise see in the static business. It’s only when all three of those things are present – discount to the value, value that’s growing and management trying to maximize per-share value – that we have the confidence to make an investment.

Private-equity firms generally look for companies they believe investors will perceive differently five to seven years from now because of changes they can put in place. Investors today might be ignoring hidden assets or are overly focusing on a temporary problem, but a private-equity approach focuses on how business values could change over several years. That’s a very different way of thinking from most investors who are trying to outguess each other on next quarter’s or next year’s earnings. We try to apply a private-equity approach to public-equity investing.

You can read the full interview here.

This article was originally published at The Acquirer's Multiple

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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