To The Moon

Source: Oakmark

Bill Nygren is a well-known value investor, known for his concentrated positions. Bill Nygren is the manager of the Oakmark Fund, Oakmark Select Fund, and Oakmark Global Select Fund. Recently, he updated his Q3 commentary.

The Q3 commentary continues to emphasize, as in previous years: long-term investing, asset allocation, and that high volatility creates stock picking opportunities.

Historical Performance

Source: Gurufocus

Following the $S&P 500(.SPX)$, Oakmark underperformed in the third quarter, with the fund down 5.9%, essentially the same as the S&P 500. 

The S&P 500 is down 24% this year and U.S. 20-year Treasuries are down 30%, which makes asset allocation seem futile. People who allocate to both stocks and bonds may even lose more money than pure stock investors. And inflation, the highest in 40 years - 8% - has added to these woes.

Why?

Interest rates are being raised. When the year began, interest rates were still close to zero and all long-term assets fell with the rate hike. Now that long-term bond yields are again above long-term inflation estimates. 

Bill Nygren believes bonds can once again play their risk-reducing role in a diversified portfolio. So continue to encourage asset allocation and sell the assets that perform well during periods of extreme volatility and invest in the assets that perform poorly.

In the last 77 years, there have been 11 bear markets with declines of more than 20%. This is just one of those times, and it could get worse. History shows that after a 20% decline, the average return over two years has been 33%.

Bill Nygren wants to emphasize two things:

1. First, the power of compounding. A 12% return in one year isn’t life changing, but stay invested for 20 years and, on average, you’ve grown your capital nearly ninefold.
2. Second, notice that the lowest number on the chart is the worst one-year return, a 39% loss. As the time extends, not only do the average results improve, but the worst losses also get smaller.

In fact, the worst 20-year result has been a gain of 155%. The fact that risk decreases with time is also apparent in the annualized standard deviations, which are lowest for the longest holding periods. That means the annual returns are not independent of each other, but rather, are mean reverting. And that’s good to know after a year like this year. 

Most investors tend to throw in the towel after large losses and go all in after large gains. History says the opposite has produced better results.

“A stock pickers’ market”

What would define a good opportunity for picking stocks? If success means selecting stocks that increase more than the average stock, then a target-rich environment would be when there is a wide range in how stocks are being priced, meaning more stocks than usual are selling at extremely high and extremely low valuations. One way to measure the opportunity is to look at the distribution of P/E ratios.

How does today’s P/E distribution compare to history?

The distribution of trailing P/E ratios for the S&P 500 compared the 450th highest P/E to the 50th highest. Over the past 30 years, the 50th highest P/E has averaged 47 while the 450th highest averaged 11. So, the highest P/Es were more than four times as large as the lowest.

Today the 50th highest P/E is above normal at 50, and the 50th lowest is below normal, under 9, for a ratio of 5.6. So, the P/E dispersion is about 40% wider than normal.

As has often been the case, unusually high volatility leads to a high spread in valuations. Bill believes a good environment to add value via stock picking. Today presents a better than average opportunity set. He expects not only good performance from the market, but better performance for the stocks we identify as attractively priced.

Here are his 7 advice:

1. If you wake up at night thinking about your investment portfolio, you should reduce your risk.
2. Defer discretionary spending until markets have recovered.
3. Don’t listen to media pundits’ advice on market timing.
4. Asset allocation matters, and investing in both stocks and bonds helps control risk.
5. Market volatility creates an opportunity to rebalance to your target asset allocation.
6. When valuation spreads are above normal, look to add value by stock picking.
7. Investors hurt themselves by selling after declines and buying after increases. Do the opposite.

Bill Nygren's top 10 holdings

Source: Gurufocus

$EOG Resources(EOG)$, $Alphabet(GOOGL)$, $Ally(ALLY)$, $APA Corporation(APA)$, $Charles Schwab(SCHW)$

$Citigroup(C)$, $Meta Platforms, Inc.(META)$, $KKR & Co LP(KKR)$, $Fiserv(FISV)$, $Capital One(COF)$

Source: https://www.gurufocus.com/news/1868017/bill-nygrens-3rdquarter-market-commentary