After failing to make his junior high baseball team in St. Paul, Bill Nygren sought another outlet to channel his competitive drive. He found it in the stock market, where he has become a mutual fund equivalent to Albert Pujols: a reliable superstar with a lot of power. Nygren’s $13.3 billion Oakmark and $4.8 billion Oakmark Select funds have beaten the S&P 500 and their respective categories over one, three, five, 10, and 15 years, according to Morningstar. That requires stamina, discipline, and sacrifice. “You’re thinking about investments most of your waking hours,” says Nygren, 55. His strategy is influenced not only by value-investing legends like Warren Buffett, but also by the philosophy of former Chicago Bulls coach Phil Jackson. Nygren says he follows Jackson’s credo that all he can do is create the circumstances for success, then let go of the outcome. The result: a calm focus that has helped Oakmark win the Lipper Award this year as best large family of stock funds. As for the recent market uncertainty, Nygren tells Fortune from his Chicago offices, that’s when the fun starts. Edited excerpts:
Are stocks overpriced today — is it hard to find value?
No, I think the market, selling at a mid-teens multiple of expected earnings, is in line with historical averages. Five years ago, when high-quality companies were available at single-digit P/Es, that was highly, highly unusual. I don’t think the fact that the market is more expensive than it was five years ago is troubling. I just think today’s average multiples mean we should set our sights on more average returns.
There are some really good companies that don’t demand much of a premium. It’s surprising how little the market asks to hold Google, Visa, or MasterCard. These are businesses that have such strong tailwinds, and you can buy them at prices not much higher than that of the average business.
What do you make of the market ups and downs so far this year?
Last year was unusual: Investors never had to face a period when they were down 5% to 10%. Through long periods of history, we’ve seen 10% corrections about every year and a half on average. And something like half the 10% corrections turn into 20% corrections. But it’s nothing to panic about. That ought to be viewed as normal. If we have that sort of correction, investors should be opportunistic and look to rebalance toward their target asset allocation. They shouldn’t be putting money in the market that they don’t expect to leave there for five years or more. And if you can’t handle a 10% loss on that capital, you really shouldn’t have it in stocks.
Your funds warn that they can be volatile because they hold relatively few stocks. How do you consistently outperform the S&P 500?
Oakmark’s most important skill is stock picking. We try to maximize it by not spreading our fund over too many companies; Oakmark Select owns only 20. So the success or failure of each holding influences our net asset value more than they do a typical mutual fund. But we select stocks that trade at a significant discount to value, so if things go wrong, we don’t have as far to fall. And when things go right, we capture a bigger return.
Also, we have a very long-term time horizon: We expect to own companies for at least five years. Take General Motors, down 16% in the first quarter. There are a lot of reasons people wouldn’t like GM. Besides the recent recalls, it has a lot of debt. But it’s a $34 stock, which is only about seven times earnings. Most of the auto companies have been through the challenges before of when the right time is to issue a recall, and in hindsight it looks like they were late doing it. So when you’re thinking, How is this going to affect GM in 2020? it’s largely going to be forgotten by then.
Where are you finding value?
What the four companies we purchased last quarter — Citigroup [for more, see “Banking on Citigroup“], Sanofi, Diageo, and General Mills — all had in common was they pretty much missed the bull market in 2013. Our biggest sector investment is in financials, which are significantly discounted because investors fear they will become heavily regulated. We aren’t convinced. But even if the banks, like Bank of America, have modest or no top-line growth, in several years investors will come to appreciate how rapidly they can grow earnings per share through stock repurchases.
It’s funny that the 20% EPS growth rates that you have with our holdings like Google, MasterCard, and Visa don’t seem high enough to attract the investors who are intrigued with Twitter, Tesla, or Facebook — newer tech companies that have high valuations. That’s not the kind of stuff we’re buying. We have fairly heavy investment in what I’d call the “established” tech companies like Oracle, Intel, Microsoft, Qualcomm. They’re selling at such discounts to the S&P 500 that if the businesses perform just average, the stocks should still rise. Apple is another great example. The bear case is that it’ll have trouble sustaining growth. But we think if it grows at all, it ought to be selling at a higher price. And even with average top-line growth, you should still see above-average EPS growth because of more share buybacks.
You recently bought shares of several companies with significant emerging-market exposure. Are you bullish on the category?
We very much like strong emerging-market exposure in the companies we own. When we can get it through a Diageo, General Mills, and don’t have to pay a high price for it, and still have the developed-market protections, that’s very attractive. Also, our time horizon is important. We don’t have a view of what emerging-market growth is likely to be between now and the end of this year. But when you stretch the time frame to five years, we believe emerging markets will grow significantly faster than developed markets.
This story is from the May 19, 2014 issue of Fortune.
