Source: Smart Investors
“At Oakmark, we undoubtedly define ourselves as long-term value investors. One way to understand this more easily is that we approach public market equity investing with the mindset of private equity.”
“For us, part of the margin of safety is not having to project seven years into the future and assume the company will still be delivering exceptional performance beyond that point.”
The above excerpts come from a recent 85-minute conversation featuring Bill Nygren, current portfolio manager of the Oakmark Funds, Chief Investment Officer for U.S. Equities at Harris Associates, and a legendary investor who has consistently outperformed the S&P 500 over a 25-year period.
He joined Harris Associates in 1983, rising from analyst to Chief Investment Officer; he began managing the Oakmark Select Fund in 1996 and the Oakmark Fund in 2000.
As of the end of Q1 2026, the combined assets under management of these two funds amounted to approximately $32 billion. The larger Oakmark Fund has delivered an annualized return of roughly 12% since 2000, compared to about 10% for the S&P 500 over the same period—outperforming by roughly two percentage points per year for 25 years.
Throughout the conversation, he repeatedly returned to a central thesis: value investing today is no longer confined to the world of ‘low P/E and low P/B.’ It must be re-evaluated—but only within the bounds of maintaining a margin of safety.
As a boundary for valuation, he limits his forecasts to a maximum horizon of seven years, acknowledging the profound complexity of the world. ‘Not pretending we can see clearly into the distant future is itself part of the margin of safety.’
This article reads more like a memorandum of judgment from a long-term thinker, capturing his genuine deliberations when investing in Apple, Meta, and Netflix, as well as his renewed understanding—as a fund manager—of management quality, capital allocation, and pricing power.
The full conversation is lengthy. Based on Nygren’s own methodology, The Intelligent Investor has distilled the key insights into a more accessible format while preserving the original intent, including essential takeaways and classic case studies.
If you’re left wanting more, it’s well worth going back to read the full version.
01. Reassessing the Capabilities of Value Investing
Bill Nygren began the conversation by highlighting a familiar yet often underestimated fact: value investing sounds simple, but is extremely difficult to execute well.
Many principles—such as not buying at high prices, adhering to a margin of safety, believing in mean reversion, assessing management quality, avoiding narrative-driven investments, and treating short-term market volatility as an opportunity rather than a signal—are easy to articulate but often hard to implement in practice.
He believes the key distinction between exceptional and average value investors lies in their ability to look beyond GAAP boundaries to identify genuine value creation, without abandoning Graham-style discipline.
This capability is not merely about relaxing accounting standards; rather, it involves deeply understanding a business’s fundamentals and recognizing which expenditures that accounting rules classify as expenses are, in reality, investments building long-term value.
He illustrated this point with his own experience of purchasing $Netflix (NFLX.US)$ shares.
At the time, an Oakmark analyst added Netflix to the weekly stock screening discussion list, prompting Nygren’s immediate reaction: “I rolled my eyes.”
But the first paragraph of the report caught his attention—the analyst had conducted a remarkably simple, almost ‘unsophisticated’ survey, asking friends and colleagues: Among all the subscription services you use, which one delivers the most value to you?
Netflix emerged as the overwhelming favorite, followed by HBO and $Sirius XM (SIRI.US)$ 、 $Spotify Technology (SPOT.US)$ . The problem was that Netflix’s monthly fee at the time was only $10, while many competing services charged close to $20.
Analysts adopted a different valuation perspective: the market was assigning a value of roughly $200 per Netflix subscriber at the time, compared to nearly $1,000 per HBO subscriber—a discrepancy that simply didn’t make sense.
If one assumes Netflix adds 25 million subscribers annually and each subscriber is worth approximately $800, the company generates roughly $20 billion in new value each year. Viewed through this lens, the stock was trading at just six times that annual incremental value.
Typical value investors might have concluded the company barely made any profit, but Oakmark saw genuine value creation.
As Nig伦 noted, when there is a clear disconnect between GAAP accounting and actual value creation, you must be willing to adopt a different perspective—rather than proudly identifying yourself as someone who only invests in stocks with low price-to-earnings or low price-to-book ratios, thereby narrowing your investment universe ever further.
Even more noteworthy, Oakmark later not only held Netflix shares in its equity portfolio, but its fixed-income team also used this analytical framework to conclude that Netflix bonds—trading near junk-bond yields—represented an exceptionally attractive opportunity, ultimately making them a significant holding in its bond fund.
Given the inherent complexity of 'reassessing value,' Nig伦 structured his own judgment along three dimensions: time horizon, valuation methodology, and assessment of management.
Dimension 1: Time Horizon – A Seven-Year Framework
In Oakmark’s investment process, Nig伦 is often asked: How far into the future do you look?
The answer is seven years, adjusted for a margin of safety. They seek companies with the potential to double in value over the next four to five years.
Why seven years? This is a figure Oakmark has debated extensively internally. It could be shortened to five years or extended to ten. They ultimately settled on seven because it 'looks further ahead than most public market investors, yet not so far as to amount to flipping a coin.'
Nygren repeatedly emphasizes a key distinction in his article: the fundamental difference between fundamental value investors and fundamental growth investors lies in how they assess when their 'crystal ball' becomes too blurry for predictions to meaningfully support valuation logic.
He acknowledges that some growth investors attempt to look 15 or even 20 years into the future and then discount those projections back using a very high discount rate.
But this is not Oakmark’s approach. They believe that beyond seven years, they no longer have sufficient confidence to assert that a company will continue growing at an extraordinary pace.
More interestingly, Nygren extends the concept of 'margin of safety' in a particularly distinctive way.
In Graham-and-Dodd-style value investing, the margin of safety is commonly understood as 'buying cheap.' However, Nygren argues that part of the margin of safety lies precisely in avoiding the need to project beyond seven years and assume the company will maintain exceptional performance indefinitely thereafter.
Not pretending to see clearly into the distant future is itself part of the margin of safety.
He once cited a poignant example.
Early in his career, the world’s 'safest' business models were considered to be fixed-line telephony and newspapers—'industries you could confidently project twenty years into the future; how could they possibly be disrupted?'
Yet eventually, entire industries declined or vanished altogether. This experience instilled in him a lasting caution toward the notion of 'permanent moats.'
At the operational level, Nygren paired the seven-year framework with a set of methodologies.
For companies with stable earnings, he directly models seven years of cash flows; for more cyclical companies, he discounts based on 'cyclical midpoint earnings,' incorporating both peak and trough periods of the business cycle.
Typically, he looks back at the worst year for the company over the past decade and projects how much earnings would decline if the same scenario were to recur today; he then performs a similar exercise for an upside scenario.
By accounting for both scenarios, the resulting discounted figure reflects a profitability level closer to the long-term norm.
What matters is not how precisely this number is calculated, but whether it brings the valuation closer to reality compared to making no adjustment at all.
Dimension 2: How to Account—Oakmark Accounting and the 60% Discount Purchase Rule
If 'how far ahead you look' defines the time dimension, Oakmark’s distinctive accounting approach defines the spatial dimension: what exactly does your assessment of value encompass?
Nygren has described a contrast between eras. Over forty years ago, when he first entered the industry, if a steel company wanted to expand, it had to build a new plant—an investment that would appear on the balance sheet and be depreciated gradually over its long useful life.
You could see that value reflected directly on the balance sheet.
Today, however, advertising expenses, R&D expenditures, and customer acquisition costs are treated differently—they are expensed immediately on the income statement in the period incurred.
The result is this: for many companies today—particularly in software, internet, and consumer sectors—that rely on their income statements to fund growth investments, their profitability, if assessed solely under GAAP standards, is significantly understated, and the long-term value they are building is overlooked.
Nygren refers to this adjusted perspective as 'Oakmark accounting.'
We look at Oakmark accounting, not just GAAP accounting. We strive to treat these intangible growth investments as long-term value-creating investments in the company.
Apple has been a long-term beneficiary of this approach. When Oakmark initially purchased Apple shares, the stock was trading at roughly a 40% discount to its estimated intrinsic value. The position ultimately generated nearly a 20-fold return.
However, when reflecting on this holding, Nygren emphasized that long-term ownership was never a matter of blind faith: 'Throughout our holding period, we did not continue holding the stock knowingly above our sell target. The reason we held it for so long was that Apple’s operational performance kept improving quarter after quarter, consistently exceeding our expectations. As new information emerged, our assessment of its business value continued to rise, and our sell target naturally increased accordingly.'
This reframes long-term holding as 'long-term holding based on continuously updated judgments,' which aligns with how things actually work in the real world.
In terms of valuation practice, Nygren established a clear threshold for Oakmark: a minimum 40% discount to their own estimate of intrinsic value.
He explained the practical basis for this margin of safety: it starts with the yield on long-term government bonds, adds the implied spread of medium-quality corporate credit, then further incorporates an equity risk premium relative to an average corporate bond. Finally, each company is assigned a risk rating from 1 to 5. Once this full discount rate framework is in place, a uniform 40% discount is applied to determine the purchase price.
Nygren stated that what they dislike most is false precision. 'Sometimes I see other value investors say, “We bought this stock at $60, and our estimate of intrinsic value is $75.12.” That kind of statement often makes me laugh.'
A 40% margin of safety is, in essence, room allocated for potential errors in valuation.
The core of this entire methodology is to prioritize consistency over precision. Apply consistent assumptions across two or three hundred companies, then rank those most undervalued at the top.
This 'ranking mindset' is most evident in his contrarian stance on bank stocks.
Banks are among the least favored sectors in today’s market—characterized by low valuations, heavy regulation, and limited growth. Yet Næglen believes it is precisely this market pessimism toward banks that creates opportunity.
He even jokes that he would be delighted if the valuation multiple of his bank portfolio instantly rose to utility-sector levels tomorrow, as that would mean the market has already pushed valuations significantly higher.
In Næglen’s view, the market’s undervaluation of banks is essentially an excessive carryover of the shadow cast by the global financial crisis. But today’s banks are not the same as they were back then; they now hold roughly twice as much capital per dollar of assets, and lending standards are far stricter.
Dimension 3: Assessing Management – Entry Points for Evaluation
If ‘how far ahead you look’ and ‘how you do the math’ determine your valuation judgment, then ‘how you assess people’ addresses a more practical question: Can you truly trust this company in the hands of its current management?
Among Næglen’s three investment criteria, the second explicitly states that management must be aligned with shareholder interests.
When evaluating management, he does not rely on listening to executive speeches or reading media reports. Instead, he focuses on three specific entry points:
First, assess whether the incentive structure reflects a ‘denominator-aware’ mindset. He places greater emphasis on earnings per share growth, enterprise value per share growth, and return on invested capital (ROIC), rather than total profit or total revenue.
The reason is straightforward: a compensation system that rewards executives solely for achieving growth targets through ever-larger acquisitions inherently steers management toward value-destroying mergers and acquisitions.
Second, observe where management spends its time. He stated plainly that he has never seen a CEO who could maintain a deep understanding of operational details while constantly traveling, promoting the company, and giving interviews.
He prefers to support CEOs who focus on substantive work rather than chasing superficial glamour.
Third, ask a few long-term questions. Unlike typical sell-side meetings, when Oakmark meets with management, it does not focus on last quarter’s results. Instead, it asks: What do you hope this company will look like five to ten years from now? When your tenure as CEO ends and you look back, what metrics will you check first to determine whether you truly succeeded?
What he aims to do is draw the CEO out of the well-rehearsed, standard talking points they’ve repeated many times before.
Underlying these three approaches, what Nig伦 truly cares about is capital allocation capability.
This is most clearly reflected in Oakmark’s starkly different judgments and actions regarding its investments in Meta Platforms and Netflix.
Take $Meta Platforms (META.US)$ first. Back when Facebook’s stock fell to around $100, Oakmark’s original rationale was that by applying relatively conservative valuation multiples separately to Instagram and the core Facebook platform, and then adding back the cash on the balance sheet, the resulting intrinsic value was clearly higher than the market price.
At that time, the real key question was whether to double—or even triple—the position size.
In the end, they did not proceed with it.
The reason was that Facebook had just appointed a new CFO, who failed to articulate the economic returns of that round of substantial new capital expenditures and R&D spending in a way convincing enough for Oakmark.
“At the time, it felt more like, ‘This is the direction we’ve decided to pursue, so of course we have to spend this money.’”
For Oakmark, that was a red flag.
Now consider Netflix. Netflix likewise went through a period of subscriber declines and saw its share price drop from over $200 to around $100.
But Oakmark’s response was entirely different. They flew to California to meet Netflix’s CFO in person, asking specifically about the path to restoring growth, how password sharing would boost revenue, and how an ad-supported tier could create new revenue streams.
“After that meeting, we came away feeling that management was thinking very economically about the company’s future. And given the existing subscriber base, the stock also appeared extremely cheap. So, we essentially reinstated nearly all the position that the market had forced us to cut.”
That move later generated substantial profits for their investors. Reflecting on it, Nygren remarked that, in a sense, it even offset the returns Oakmark missed out on by not investing in Meta Platforms.
02. If we didn’t hold it today at all, would we still buy it?
In this conversation, Nygren laid out a series of highly practical evaluation questions to help investors address one core proposition after their research: Do you truly understand this company?
Can this company, seven years from now, grow organically enough to bring its valuation to a reasonable level?
Of the GAAP earnings it disclosed today, how much long-term value has been expensed? Viewed through a different lens, does it appear cheaper?
During its most recent period of significant capital expenditure expansion, did management clearly articulate the rationale using the language of 'economic returns'?
If we didn’t hold this stock at all today, would we still buy it?
This final question represents the strictest research discipline Nig伦 has set for himself.
He said many value investors easily fall into a state of paralysis: “I don’t yet know enough to confidently buy—but I also don’t know enough to feel comfortable selling.”
Oakmark’s approach is to force itself to answer explicitly: Based on what I know today, do I still want to hold this position? If the answer isn’t a clear 'yes,' it shouldn’t remain in the portfolio.
I really like this standard.
It compels investors, at regular intervals, to reset their perspective as if they held zero positions and re-examine every investment with fresh eyes. This kind of discipline is actually very rare in today’s information-saturated, narrative-driven market.
In this conversation, Nagel nearly summed up his more than two decades of work in a single sentence: “What matters is identifying which companies are most undervalued—not calculating every number with extreme precision.”
This statement is, in fact, another way of expressing Graham-style margin of safety in the context of a new era. Næglen himself acknowledges that Oakmark’s entire methodology is essentially an extension of Graham and Dodd—he has merely refined the classic concept of margin of safety to better align with a world where GAAP no longer captures full intrinsic value.
The so-called re-evaluation of value investing has never been about reassessing value investing itself, but rather about reassessing the world.
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Editor /rice