An Extreme Buying Opportunity

You probably consider this title salacious, but "extreme" isn't even my word. It's Bill Nygren's. He said on his fund's fourth-quarter conference call, "The values that we're seeing today in financials and retailers are extreme."

He also confessed, "I'd love to be coming into the office every morning and putting 20 million new dollars to work each day, because I think the opportunity is very great."

That's right. One of the world's best investors is positively giddy about today's buying opportunities. The bad news is that he doesn't have enough money to invest.

Ay, there's the rub
Bill Nygren -- if you don't know him -- is a value investor. That means he waits for market pessimism to drive the stocks of great companies down to prices far below their true worth. Then he buys and profits. Recent buys, according to Portfolio Reports, have been into currently unloved companies such as Dell (Nasdaq: DELL  ) , Comcast (Nasdaq: CMCSA  ) , and Capital One (NYSE: COF  ) .

Over the past 15-plus years, Nygren has profited handsomely with this strategy. His Oakmark fund has returned 13.6% annually since August 1991, versus just 7.7% for the broader market. That's good. Really good.

All good things must come to an end
But the tables have turned. A big bet on Washington Mutual (NYSE: WM  ) went wrong, and Nygren's Oakmark fund has lost nearly 11% of its value over the past year. Worse, it's been outperformed by 90% of the funds in its category. Worst of all, discouraged shareholders are pulling money from the fund.

Not only can Nygren not buy as much of the extreme values he sees, but he needs to sell holdings he thinks are cheap to meet redemption demands. This is Nygren's paradox of value investing: "When the opportunities are the greatest, confidence in the approach is at its lowest."

A tough break, but that's life
When you're done feeling sorry for Nygren, ask yourself what you've been doing lately. He's seeing redemptions in his fund because individual investors are panicking. They've lost money in this terrible stock market over the past six months, and they don't want to lose any more. So they throw a tantrum, pick up their ball, and go home.

This is crazy.

Don't be crazy
The good news is that if you're willing to stick with stocks, you can take advantage of the market's craziness. As Warren Buffett's longtime friend and colleague Charlie Munger observed last year:

There are at least two kinds of markets that are inefficient. One is those that are so small they are neglected. ... The other are the markets wherein really crazy people are doing really crazy things -- particularly if they're selling.

All of this craziness results in "crazily mispriced securities." Buy them, and you'll do well -- just as Nygren, Buffett, and Munger all have.

But today you can do even better. See, not only is the market selling crazily today, but it's doing so most crazily in the generally neglected small-cap universe. Put neglect together with insanity, and you can find some outrageously cheap buying opportunities.

Some stocks are cheap, but buyer beware
Recognize, of course, that buying stocks -- and small-cap value stocks in particular -- is not for the faint of heart. Though the total return potential is tremendous, volatility is inevitable. Noted value investor Richard Pzena has said that you're not doing value investing correctly unless your portfolio makes you want to throw up. (Given that he owns hefty stakes of Citigroup (NYSE: C  ) , Fannie Mae (NYSE: FNM  ) , and Freddie Mac (NYSE: FRE  ) , Pzena may very well want to do more than that today.)

So while we guarantee volatility, we can mitigate that volatility by taking the long-term view, drilling down on quality and valuation, and ignoring this crazy market. That's where we're focused for our Motley Fool Hidden Gems small-cap investing service, and we're poised to take advantage of some spectacular prices we see in the market today.

To see our top small caps for new money now, click here to join Hidden Gems free for 30 days. It won't all be smooth sailing from here on out, of course, but we're confident that a diversified portfolio of our picks has significant long-term return potential.

Tim Hanson does not own shares of any company mentioned. Dell is a Motley Fool Stock Advisor and Inside Value recommendation. Washington Mutual is a former Income Investor pick. The Fool's disclosure policy is declaring for the 2008 NBA draft, though it will not be hiring an agent.


Read/Post Comments (25) | Recommend This Article (145)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2008, at 10:55 PM, Seafairer wrote:

    Tell me about it! I bought 1000 shares of a small -67million m-cap at 1.15. Now it trades at a buck. But it is profitable and now has Proffessional Analyst coverage. It will be some years before the stock climbs, but I am waiting....

  • Report this Comment On April 25, 2008, at 10:19 AM, Flicks wrote:

    Nice Try

  • Report this Comment On April 25, 2008, at 2:20 PM, swiver wrote:

    I have lost all faith in financial institutions here and in UK.

  • Report this Comment On April 25, 2008, at 4:49 PM, kosmo1090 wrote:

    Has anyone tried the 'Motley fool Hidden Gems'. Is it that good as they say it is. Want to hear from the horse's mouth.

    Thanks for feedback.

  • Report this Comment On April 25, 2008, at 7:21 PM, bigjim22 wrote:

    VDTI got FDA approval this week for a diabetes treatment. I think it will move from its 0.50 stock price on Apr. 25.

  • Report this Comment On April 25, 2008, at 10:16 PM, Erulehto wrote:

    kosmo1090: I have tried Hidden Gems, and am generally quite pleased with it. Once the macro situation improves I will be using it to buy back into stocks.

    To comment on the article, I've spent far too much time watching the housing bubble run up, including all the fun 'n exotic debt instruments that got used. I've got a fairly decent idea of what's on the banks' balance sheets and the idea that this is just a "liquidity problem" or a "crisis of confidence" holds about as much water as the idea that many of the dot coms had feasible business plans or that "it's a whole new paradigm". I've been sitting in cash for 2008 because I'd rather not see what happens to earnings when a few trillion dollars of credit disappears from the economy.

  • Report this Comment On April 25, 2008, at 10:17 PM, Wildeyes007 wrote:

    I am a subscriber of Hidden Gems, Rule Breaker, and Advisor. I am overweighed in Rule Breaker's recommendations. Also, it has an exciting discussion board.

    Wildyeyes007

    (George)

  • Report this Comment On April 26, 2008, at 12:33 AM, oneheart329 wrote:

    Wish I COULD FIND that elusive discussion board i hear so much about or even one person to talk stocks and trends with. 'spose I'll have to remain happy with my portfolio and try to stay happy with the div's.(800 cmed, 300 cmp, 1500 exm,800 fro,200 pbt,and 1100 rio). They all be in the green and that's not taking into account dividends!

  • Report this Comment On April 28, 2008, at 9:02 AM, marcrobert wrote:

    I'm so tired of these thinly veiled advertorial content that you pump out on a daily basis and that fills up by inbox.

  • Report this Comment On April 28, 2008, at 9:04 AM, marcrobert wrote:

    I'm so tired of these thinly veiled advertorials that you pump out on a daily basis and that fill up my inbox.

  • Report this Comment On April 28, 2008, at 9:40 AM, BrushpileBill wrote:

    Agree with marcrobert. I'm a subscriber and don't appreciate continual email solicitations to subscribe again. MF needs to stop sending advertisements to current subscribers.

  • Report this Comment On April 30, 2008, at 6:22 AM, spastic100 wrote:

    agree with brushpilebill and not send advertiorals to current subscribers

  • Report this Comment On April 30, 2008, at 6:53 AM, wiseoldbaldy wrote:

    Yes, please don't keep sending these advertisements disguised as advise to current subscribers. After reading 4 pages of self praise, all you get is a subscription request. It is like showing a little bit of thigh all night long, without evr getting any!!

  • Report this Comment On May 06, 2008, at 8:56 PM, roywhart wrote:

    I also hate the constant advertisements to buy new subscriptions. You should make all your recommendations to your subscriber base as a whole. You might make less money in the short run, but you might retain your customers longer since they would not get aggravated by the current process.

  • Report this Comment On September 01, 2008, at 1:15 AM, doubleDownDave wrote:

    In his article, Tim Hanson states or at least implies that Bill Nygren has been running Oakmark Fund since 1991. Unfortunately I have owned Oakmark for more than ten years. During that time I have enjoyed reading most of their quarterly letters to unitholders.

    Bill Nygren has been running or co-running Oakmark and Oakmark Select stocks selection since about 2001. During that time, the fund has underperformed the S&P 500 I believe. Prior to that time, the fund was run by a guy named Sandborn I believe. This guy performed much better than Nygren. He got the boot when the dot-com boom was underway and seaminly sensible value strategies didn't work for a couple of years.

    By sticking with Wamu as a very large holding for the past few years, this shows Nygren really blew it and shouldn't be thought of as a good stock picker. Nygren should have done much more detailed research and realized that house prices were overvalued and foreclosures would skyrocket in 2007 or 2008, thus severly damaging Wamu.

    I'm not sure why so many investment reporters think Nygren is so great. Maybe it's that he seems to have a sound strategy and is willing to talk to reporters for their stories.

    If you look at his track record, it really doesn't pan out. Also, you really need to look at his stock selections, since he inherited some good stocks from Sanborn and held onto them since Oakmark has a low stock turnover.

    I guess I've just convinced myself to dump Oakmark.

  • Report this Comment On October 19, 2008, at 10:19 PM, sb101cu wrote:

    "Tim Hanson does not own shares of any company mentioned."

    To make this more Foolish, recommendations should be based on, the stock they own. Put your words where your mouth is......not some where else

  • Report this Comment On December 15, 2008, at 9:39 AM, eglp wrote:

    So what am I to think now? I have subscribed to Motley Fool Advisor based on the premise that their research and unique approach would reveal to me the best stock investments available. Ah, but wait...now I learn that a subscription to the Advisor is just an investing "hors doerve," and if I want to actually get fed I have to subscribe to to all of the other publications they offer. Subscribe to the the Motley Fool Advisor and profit from our insight ( but we'll not tell you of the really profitable investing ideas; no, we'll tease you until you dole out more money for everything that we offer). When I became a subscriber ( two weeks ago ), I thought that their approach was refreshing, but now I feel duped and misled, as if they are supplying just the outer edge of a jigsaw puzzle. Very disappointed.

  • Report this Comment On December 20, 2008, at 10:24 AM, PropagandaChewer wrote:

    My research tells me...

    I have been doing a lot of reading of the send-outs here lately and I have come to the same conclusion...

    In my opinion, they are a path to get you in and then another path is introduced to get you in deeper...

    Having said that, I must admit that I have learned quite alot from the reading of many of the articles without having invested a dime. I don't want to steer potential subscribers away from learning opportunities and I am thankful for the advice that is shared in small doses. One must keep in mind that a subscription is an investment as well and "Foolish Is As Foolish Does".

  • Report this Comment On December 20, 2008, at 11:01 AM, wuff3t wrote:

    Guys, if you don't want TMF e-mails in your inbox, create a rule in your spam filter to mark them as spam. You can find information about each of the newsletters easily enough on the TMF website.

    TMF newsletters are all designed to stand alone - you don't need to subscribe to more than one, so you can ignore any adverts you like. The free trials are just an offer to see whether you might find another service that suits your goals/temperament/risk tolerance better. You could, I guess, even try a 30-day trial of another newsletter and pick up a load of free stock tips if you wanted. That's actually a very generous offer when you think about it - much moreso than you'll find with many other advisory services.

  • Report this Comment On December 20, 2008, at 12:59 PM, JLOGAN005 wrote:

    THANKS KEEP THEM COMMENTS` COMING....,IT`S IS GOOD TO HAVE A GOOD STOCK INVESTER.,ON OUR LEVEL...!,,,WITH A GOOD HONEST OPINION OF ARTICLES WRITTEN BY PROFESSIONAL.THANKS {JL}

  • Report this Comment On January 01, 2009, at 10:39 AM, PuckMeister wrote:

    To egpl;

    He writes;

    "but now I feel duped and misled, as if they are supplying just the outer edge of a jigsaw puzzle. Very disappointed"

    egpl

    I wouldn't normally take time for this response but I think you deserve an explanation and an incentive to journey into a world of enlightenment.

    First; I agree, TMF does solicit new business to an extreme from existing customers. After a while you will learn to ignore that part of certain post. Remember they must pay the help, so please understand.

    Second; Now your journey into the wonderland of understanding the financial operation and manipulations of some great and not so great public held companies can begin. You chose a good service in the Advisor Letter. You have not been duped nor mislead. As a person who has been involved (as a member) with TMF since the mid 90"s let me assure you this is not the case. The few hundred dollars I've spent in this endeavor have been rewarded with tens of thousands of dollars of knowledge and pleasure from the discussion boards alone. Please give the service you've purchased a chance. Read, join in and enjoy. It will be a path well traveled I hope. Welcome to our groups.

    HC

    Formally "twobogie"

    Now "puckmeister"

  • Report this Comment On January 18, 2009, at 11:27 PM, ctnative wrote:

    egip: Hey I agree with you. I paid up for the same reason and expected professional guidance only to find that there is another pub. that will give it for another fee. Everything is going normal

  • Report this Comment On March 20, 2009, at 1:20 PM, tomd728 wrote:

    doubledowndave has Nygren nailed as one of the

    worst mutual fund managers in recent memory.

    I too owned Oakmark under Nygren's aegis and

    actually E-mailed Bill on his exposure to WAMU

    back in '07.His answer was straight forward, "canned"

    perhaps, that "he was sorry we disagreed".

    I'm delighted we disagreed as I was out of Oakmark

    in a flash with that retort.

    The only clear winner Bill Nygren has had under

    his management is YUM. And on that holding we

    agree.

    I hope he still holds YUM as it bodes well for stock

    on weaking dollar and is a good China play to boot.

    Peace out............

  • Report this Comment On March 30, 2009, at 5:16 PM, squid13 wrote:

    Guys, my advice to you is to cancel any subscriptions you have and get your refund back. They are very good about this. The truth is that Motley Fool's founders did very well when the market was going up in general. it was like shooting fish in a barrel. But they don't know any more than the next expert. They live off of our subscriptions. They are like those sports handicappers that sell you picks on the phone for a fee. Right or wrong, they keep your money. The bottom line is that if anyone had the fool-proof method for picking stocks (or sports), then they wouldn't need to sell their picks. I know I wouldn't share my knowledge. Unless of course I had ego and insecurity issues and needed to feel respect.

  • Report this Comment On April 08, 2009, at 2:25 PM, rcrouse wrote:

    If you are not discouraged in this market, you are a genius, have no money, or live in another world, I have subscribed to the Advisor since it's inception. I share the feelings of those who feel that communications represent little info and thinly veiled advertisements. Perhaps their success had led to mergers with other authors of newsletters, and that's the reason for the ads. That's the most positive spin I can consider. I'm a longtime fool.

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