#1. Bill, I understand that you sell when the price of the stock reaches 90% of your estimate of its intrinsic value. Have there been any exceptions? On average, have you found this to be an optimal sell strategy?
Bill Nygren: Four exceptions:
We sell at less than 90% of value if we lose confidence in either the management or the ability of the business to grow. Effectively, those are sales of our mistakes.
We sell at less than 90% of value if the business needs to be owned by someone else to maximize value (generally meaning acquisition synergy) and there is no reason to believe such a change in ownership is imminent.
We will sell at less than 90% of value if non-owned stocks are available at less than 60% of value. The relative gap of 40-50% appreciation is what we are really trying to capture.
We will wait for a holding to go long term if it is selling at around 90%-110% of our value estimate. If it increases past that, we’ll accept the short term tax penalty to avoid the risk of holding a significantly overvalued security.
Importantly, there is no magic in using 90%. For us, it seems to be about the right percentage to allow us to be generally fully invested, create reasonable turnover, and not create false precision in our estimates.
#2. I presume that a buyer of a whole business is willing to pay a premium for control. How much is this premium, typically? Is this premium the reason you as a non-control owner sell at 90% rather than 100% of fair value?
Bill Nygren: When I started in the business, control premiums were quite high, because in many cases, businesses weren’t being run to maximize value for the shareholders. Buyers, therefore, were willing to pay a high premium for control because they were going to radically change how the business was being managed. Today, I believe most businesses are already being run to maximize their value and buyers don’t bring much to the table, other than a willingness to use more financial leverage, so premiums are smaller. I don’t have a guess at a typical control premium. In general, I believe it is highest when a corporate buyer has synergy opportunities.