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By Jeremy Glaser | 05-03-2013 03:00 PM

Yacktman: Stocks Still Attractive Relative to Bonds

Equities may not be significantly undervalued but still look good relative to the paltry returns available in the fixed-income market, says Don Yacktman.

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. We’re here at the Value Investor Conference in Omaha, Neb., ahead of the Berkshire Hathaway Annual Meeting. I’m sitting down with Don Yacktman of the Yacktman Funds. We want to get his thoughts on stock valuation and also get his take on the Berkshire Hathaway succession.

Don, you’re obviously very well-known bottom-up buy-and-hold investor, as is Warren Buffett. But his lieutenants have been trading a lot more frequently than Buffett would in his core portfolio. Do you think this is a sign that buy and hold is going out of fashion, that it’s in trouble in some way, or do you think that’s still the best way for investors to approach equity investing?

Don Yacktman: Well, I think time horizon is a big difference, and I think the true investor has a much longer time horizon. We have a lot lower turnover rate than most funds. Most mutual funds, I think, turn over about 100%, ours is about 20%. But we’ll turn over some. I think, the secret is really, I think, to be objective and in effect, look at stocks as though they were bonds and look at them as though everything you buy, every asset you buy is based on risk-adjusted forward rates of return. And so it becomes like a bond portfolio, and then you can objectively make decisions.

Glaser: So if you’re thinking about stocks as bonds, does that mean that you're kind of doing a credit analysis, making sure that those are companies that are going to be there for the long haul, or is valuation more important than kind of business quality?

Yacktman: It's a combination. I mean, what you're basically doing is you're buying future cash flows, and the predictability of the cash flow is certainly one of the elements that determine what the future rates of return are. And nobody can predict the future with absolute certainty. So you have to, I think, by that very definition, have to have a range of outcomes and then establish probabilities to that range of outcomes. So the more financial or operating leverage a company has, or the less predictable the products are, the business model in effect, means that the outcomes are going to have a wider array of potential outcomes. So you have to take that into account.

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