Bill Nygren Market Commentary | 1Q21

March 31, 2021

Oakmark Fund - Investor Class
Average Annual Total Returns 03/31/2021
Since Inception 08/05/91 12.93%
10-year 13.57%
5-year 15.83%
1-year 87.43%
3-month 15.52%

Gross Expense Ratio: 0.93%
Net Expense Ratio: 0.91%

Expense ratios are based on estimated amounts for the current fiscal year; actual expenses may vary.

The net expense ratio reflects a contractual advisory fee waiver agreement through January 27, 2022.

Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost. To obtain the most recent month-end performance data, view it here.

“We laughed and said they are trying to put a computer on a phone, that it won’t work. We are now 3-4 years too late.”

Anonymous BlackBerry employee letter quoted in
Think Again by Adam Grant

What a difference a year makes
When writing this commentary a year ago, the United States was close to completing its lockdown for “15 days to flatten the curve.” I wrote about the 34% decline in the S&P 500 Index, the abrupt transition to work from home, the benefits of rebalancing portfolios and our focus on owning companies that could prosper in the unlikely event the shutdown lingered. The commentary closed with this paragraph:

“We are hopeful that three months from now, when you read our second-quarter commentary, the Cubs will be playing baseball, we will be eating inside of restaurants and we will all be rescheduling the trips we’ve had to cancel. If that has happened, we believe the economy will likely recover quickly as will the stock market. But if it takes longer to return to normal, know that we have weighted our portfolios toward companies that we believe can survive a longer downturn and that we fully expect can emerge stronger on the other side.”

In hindsight, that sounds so naïve! A full year later, Dr. Fauci is still leading the daily news, restaurant capacity is still limited, vacations are still being deferred and the Cubs have yet to play in front of live fans (though they will be allowed 25% of capacity for opening day). But the lingering effect of Covid-19 didn’t stop the stock market. On March 23, 2021, the S&P 500 recorded its largest one-year price increase in the past 85 years, 75%. And just a few days earlier, on March 18, the Oakmark Fund recorded its largest ever one-year increase of 113%. Last year was just another example of how difficult the market timing game can be and why Oakmark doesn’t play it. Instead of trying to time the market, we encourage you to consider portfolio rebalancing. If you invested near the low last March to restore your equity allocation, congratulations, but now you may want to make sure it hasn’t grown too large.

At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.

Following a painful four years for value investors, we’ve finally had two consecutive quarters where value has outperformed growth, the first time in more than four years. In my September commentary, I wrote about the stock market having seemingly bifurcated into two markets: one including many tech and other rapid growth stocks that had become very expensive relative to historic norms and one with more traditional businesses that had not. The two-quarter outperformance of value has done very little to change that. Low P/E stocks remain priced at historically large discounts to high-growth stocks. Though we certainly don’t expect the market or our Funds to reproduce the returns of the past year, we remain excited about the prospects for our portfolios. We expect the market’s two-tiered valuation gap to continue to narrow, and we believe our Funds are positioned to benefit.

Think Again
We attribute our outperformance over the past year to two primary factors: how quickly we rethought our financial models at the onset of the pandemic and our much longer forecast horizon. While most investors worried about how bad 2020 might be, we focused on how good things could be in 2025. As is often the case during a crisis, we had more confidence in our accuracy forecasting 2025 than 2020. Certainly, the economic downturn made us think again about many of the assumptions that underlie our business value estimates, but for most companies, we found that the loss in intrinsic value was much less than the stock price decline.

In his book Think Again,1 author Adam Grant points out, “Intelligence is traditionally viewed as the ability to think and learn. Yet in a turbulent world, there’s another set of cognitive skills that might matter more: the ability to rethink and unlearn.” The quote at the top of the page, a classic example of not rethinking assumptions, came from an employee at BlackBerry. In 2009, BlackBerry accounted for nearly half the smartphone market, but in five short years, its market share fell to 1% because it refused to rethink the importance of its physical keyboard. It’s nearly impossible to maintain success in either business or investing without frequently rethinking one’s assumptions.

Grant, quoting work by his colleague Phil Tetlock, says we often get so caught up preaching, prosecuting or politicking that we don’t take time to rethink our own views. Investment professionals spend a lot of time preaching about the merits of their favorite investments, prosecuting those who disagree and politicking to broaden support for their beliefs. In contrast, Grant says if you think like a scientist, you simply search for the truth. He says, if you are truly a scientist, you are “expected to doubt what you know, be curious about what you don’t know, and update your views based on new data.” Scientists’ work is also subject to replication and extensive peer review, which results in rejecting incorrect theories. Grant’s book was not aimed specifically at investors, but it sure could have been. His description of thinking like a scientist is exactly what Oakmark asks of its research analysts. Further, we also submit each analyst’s research to extensive internal peer review to reduce our error rate. If investors can’t shift to scientist mode and search for new information that might change their minds, they are doomed.

Before you’re tempted to dismiss this by saying investors tend to be smarter than average, Grant quotes studies showing that the higher someone’s IQ, the more resistant they are to rethinking their beliefs. He explains, “In psychology there are at least two biases that drive this pattern. One is confirmation bias: seeing what we expect to see. The other is desirability bias: seeing what we want to see. These biases don’t just prevent us from applying our intelligence. They can actually contort our intelligence into a weapon against the truth.” That’s one reason it can be so difficult for a smart investor to give up on a stock when its thesis comes into question.

Grant extensively discusses how intelligent people can fall prey to the psychological irony referred to as the Dunning-Kruger effect—the inverse relationship between our competence in a subject and our confidence in our opinion. It’s why in a group of football fans, the most vocal critic is often the one who knows the least about the sport. It may also explain our unwillingness to ask for directions when we are lost. Our brain is telling us to rely on ourselves at the very time it is most important to challenge our assumptions and seek new input. As investors, we can’t ever think we know so much that we don’t need to bother with new information.

We’ve written previously about the delicate balancing act facing investors between seemingly contradictory traits. You have to be patient, but you can’t be stubborn. Risk averse, but not fearful. Confident, but not arrogant. It’s no wonder that investing is such a challenge. Grant believes that the state for optimum decision-making is “confident humility—having faith in our capability while appreciating that we may not have the right solution or even be addressing the right problem. That gives us enough doubt to reexamine our old knowledge and enough confidence to pursue new insights.” The best investors are always seeking new information, especially information that could prove them wrong.

In scientist mode, getting to the right answer is more important than being right. If you were to observe Oakmark’s weekly meetings where new stock ideas are presented, you might ask how colleagues at a firm that so highly values collaboration and collegiality can have such aggressive arguments with one another. But, as Grant asserts, “The absence of conflict is not harmony, it’s apathy.” Clearly, our investment team is not apathetic about stocks we are considering buying! The more mistakes we can identify before we invest, the better off our clients will be. Grant goes on to say that “when I argue with someone it’s not a display of disrespect—it’s a sign of respect. It means I value their views enough to contest them. If their opinion didn’t matter to me, I wouldn’t bother.” The intensity of our debates definitely shows that Oakmark’s investment team has a lot of mutual respect for each other. And that’s why after our knockdown, drag-out arguments, we can all enjoy lunch together.

In closing, I’ll largely repeat what I said a year ago. We hope that by the time we are writing our next quarterly report, most of us will have had the opportunity to be vaccinated and will be well on our way to enjoying the freedoms we took for granted before 2020. By next quarter, capacity limits at restaurants and Wrigley Field should be much higher, families will again take summer vacations, employees will return to the office and someone other than Dr. Fauci will lead the evening news. If those things happen, we expect a very strong economy. Importantly, as we continue to rethink our assumptions, the window for the return to normal is narrowing. Last year, as the disease progressed, the debate became which year would finally be normal again. Now, it’s which quarter. That’s progress.

1Grant, Adam. (2021). Think Again. Viking.

As of March 31, 2021, Blackberry is not held in any of the Oakmark Funds. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. This index is unmanaged and investors cannot invest directly in this index.

The price to earnings ratio (“P/E”) compares a company’s current share price to its per-share earnings. It may also be known as the “price multiple” or “earnings multiple”, and gives a general indication of how expensive or cheap a stock is. Investors should not base investment decisions on any single attribute or characteristic data point.

The Oakmark Funds’ portfolios tend to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.

Because the Oakmark Select Fund and Oakmark Global Select Fund are non-diversified, the performance of each holding will have a greater impact on the fund’s total return, and may make the fund’s returns more volatile than a more diversified fund.

Oakmark Select Fund: The stocks of medium-sized companies tend to be more volatile than those of large companies and have underperformed the stocks of small and large companies during some periods.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.

All information provided is as of 03/31/2021 unless otherwise specified.