In the early days of the Covid-19 lockdown, I was working in my new office (previously known as our guest room), when my 10-year-old son walked over from his new classroom (previously known as his bedroom) and asked a simple question. “Dad, what do you do at work? It looks like you’re just reading a lot and doing some math like I am.”
It’s funny how kids have a way of simplifying what we as adults like to make too complicated. After pausing for a minute, I said, “That’s pretty much it. I read a lot, learn about how businesses work, do some simple math to estimate how much they’re worth, and then talk to my colleagues to see what they think. Sometimes, the price of a business is less than what I think it is worth. When that happens, we buy a little piece of the business.” My son then asked, “Ok. Cool. So why do you like your job,” to which I replied, “Because it’s like a game where you are trying to solve a puzzle that is changing as you put it together. You never fully figure it out, but if you can see the outlines a little more clearly and a little sooner than others, you can win. The people who are best at the game are those who are constantly learning.”
At Harris Associates, investment advisor to the Oakmark funds, we believe continuous learning is foundational to successful investing in a dynamic world. This is especially true today as we navigate the independent, yet intertwined experiences of Covid-19 and accelerating technology change. Given that learning scales with the volume of new experiences encountered, one could argue that we are currently living through a golden age of learning about businesses and the people who run them.
Covid-19 has stressed businesses in unique ways, effectively serving as a large-scale experiment that will yield new insights on everything from cost structure flexibility to company culture. In addition to providing lessons about the puzzle as it looks today, this crisis is also providing hints about how the puzzle will look tomorrow. Notably, the digitally centric routines that have connected society during this unique period have shined a spotlight on an era of technological disruption that continues to gain momentum. At the most basic level, digitally enabled technologies are enhancing our ability to gather, analyze and share data. This ultimately enables businesses to develop products and services that better meet underlying consumer preferences and to deliver them more efficiently. Given the general purpose nature of these technologies, few companies will be spared from the change that ensues.
While many investors direct their attention to the daily challenge of navigating these “unprecedented” times, we’re embracing this generational opportunity for long-term knowledge growth and believe our firm is particularly well-suited for this task. The following quote from psychologist Daniel Kahneman elegantly depicts the type of learning that we strive to maximize at Oakmark. “The test of learning psychology is whether your understanding of situations you encounter has changed, not whether you have learned a new fact.1” As change accelerates, the potential for learning has never been higher, but so is the risk of drowning in a deluge of new “facts.” Valuable lessons imbedded in change have to be integrated into broader frameworks to be useful, a process akin to starting a good puzzle with the edges first, creating a frame onto which incremental pieces can be attached.
An interesting window into our learning mindset comes from feedback we often receive after meeting with a company’s management team for the first time. A common refrain from executives is how refreshing it is to have a thoughtful discussion focused on understanding how they think, as opposed to agonizing over the details of current events. In a world adept at throwing curve balls, we simply think it’s better to study the pitcher than the pitches. This mentality also applies to how we analyze businesses. As generalists, we are trained by experience to abstract away the surface-level complexity of a business to isolate the core economic drivers that determine long-term results.
Our analysis of Netflix provides a great example of the economic filter through which we view technology change. This streaming pioneer has leveraged increased internet penetration and advanced analytics to gather and analyze data about customer preferences, develop unique content that better matches those preferences and share the resulting content via a more efficient distribution platform. The end result is an improved all-around customer experience. As a first mover in this space, Netflix has benefitted from the tendency for digital platforms to evolve toward concentration due to network effects and economies of scale, creating durable competitive advantage.
By evaluating change through the lens of economic frameworks, we simplify what can at first appear complex, turning change from a distraction into an opportunity. Our ability to efficiently learn amidst change is further aided by a culture of robust debate amongst an investment team armed with diverse insights that transcend industry silos, which can prove enormously valuable in broadening perspective.
The world has rarely been as dynamic as it is today, and as a result, continuous learning has never been more important. Our firm has been purposely built to learn, and we’re excited about putting those capabilities to use as we piece together the world of tomorrow.
1Kahneman, Daniel. Thinking, Fast and Slow. New York, Farrar, Straus and Giroux, 2013.
The holdings mentioned comprise the following percentages of total net assets as of 12/31/20:
As of 12/31/20, the holdings mentioned were only held in the Oakmark and Oakmark Select Funds and not held in other the Oakmark funds.
Portfolio holdings are not intended as recommendations of individual stocks and are subject to change. The Funds disclaim any obligation to advise shareholders of such changes. Information about portfolio holdings does not represent a recommendation or an endorsement to Fund shareholders or other members of the public to buy or sell any security contained in the Funds’ portfolios. Portfolio holdings are current to the date listed but are subject to change any time. There are no assurances that the securities will remain in the Funds’ portfolios after the date listed or that the securities that were previously sold may not be repurchased.
The Fund’s portfolio tends 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.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given 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.
Joseph P. Pittman, CFA
U.S. Investment Analyst