Theme and Background
This chapter focuses on the asset allocation tendencies of millennial investors (born 1981–1996), noting that they are in a life stage involving major financial decisions (large expenditures, debt repayment, and savings). The report argues that millennials' investment approach has a significant impact on their long-term financial health, yet they currently show a general preference for technology growth stocks over value stocks.
Core Thesis
The report's central argument is that millennial investors should most increase their exposure to value stocks within their equity portfolios, despite their current inclination to hold technology growth stocks. The counterintuitive judgment is that millennials overweight growth stocks due to behavioral factors such as familiarity bias, social proof, and loss aversion, but this very tendency makes them the least suited to ignore value investing—fundamental analysis, diversification, and a long-term time horizon are particularly important for this group.
Key Arguments and Data
- Survey Data: A Business Insider survey shows that the top three long-term holdings favored by millennials are Amazon, Microsoft, and Apple, collectively accounting for nearly 20% of votes. Tesla ranks fourth.
- Behavioral Biases:
- Familiarity Bias: Millennials tend to mistake "products they use daily" for attractive investment opportunities (e.g., shopping on Amazon every day should not drive a decision to buy its stock).
- Social Proof: Social media and online review culture lead millennials to gravitate toward stocks with the "highest ratings" or "most popular" status.
- Loss Aversion: Having experienced three major market downturns—9/11, the Global Financial Crisis, and Covid-19—within a short period, millennials may avoid value stocks that have historically underperformed.
- Fundamental Comparison: Tesla's enterprise value is 10 times that of Daimler (Mercedes-Benz) or BMW, yet Tesla's cash flow is significantly lower than these two peers, and it performs worse on key fundamental metrics.
- Diversification Risk: A Glassdoor survey shows that millennials' list of most desired employers overlaps heavily with their most favored stocks. When Enron collapsed in 2001, 62% of employees' 401(k) assets were concentrated in company stock.
- Time Horizon: The oldest millennials still have 25–30 years until retirement, and this long time horizon provides an opportunity for value investing.
| Comparison Item |
Tesla |
Daimler (Mercedes-Benz) |
BMW |
| Enterprise Value Multiple |
10x Daimler/BMW |
1 (Baseline) |
1 (Baseline) |
| Cash Flow |
Significantly lower than peers |
Higher |
Higher |
| Fundamental Performance |
Lagging |
Leading |
Leading |
Companies/Assets Involved
- Amazon, Microsoft, Apple: The top three long-term holdings favored by millennials, collectively accounting for nearly 20% of survey votes. The report does not explicitly take a bullish or bearish stance but implies these stocks are overweighted due to familiarity bias.
- Tesla: The fourth most preferred stock among millennials. The report is bearish on its valuation, noting that its enterprise value is 10 times that of Daimler/BMW, while its cash flow and fundamental performance are weaker.
- Daimler (Mercedes-Benz) and BMW: Used as value stock benchmarks, the report is bullish on their fundamentals, noting they have emerging electric vehicle businesses but trade at valuations far below Tesla. Oakmark Global Fund holds Daimler (3.6%), Oakmark Global Select Fund holds Daimler (6.8%), and Oakmark International Fund holds Daimler (3.9%) and BMW (3.3%).
- Enron: Serves as a cautionary example of the risks of overconcentration (62% of 401(k) assets in a single stock).
Investment Implications
- Increase Value Stock Exposure: Millennials should allocate value stocks in their equity portfolios to hedge against the overweight in growth stocks and leverage their long time horizon to capture returns from fundamental discounts.
- Avoid Familiarity Bias: Do not equate products used daily (e.g., Amazon, Apple) with good investment opportunities; decisions should be based on fundamentals (assets, earnings, dividends) rather than personal experience.
- Diversification is Key: Avoid overconcentration in employer stock or popular tech stocks; value stocks can serve as a balancing tool against the overweight of momentum stocks in passive index funds.
- Patience Over Speculation: Utilize the long time horizon (25–30 years) for value investing and avoid chasing short-term price fluctuations.
Theme and Background
This section is "Part 2" of the Oakmark research report, focusing on the risks and valuation methodology of value investing. The report reaffirms its investment team's judgment on value stocks, provides links to the latest holdings lists for the Oakmark International Fund and the Oakmark International Small Cap Fund, and explains in detail the calculation logic of its core valuation metric, "Price to Value."
Core Viewpoint
The report's core investment thesis is: Value stocks face the risk of periodically underperforming growth stocks, but the Oakmark team still adheres to a valuation model based on intrinsic value. Counterintuitively, the report does not avoid periods when value investing may fail; instead, it explicitly discloses this as a risk factor, suggesting that the author believes the current market's excessive preference for growth stocks may be creating a window of opportunity for value investing.
Key Arguments and Data
- Valuation Metric Definition: The report defines the "Price to Value" ratio as the current stock price divided by the intrinsic value calculated by the investment team's valuation model. The portfolio's Price to Value is the weighted average of this ratio across all holdings.
- Risk Disclosure: It explicitly acknowledges that value stocks may "fall out of favor with investors" and underperform growth stocks over specific periods. While this risk statement is standard compliance content, combined with the analysis in Part 1 of the report on millennials' overweighting of growth stocks, it serves as a warning about the structural risks in the current market.
Companies/Assets Involved
- Oakmark International Fund: Provides a complete list of holdings as of the most recent quarter-end.
- Oakmark International Small Cap Fund: Provides a complete list of holdings as of the most recent quarter-end.
- Harris Associates L.P.: The report's investment advisor, responsible for the valuation model and investment decisions.
Investment Implications
- Specific Direction for Investors: By emphasizing the valuation discipline of "Price to Value," the report implies that investors should focus on the gap between current stock prices and intrinsic value. Combined with the analysis in Part 1 of millennials' preference for growth stocks, the author believes that value stocks (especially international and small-cap value stocks) may currently be undervalued, while the valuation premiums of growth stocks (such as Tesla) have lost fundamental support.
- Risk Warning: Investors must accept that value investing may experience periodic underperformance, but over the long term, a disciplined investment strategy based on intrinsic value is expected to benefit from mean reversion.