Oakmark is the mutual fund family launched in 1991 by Harris Associates, the Chicago deep-value firm founded in 1976 (about $105bn AUM). Bill Nygren runs the flagship Oakmark Fund and David Herro the Oakmark International Fund, buying businesses at large discounts to intrinsic value and holding them like owners — publishing quarterly fund commentaries, market commentaries and insight articles.
This piece explains a common investor mistake: assuming bonds and high-dividend stocks are 'safe' without checking if they're overpriced. The author shows that buying 30-year Treasury bonds today could be riskier than stocks—if rates rise, bonds could lose nearly 30%. High-dividend stocks aren't cheap either; their valuations are 40% above historical averages. For regular investors, don't chase 'safe' assets blindly. Instead, consider overlooked large-cap stocks like Disney or eBay, where hidden value in businesses like ESPN or PayPal is ignored. Worth reading because it helps you avoid traps that look safe but are actually dangerous.
Oakmark’s research article opens with a quote from hedge fund manager Colm O'Shea, emphasizing that significant price movements stem from market participants being forced to reassess their biases, rather than from dramatic changes in the world. The core argument of the article is that, as a long-ter
This chapter discusses how investor biases lead to asset mispricing and how long-term value investors can profit from such biases. In the current market environment, investors generally view bonds and large-cap stocks as low-risk assets, but Oakmark argues that this perception overlooks valuation levels and may result in greater investment risk.
The author’s core investment argument is: Investors’ risk biases toward asset classes (e.g., “large-cap stocks = low risk,” “bonds = safe”) often ignore valuation levels, and when the market is forced to reassess these biases, prices undergo violent shifts. Counterintuitive judgments include:
1. Bond Risk Underestimated
2. Risk Comparison Between Stocks and Bonds
| Metric | 30-Year Treasury | S&P 500 |
|---|---|---|
| Current Yield | 2.7% | Approximately 2.5% |
| If Yields Revert to 10-Year-Ago Levels in 5 Years | Principal down 43%, total loss 29% | P/E would need to fall from 12.9x to 7x to match bond losses |
| Historical Average P/E | - | Approximately 15x |
3. Valuation Bubble in High-Dividend Stocks
1. Reduce bonds, increase stocks: Current bond yields are extremely low, with the risk of rising interest rates far exceeding the downside risk of stocks. Investors should reassess the “bonds = safe” bias.
2. Avoid chasing high-dividend stocks: High-dividend stocks have shifted from a historical discount to a premium, and their “safety” is an illusion, with actual valuations too high.
3. Focus on large-cap discount opportunities: Large-cap stocks are currently trading at a discount, not a premium; historically, the low risk of large caps came from business scale, not market capitalization.
4. Adhere to value investing logic: Seek mispricing caused by market biases, such as Dell’s non-PC business, Disney’s undervalued ESPN, and other assets, waiting for the market to reassess.
This chapter focuses on the current market bias among investors toward high-dividend stocks and Oakmark's contrarian view on this trend. The author notes that utility stocks (the most bond-like equities) currently trade at a price-to-earnings ratio nearly on par with the S&P 500, whereas historically their P/E has typically been about two-thirds of the S&P 500's, and they have traded at a discount greater than the current level 90% of the time. This reflects investors' mistaken tendency to chase yield while ignoring valuation.
Oakmark argues that investors currently buying high-yield stocks for higher dividend income are making the same mistake as bond investors—ignoring valuation and mistakenly believing that high yields protect principal. The author judges that high-dividend stocks are more likely already fully priced rather than serving as a safe haven. Meanwhile, Oakmark has no bias toward the method of returning capital, believing that stock buybacks and dividend payments are equivalent in effect, with buybacks being more tax-efficient (deferring income tax). If the 2013 policy of taxing dividends at a higher rate than long-term capital gains is enacted, the appeal of high-payout companies will diminish.
| Metric | Current Situation | Historical Average/Norm |
|---|---|---|
| Utility Stock P/E vs. S&P 500 | Nearly equal | Approximately two-thirds of the S&P 500 |
| Utility Stock Discount Magnitude | Only 10% of the time has the discount been smaller | 90% of the time the discount has been larger |
(Note: Holdings data are as of a historical date and do not constitute current investment advice.)