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 report argues that trying to predict the economy is a losing game. Instead, focus on finding undervalued stocks. For example, bank stocks look risky to many, but their prices are so low that even without profit growth, share buybacks could boost value per share significantly. Meanwhile, popular "safe" stocks like utilities are now overpriced and actually risky. The key takeaway: don't confuse price swings with real risk—what matters is whether you're paying a fair price for a company's true worth.
Oakmark's quarterly commentary addresses three common questions. The core stance is to adhere to a bottom-up stock selection strategy, opposing the abandonment of individual stock picks due to the macroeconomic environment. The report argues that macroeconomic forecasts need to be "non-consensus and
This chapter addresses two common investor criticisms: first, whether bottom-up stock selection remains effective when macroeconomic factors overwhelm individual stock factors; second, whether Oakmark’s heavy allocation to financial stocks underestimates the long-term impact of regulatory tightening on profitability. The author argues that stock selection is far more likely to generate excess returns than macroeconomic forecasting, and that current valuations of financial stocks already fully reflect the risk of declining earnings.
Ineffectiveness of Macro Forecasting:
Valuation Comparison Between Financial and Utility Stocks:
| Metric | Pre-Crisis Bank (Typical) | Current Average Utility Stock | Oakmark’s Financial Holdings |
|---|---|---|---|
| ROE | 15% | Slightly below 11% | 8-10% |
| Price-to-Book Ratio | Over 2x | Approximately 160% | Significant discount |
| P/E Ratio | — | 17x | Mid-single digits (based on 2014 earnings) |
Volatility Analysis:
This chapter discusses the recent "great reversal" phenomenon in the market: bonds outperforming stocks, and low-growth, high-dividend stocks being sought after as "low-risk" assets. The author argues that investors are mistakenly extrapolating recent trends while ignoring the comparison between price and value, which in turn creates new low-risk, high-return opportunities.
The author's core investment thesis is: The market is currently mispricing risk. Specifically:
Counterintuitive judgment: Assets considered "low-risk" by market consensus (long-term bonds, high-dividend stocks) are actually very risky; while assets considered "high-risk" by the market (value stocks held by Oakmark) are actually very low-risk.
1. Historical Return Reversal: Bonds have historically underperformed stocks but have performed better over the past decade. The author believes this trend is unsustainable.
2. Risk Pricing Mispricing: Investors extrapolate based solely on recent performance without comparing current prices to intrinsic value, making them prone to "buying high and selling low."
3. Oakmark's Stock Selection Criteria: The portfolio invests in three types of stocks—those trading at a significant discount to business value, those with expected growth in business value, and those where management is committed to maximizing long-term per-share value. The author argues that these three criteria inherently reduce risk.
4. Volatility Does Not Equal Risk: The author believes that the portfolio's daily high volatility is merely "annoying" and does not represent real risk of loss.
This chapter does not mention specific company names, primarily discussing asset classes and market behavior: