Bill Nygren Market Commentary | 4Q12

Theme and Background

This chapter uses the contrast between rising stars and seasoned veterans in the sports world as a lead-in to discuss the long-term value of experience accumulation in the investment industry. The report notes that despite standout performances from NFL rookie quarterbacks (such as Andrew Luck and Robert Griffin III), the MVP candidates remain 36-year-old Peyton Manning and 35-year-old Tom Brady; 38-year-old R.A. Dickey won the Cy Young Award, and the New York Knicks, with the NBA's oldest roster averaging nearly 33 years old, achieved their best start to a season. The report emphasizes that the career path in investing is closer to that of a sports journalist than an athlete: experience continues to appreciate with age.

Core Thesis

The author's core investment argument is: The investment management industry is a field where experience continuously appreciates, and age and long-term experience are advantages, not disadvantages. This stands in stark contrast to the career trajectory of athletes—who face physical decline in their 30s—while investment managers can remain highly effective well into their 70s. Counterintuitively, the report argues that the market's enthusiasm for "rookie managers" may be excessive, and that managers with long-term experience, along with their succession plans, are the key to sustainable investing.

Key Arguments and Data

1. Contrast of Experience and Age in Sports:

• NFL rookie quarterbacks set records: Five teams started rookies every game, and three (Indianapolis, Seattle, Washington) went from below .500 winning percentages last season to making the playoffs.
• Yet the MVP candidates remain 36-year-old Peyton Manning and 35-year-old Tom Brady.
• The New York Knicks, with the NBA's oldest roster in history (averaging nearly 33 years old), achieved their best start to a season.
• The New York Yankees had nine players with eight-figure contracts, a total payroll of $159 million, and an average age of 35.6 years (the report sarcastically refers to them as "retired players").

2. Career Path of Sports Journalists:

• Harry Caray did not call his first professional baseball game until age 31, called his first Cubs game at 67, and was still rising in popularity when he died at 84.
• Conclusion: In the sports broadcasting industry, each additional year of experience is enough to offset physical decline well into old age.

3. Age and Succession of Investment Managers:

• A Wall Street Journal article focused on six well-known mutual funds long managed by industry stars, five of whose portfolio managers were in their 70s, with none planning to retire.
• All six managers emphasized that they had already arranged for succession to ensure the funds' continued operation.

4. Oakmark's Own Case:

• In 2012, two managers retired (Ed Studzinski and Henry Berghoef, both in their 60s), but the succession process went smoothly because the investment team had sufficient depth.
• The report emphasizes: After succession, the fund has "more eyes" monitoring it, not fewer.

Companies/Assets Involved

Company/Asset	Role	Key Data	Bullish/Bearish
McDonald's	Exemplar of succession planning	All managers must have at least two emergency succession candidates; two CEOs died within nine months, yet operations were uninterrupted	Bullish (as a best-practice case)
Oakmark Funds	Subject of the report	Two managers retired in 2012, but team depth was sufficient; all current managers are younger than the youngest 70-something manager in the Wall Street Journal article	Bullish (emphasizing robust succession planning)
Washington Redskins	Succession case	After rookie quarterback RG3 was injured, another rookie, Kirk Cousins, led the team to consecutive wins	Neutral (as an example of the "next man up" strategy)

Investment Implications

1. Focus on Management Team Depth Rather Than a Single Star Manager: Investors should prioritize fund companies with clear succession plans and sufficient team depth, rather than relying on individual star managers. Oakmark's case shows that even when managers retire, the team can seamlessly transition.

2. Long-Term Experience Is an Advantage in Investing: Unlike in sports, investment managers' experience appreciates with age. Managers in their 70s can still effectively run funds, and the market's enthusiasm for "rookie managers" may overestimate the short-term performance of younger managers.

3. Beware of "Star Manager Dependency" Risk: Many small investment firms decline after a key person leaves. Investors should assess whether a fund company's organizational structure has the "next man up" capability, similar to McDonald's succession culture.

4. Succession Planning Is a Prerequisite for Long-Term Investing: Oakmark emphasizes that even without retirement plans, preparations must be made for "unwanted events." Investors should require fund companies to disclose details of their succession plans as part of due diligence.

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Theme and Background

This chapter continues the report’s discussion on the long-term value of an investment career, using the career of baseball pitcher Jim Bouton as an analogy to emphasize that investing, like sports, is a captivating endeavor requiring long-term commitment. Through this, the author expresses the Oakmark fund managers’ passion for their work and reiterates the core characteristics of their investment strategy: concentrated holdings and long-term holding.

Core Argument

The author’s central thesis is that investing is a “fascinating” pursuit, and fund managers’ love for their work serves as the intrinsic driving force behind long-term adherence to value investing. This aligns with the earlier judgment that “experience continues to appreciate with age,” highlighting the connection between professional passion and long-term performance. The counterintuitive aspect is that the report does not shy away from the high volatility brought by concentrated holdings; instead, it views this as a necessary cost for achieving long-term excess returns.

Key Arguments and Data

• Career Analogy: Citing former Major League pitcher Jim Bouton’s famous quote, “You spend a good piece of your life gripping a baseball and in the end it turns out that it was the other way around all the time,” the report likens investing to a deeply absorbing profession.
• Portfolio Concentration: Both the Oakmark Fund and the Oakmark Select Fund employ a concentrated holding strategy, where fluctuations in individual securities have a greater impact on the fund’s net asset value. This increases short-term volatility, but the author believes it can generate attractive long-term returns.
• Non-Diversification Risk: As a non-diversified fund, the Oakmark Select Fund’s total return is more heavily influenced by individual holdings, resulting in higher volatility compared to diversified funds.

Companies/Assets Involved

• McDonald's Corp. (MCD): As of December 31, 2012, this stock accounted for 0.9% of the Oakmark Fund’s net assets and 0% of the Oakmark Select Fund. The report explicitly states that holdings are subject to change at any time and does not constitute a recommendation for individual stocks.

Investment Insights

• Embrace Volatility for Long-Term Returns: Investors should understand the inherent volatility of a concentrated holding strategy rather than seeking short-term stability. Oakmark’s approach suggests that willingness to endure higher volatility is a prerequisite for achieving excess returns.
• Focus on Fund Managers’ Professional Passion: When selecting funds, investors should assess whether the management team genuinely loves the investment profession. This intrinsic drive is key to maintaining disciplined value investing over the long term.
• Beware of Changes in Holdings: The report emphasizes that holding data is only a snapshot at a specific point in time. Investors need to continuously track the fund’s latest portfolio rather than relying on historical disclosures.