Theme and Background
This chapter uses the Chicago Cubs' journey from a prolonged slump after their 1908 championship to their return to the playoffs in 2015 as a lead-in to explore the core logic of long-term value investing. The report argues that early improvements in fundamentals are often not reflected in short-term data, and investors need patience for the gap between price and intrinsic value to narrow.
Core Thesis
The author's core investment thesis is: Long-term value investing requires patience; early improvements in fundamentals may be masked by short-term data, but sticking to the strategy will ultimately yield returns. The counterintuitive judgment is: Short-term performance (e.g., win rate, financial reports) should not be the sole criterion for evaluating management or investment success, as market sentiment and valuation fluctuations can distort true performance.
Key Arguments and Data
- Cubs Rebuilding Case: Theo Epstein took over the Cubs in 2011. Over the first three years, the team accumulated 46 games below .500 (losing 40 games in the first year, 20 more than the previous year). However, by replacing veterans, cultivating young stars (e.g., trading Scott Feldman for a three-month rental to acquire Jake Arrieta, and trading Jeff Samardzija for a three-month rental to acquire Addison Russell), and hiring manager Joe Maddon, the team achieved 32 games above .500 in the fourth year (2015) and advanced to the playoffs.
- Analogy to Premark CEO Warren Batts' View: A new CEO needs about two years to complete strategic acquisitions/divestitures and team building, then another year to build the subordinate team. Thus, the transformation truly begins after three years, but investors often give up by then.
- Controversy over CEO Evaluation Metrics: The report criticizes political debates that use single metrics such as sales, earnings, stock price, employee count, or R&D spending, while ignoring changes in the balance sheet and per-share value. For example, when Jack Welch retired, GE had a P/E ratio of 40x. Jeff Immelt took over just as the 2000 bull market ended, and the subsequent stock decline was not his personal fault.
- Oakmark's Definition of CEO Goals: Maximize the long-term value of the enterprise (including dividends), adjusted for net debt, on a per-share basis. If a company doubles its size through stock issuance, it is effectively standing still.
Companies/Assets Involved
- Chicago Cubs: Used as an analogy to demonstrate the value of patience in long-term rebuilding. Key data: prolonged slump after the 1908 championship, a 3-1 lead blown in the 2003 playoffs, a 71-91 record in 2011 (20 games below .500), and 32 games above .500 in 2015.
- Oakmark Fund: The author's firm, emphasizing a strategy of long-term holding and buying when price is below intrinsic value.
- Premark (delisted): Case study of former CEO Warren Batts, illustrating that transformation takes three years.
- General Electric (GE): Jack Welch retired with a P/E ratio of 40x; Jeff Immelt took over and the stock declined, partly due to market valuation contraction.
- Oakland A's: Reference to Billy Beane's statistical selection strategy in Moneyball, analogous to Oakmark's stock-picking approach.
Investment Insights
- Investors should focus on long-term per-share value growth, rather than short-term earnings or stock price fluctuations. CEO success should be based on maximizing per-share value adjusted for net debt, including dividends and share buybacks.
- Patience is key: Fundamental improvements may take more than three years to show up in data; poor short-term performance should not be a reason to give up. For example, the Cubs had terrible records in the first three years but broke out in the fourth.
- Beware of misleading single metrics: Metrics such as sales, earnings, and stock price can be distorted by changes in capital structure (e.g., stock issuance) or market sentiment. True enterprise value should be assessed by combining the balance sheet and changes in equity.
- Capital allocation efficiency: Companies with no growth should return capital through dividends or buybacks, rather than blindly investing in low-return projects. This helps direct capital to more efficient areas (e.g., funds from mainframe companies flowing to internet startups).
Theme and Background
This chapter extends the analogy of the Chicago Cubs' rebuilding process, defining a CEO's "win-loss record" as the change in per-share value during their tenure. The author argues that exceptional CEOs, like great baseball general managers, maximize value growth by assembling the right team, and Oakmark's portfolio is constructed based on this logic.
Core Thesis
The author's central argument is: Investing in undervalued companies led by exceptional CEOs may underperform in the short term (the next quarter or even the next year), but the foundation for long-term success has already been laid. This judgment runs counter to market consensus, which often overemphasizes short-term performance while overlooking management's ability to create long-term value.
Key Arguments and Data
- Definition of CEO win-loss record: Measured by the change in per-share value during the tenure, rather than quarterly earnings or stock price fluctuations.
- Portfolio analogy: Oakmark's portfolio is akin to the Cubs' rebuilding process—short-term results (returns) may be poor, but the foundation (undervalued assets plus exceptional management) is set for long-term success.
- Historical case reference: The report implicitly references the Cubs' journey from rebuilding in 2011 to reaching the playoffs in 2015 (cumulatively 46 games below .500 in the first three years, followed by 32 games above .500), illustrating that fundamental improvements are not immediately reflected in the data.
Companies/Assets Involved
This chapter does not directly discuss specific companies but references the following holdings (as of September 30, 2015):
| Company |
Oakmark Fund Weight |
Oakmark Select Fund Weight |
| Premark International, Inc. |
0% |
0% |
| Kraft Foods Group, Inc. |
0% |
0% |
| General Electric Co. |
2.3% |
6.6% |
Note: The holding data is for illustrative purposes only and does not constitute current investment advice.
Investment Implications
- Long-term holding: Investors should focus on a CEO's long-term value creation record rather than short-term stock price fluctuations. Oakmark's strategy is to buy and hold until price converges with intrinsic value, which may take several years.
- Tolerating short-term volatility: With concentrated portfolios (Oakmark Fund holds relatively few stocks, and Oakmark Select Fund is non-diversified), short-term volatility is higher, but long-term return potential is greater.
- Prioritizing management quality: Companies with a strong CEO "win-loss record" are worth allocating to, even if current valuations are depressed.