Bill Nygren Market Commentary | 3Q16

Theme and Background

This chapter uses the example of the Chicago Cubs winning 103 games in the regular season (best in MLB) yet having only a 23% probability of winning the playoffs to illustrate the contrast between short-term volatility and long-term trends in investing. The author emphasizes that current investors, influenced by 24/7 financial media, operate on excessively short timeframes, akin to focusing solely on the "World Series" rather than the entire "season." The 25th anniversary of Oakmark (August 5, 1991) provides an opportunity to reflect on long-term investing.

Core Views

• Long-term holding outperforms market timing: The S&P 500 delivered over 9x returns to investors over 25 years, demonstrating that attempting to predict short-term market fluctuations is nearly impossible.
• Active management can generate excess returns: The Oakmark Fund delivered over 19x returns over 25 years, more than double the S&P 500's 9x return, refuting the view that "active management is ineffective."
• Concentrated investing can enhance long-term returns: Oakmark Select (holding approximately 20 stocks) has delivered 10x returns since its inception in 1996, while the more diversified Oakmark Fund (holding over 50 stocks) returned 5x over the same period, showing that higher concentration can yield greater long-term returns despite higher volatility.

Key Arguments and Data

1. The "miracle" of long-term returns: Since Oakmark's inception in 1991, S&P 500 investors could have achieved over 9x returns. The author lists a series of major events over 25 years that market timers would have considered "sell signals" (e.g., Desert Storm, global recession, tech bubble, 9/11, financial crisis, Brexit), yet the market still rose over 9x, highlighting the extremely high bar for successful timing.

2. Excess returns from active management: The Oakmark Fund delivered over 19x returns over 25 years, more than double the S&P 500's return. However, the author notes that for one-third of the holding periods (5 years), returns lagged the S&P 500, indicating that short-term underperformance is normal and requires patience.

3. Advantages of concentrated investing: Comparison between Oakmark Select (20 stocks) and the Oakmark Fund (over 50 stocks):

Metric	Oakmark Fund	Oakmark Select
Number of stocks held	Over 50	Approximately 20
Return since November 1, 1996	Over 5x	Over 10x
Volatility	Lower	Higher

4. Future outlook: The author believes that in the current low-interest-rate environment, the S&P 500 is unlikely to rise another 9x over the next 25 years, but it will still significantly outperform bonds and cash in the long run. Oakmark cannot guarantee continued doubling, but its investment process (seeking undervalued growth companies, patiently waiting for value realization) will remain unchanged.

Companies/Assets Involved

• Oakmark Fund: Flagship fund, 25-year return over 19x, more than double the S&P 500. The author is bullish on its long-term value investing strategy.
• Oakmark Select: Concentrated investment fund, 20-year return over 10x, double that of the Oakmark Fund. The author is bullish on its high-concentration strategy.
• S&P 500 Index: 25-year return over 9x, serving as a benchmark. The author believes it will still outperform bonds and cash in the long run, but future gains may slow.
• Chicago Cubs: Used as an analogy; 103 regular-season wins (best in MLB) but only a 23% probability of winning the playoffs, illustrating that short-term series cannot reflect long-term advantages.

Investment Insights

• Abandon market timing: History shows that attempting to adjust asset allocation based on short-term events (e.g., interest rate changes, political crises) is nearly impossible to succeed. Investors should focus on the long-term "season" (e.g., 25 years) rather than the short-term "World Series."
• Stick with active management: Oakmark's 25-year record demonstrates that by identifying undervalued growth companies and holding patiently, active management can significantly outperform indices. However, investors must accept periods of short-term underperformance.
• Concentrated investing can enhance returns: For investors with higher risk tolerance, concentrating assets in a few high-conviction holdings (e.g., the Oakmark Select model) may yield higher long-term returns, but requires tolerance for greater volatility.
• Focus on the investment process, not short-term performance: The author emphasizes that Oakmark's success stems from adherence to investment discipline (seeking value, waiting patiently), not from market predictions. Investors should choose funds aligned with their philosophy and avoid chasing highs and selling lows (data shows that investors who buy during good performance and sell during bad performance typically incur losses).

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Theme and Background

This chapter serves as a summary marking the 25th anniversary of Oakmark (20th anniversary of Oakmark Select, 10th anniversary of Oakmark Global Select). The report reaffirms its core commitment to long-term value investing, demonstrates the effectiveness of its strategy through historical performance data, and emphasizes alignment with investor interests.

Core Thesis

The author's core investment argument is that long-term holding, maximizing after-tax returns, and standing with investors are the cornerstones of Oakmark's sustained success. The implicit contrarian judgment in the report is that while short-term (1-year) performance may lag the benchmark (e.g., Oakmark Fund's 1-year return of 14.36% vs. the S&P 500's 15.43%), the long-term (10-year, since inception) value investing strategy can significantly outperform the market.

Key Arguments and Data

The report uses specific performance data to support its long-term investment philosophy:

• Oakmark Fund (OAKMX): Since its inception in 1991, it has achieved an annualized return of 12.51%, far exceeding the S&P 500's 9.33%. Its 10-year annualized return of 8.50% also outperformed the benchmark's 7.24%.
• Oakmark Select Fund (OAKLX): Since its inception in 1996, it has achieved an annualized return of 12.43%, far exceeding the S&P 500's 7.81%. Its 10-year annualized return of 7.32% also outperformed the benchmark's 7.24%.
• Short-term vs. Long-term Comparison: 1-year performance lagged (OAKMX 14.36% vs. 15.43%; OAKLX 11.76% vs. 15.43%), but long-term (10-year, since inception) performance significantly led.

Fund	1-Year Return	3-Year Return	5-Year Return	10-Year Return	Return Since Inception	Benchmark (S&P 500) Since Inception
Oakmark Fund (OAKMX)	14.36%	9.30%	16.64%	8.50%	12.51%	9.33%
Oakmark Select Fund (OAKLX)	11.76%	9.22%	16.28%	7.32%	12.43%	7.81%

Companies/Assets Involved

• Oakmark Fund (OAKMX): Core fund, established 25 years ago, with an expense ratio of 0.85%. Long-term performance is excellent, but short-term performance lags the benchmark.
• Oakmark Select Fund (OAKLX): Select fund, established 20 years ago, with an expense ratio of 0.95%. Long-term performance also significantly exceeds the benchmark, but short-term performance is weaker.
• Oakmark Global Select Fund: The newest fund, established 10 years ago, with no specific performance data provided.
• S&P 500 Total Return: Used as the benchmark index to measure the fund's relative performance.

Investment Insights

• Long-term holding outperforms market timing: Oakmark funds' long-term (10-year, since inception) returns have significantly outperformed the S&P 500, while short-term (1-year) returns may lag. Investors should avoid frequent trading due to short-term volatility.
• Value investing strategy is effective: Despite market style rotations, Oakmark has achieved excess returns over a 25-year cycle by identifying undervalued growth companies and holding them patiently.
• Trade-off between fees and returns: Oakmark funds' expense ratios (0.85%-0.95%) are higher than those of index funds, but their long-term excess returns are sufficient to cover the costs. Investors need to assess whether the active management fees are worthwhile.