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 is a Q&A with Oakmark fund manager Bill Nygren. He explains his simple stock-picking rule: buy companies trading below their true value, where value is growing, and management works to maximize shareholder wealth. He gives two examples: Baxter International, where a new CEO doubled profit margins and the stock rose 55%; and General Electric, which overhauled its bonus system to reward performance, not tenure. He warns against trying to time the market—even when stocks look expensive—and says the key is finding individual bargains. Worth reading because it shows how pros think, without hype.
An Oakmark research article discusses a long-term value investing strategy, with the core argument that investing requires meeting three conditions simultaneously: the stock price is below intrinsic value, value is consistently growing, and management is committed to maximizing per-share value. The
This chapter, presented as an interview between Oakmark fund managers Bill Nygren and Win Murray with Value Investor Insight, systematically elaborates on Oakmark’s long-term value investing framework. It centers on three unchanging investment criteria: stock price below intrinsic value, sustained value growth, and management committed to maximizing per-share value. It also explores how to identify mispricing opportunities in well-known companies.
The author argues that the most common source of mispricing in the market is investors’ simple extrapolation of historical trends. When such extrapolation leads to a significant deviation from future reality, it creates investment opportunities. Oakmark adopts a private-equity-like mindset, focusing on changes in enterprise value over a 5-7 year horizon rather than short-term earnings forecasts. A counterintuitive insight is that even the world’s most famous and closely followed companies can be significantly mispriced due to management changes, non-earning assets, or overreactions to short-term negative news.
1. Three Investment Elements Are Indispensable: If the stock is not cheap, it is not value investing; if value does not grow, time becomes an enemy; if management does not focus on maximizing long-term per-share value, even the best business analysis is useless.
2. Sources of Mispricing:
3. Baxter International (BAX) Case: When new CEO Jose Almeida took over, the operating margin was only half of the potential 20%. The stock price rose from $38.15 to $59.20, a gain of approximately 55%.
4. Valuation Method: Use normalized cash flow levels (EBITA as a simplified proxy) and assign a reasonable multiple consistent with a DCF model. Analysts should aim for a valuation estimate that is "between a rock and a hard place," rather than being conservatively or aggressively biased.
5. Deviation Trigger Mechanism: When fundamental results deviate from the 5-7 year model plan by a double-digit percentage, a full re-examination of assumptions is triggered.
| Company | Role | Key Data | View |
|---|---|---|---|
| Baxter International (BAX) | Case: Value recovery driven by management change | Operating margin was only half of the potential 20%; stock price rose from $38.15 to $59.20 | Bullish: New CEO has a successful track record; the market’s outdated perception of the company will change |
| General Electric (GE) | Case: Opportunity from a shift in capital allocation culture | Past: Bought high-multiple businesses at high prices, sold low-multiple businesses at low prices (e.g., Amersham, Lufkin, NBC); Post-2013: Bought Alstom at a low price (single-digit multiple), sold Synchrony at a high price (tax-advantaged spin-off), sold appliances (high multiple), merged with Baker Hughes (asset-light), rapidly dismantled GE Capital (above book value) | Bullish: CFO Jeff Bornstein’s capital management style shifted toward value orientation after taking office |
1. Focus on Management Changes: The arrival of a new CEO or CFO, especially from a company with a successful track record, can be a catalyst for value recovery. Assess whether the new management possesses a "contrarian value investor" mindset for capital allocation.
2. Beware of Historical Extrapolation: When the market broadly prices a stock based on trends from the past 3-5 years, and there are reasons for structural changes in fundamentals (e.g., profit margins, return on assets), significant mispricing may arise.
3. Set Deviation Triggers: Build a 5-7 year fundamental model for each investment. When actual results deviate from the plan by more than 10%, re-evaluate the investment as if it were a new one, rather than blindly holding on.
4. Valuation Should Be "Between a Rock and a Hard Place": Analysts should pursue precision in valuation estimates, not deliberate conservatism. The absolute magnitude of the error is the key factor leading to investment mistakes, not merely overestimation.
This chapter continues to explore the logic behind Oakmark Fund’s core holdings, focusing on General Electric (GE)’s management transformation and business outlook, as well as the customer base transition challenges facing Harley-Davidson (HOG). At the same time, the fund manager shares views on whether current market valuations are too high and whether it has become difficult to find sufficiently cheap stocks.
1. GE’s Management Transformation and Business Assessment
2. Harley-Davidson’s Customer Transition
| Metric | Data |
|---|---|
| Motorcycle ownership rate among current 25–50 age group vs. baby boomers at same age | Higher |
| Average number of Harleys purchased by those under 35 vs. baby boomers at same age | More |
| U.S. motorcycle registrations | Approximately 8 million |
| Global motorcycle registrations | Approximately 150 million |
| International business as a share of Harley’s total sales | 36–37% |
3. Market Valuation and Timing
1. Focus on fundamental changes in management incentives: GE’s case shows that when a large company shifts from a “seniority-based” to a “performance-based” compensation system, it can mark the beginning of long-term value release. Investors should deeply analyze such institutional changes.
2. Beware of linear extrapolation of demographic trends: The Harley-Davidson example illustrates that investors should not short a company solely because its core customer base is aging. Focus on whether the brand can attract new generations and the penetration potential of overseas markets. Data (e.g., younger generation purchase rates) is more important than intuition.
3. Abandon market timing and focus on individual stock value: The author explicitly states that even if the overall market is overvalued (P/E ratio 15–20% above average), it should not be a reason to stop investing. The key is whether one can find individual stocks that meet three conditions: price below intrinsic value, value growing sustainably, and management committed to maximizing per-share value.
This section serves as the holdings disclosure and disclaimer for the Oakmark Select Fund. It lists the portfolio weights of the mentioned securities as of June 30, 2017, and emphasizes that holdings are subject to change and do not constitute individual stock recommendations. Additionally, it defines the price-to-earnings (P/E) ratio and the S&P 500 Total Return Index as the market benchmark.
This section contains no investment thesis or analysis; it is solely a compliance-driven holdings disclosure and terminology explanation. The author expresses no investment judgment or market views.
| Security Name | Percentage of Oakmark Select Fund's Total Net Assets |
|---|---|
| Baxter International, Inc. | 0% |
| Covidien Ltd. | 0% |
| General Electric Co. | 5.4% |
| NBCUniversal | 0% |
| Alstom | 0% |
| Synchrony Financial | 0% |
| Baker Hughes, Inc. | 0% |
| Safran SA | 0% |
| Harley-Davidson, Inc. | 4.0% |
| Polaris Industries | 0% |
| Honda Motor Co., Ltd. | 0% |
| Yamaha Motor Co., Ltd. | 0% |
This section offers no investment implications. The report is solely for confirming fund holdings and benchmark definitions, providing no directional advice. Investors should refer to the complete holdings list for more comprehensive information.