Commentary on The Oakmark and Oakmark Select Funds

[offshore-engineer]

Commentary on The Oakmark and Oakmark Select Funds
9/30/2005
 

An optimist stays up until midnight to see the new year in. A pessimist stays up to make sure the old year leaves.

- Bill Vaughan  

At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.



Weve often said that Oakmark tends to be early. That observation even extends to our New Years celebration. By having our fiscal year end on September 30 rather than December 31, we beat the rush for audits and save our shareholders a few dollars on fees. We also beat the rush for reflecting on the past year and thinking about how to approach the new one.

We look back on fiscal 2005 with mixed feelings. Our primary goal is, over time, to increase the wealth of our shareholders. Measured against that goal, any return that starts with a plus sign can be viewed as a success. Were pleased that both Funds achieved new all-time high prices last quarter. With the S&P 500 still priced about 20% below its 2000 peak, most competing funds cannot make that statement, which is an important reason to view our year as a success. Switching to the negatives, a couple of issues will cause us to stay up to make sure the old year leaves. The S&P 500 increased more than either Fund did, not just in fiscal 2005 but also for the trailing three years. Further, the Funds have also lagged behind their value peers. Why did that happen?

We construct our portfolios based on each stocks merits, but two themes affected many of our decisions and hurt our returns. First, a year ago many commodity companies, including energy companies, were trading at low P/E ratios and therefore looked cheap. We rejected most of those stocks because that cheapness vanished after adjusting earnings for our belief that the commodity prices necessary to balance long-term supply with demand were substantially below then-current commodity prices. Using oil as an example, a year ago the price was $50 per barrel, up from under $20 at the beginning of 2002. Typically, an extreme price spike sows the seeds for its own reversal. Consequently, we believed that energy producers and consumers would alter their behavior, eventually resulting in higher supply, lower demand, and a price significantly below $50 per barrel. Based on that assumption, which was reflected in the futures market, we felt that most energy stocks, as well as the stocks of most commodity producers were not selling at large discounts to their values. So we held few of those stocks. Instead of the price of oil declining, consistent with our long-term expectation, the price increased by another third last year, and energy stocks were large gainers. Because we invest based on long-term fundamentals, we continue to focus on the market clearing price, which we believe is significantly below $50 per barrel and we have decreased our holdings of the few energy stocks we own.

The second theme that hurt results was our belief that higher quality businesses deserve to sell at meaningfully higher multiples of earnings than lower quality businesses. Back in 1999 many stocks sold at low P/Es despite the overvalued market. In a quarterly letter a little over a year ago, I noted that in mid-1999 nearly 100 stocks in the S&P 500 were priced at less than half the S&P 500 P/E multiple, but in mid-2004 that number had fallen to just 20. In 1999, we believed that the market had generally overpriced high quality businesses. A year ago, we believed that the market had over-reacted by so tightly compressing the P/E dispersion. We found that large growth businesses, finally available at average prices, were the best new opportunities for investment. We anticipated that high quality names would eventually return to significant premiums and low quality names would return to significant discounts, creating a more normal P/E distribution. Instead, over the past year, multiples have compressed further. Now only 13 stocks in the S&P 500 sell at less than half the market multiple. One could argue that identifying superior businesses has become very difficult and, therefore, most stocks should sell at the same multiple. But we believe that some businesses still possess significant competitive advantages and deserve to sell at premiums. We also believe that momentum investors who previously bid up the price of large growth companies and technology stocks have now switched over to the below-average businesses that value investors used to own.

In investing, the line between early and wrong can be very fuzzy. I believe we are just early, but only time will tell on which side of that line we fall. As we begin fiscal 2006, we are clearly optimists excited by our expectations for the New Year. Though neither we nor any other mutual fund can make promises about future investment performance, there are four important promises we can make:



We will continue to apply a high level of effort and talent. In many endeavors consistent effort produces consistent results. So, naturally, when returns arent stellar, investors tend to assume that we need to try harder. One e-mailer even suggested that I need to spend less time on the golf course and more time in the office! (I dont golf.) But in investing, there is no short-term correlation between effort and returns. This isnt to say that long-term investment success is uncorrelated with effort far from it. We just dont know in what year we will harvest the seeds we plant today. Our Research Department is larger and more experienced than it was five or ten years ago, and its compensation structure continues to provide incentives for finding undervalued stocks. Further, our analysts are best described as stock nuts meaning that the thrill they get from discovering great investment ideas is as important to them as their compensation is. As with our analysts, my passion for investing extends beyond normal office hours. My kids know that on weekends, if Im at their sporting events or watching the Bears or Badgers football games on TV, Im usually also reading Value Line, Barrons, and now, the new weekend edition of The Wall Street Journal.


We will continue to use the same investment philosophy. We invest in companies that we believe will grow and that are managed to maximize long-term per-share business value. We only buy stocks that are selling at large discounts to our estimates of value. Then we patiently wait for the gap between price and value to close. There are two ways this approach can fail. First, we can misjudge business fundamentals. Second, we can lose the patience our approach requires. Our lawyers may balk when I use the word guarantee, but I can guarantee that we will make our share of mistakes analyzing individual companies. Our successful long-term track record includes more mistakes than I care to remember. Only by acknowledging our failings, eliminating them from our portfolios, and learning from our mistakes, can we limit the damage they cause. And what about the risk that we might lose patience and change investment philosophies? Surely thats a risk worth assessing. Many investment firms have changed their approach at just the wrong time resulting in substantial losses and missed opportunity. Instead of taking my word that we wont change, look at our history. The first Oakmark Fund report to shareholders in 1991 outlined our investment philosophy. Point number one was Invest in securities selling significantly below their long-term underlying value. And prior to Oakmark, our company Harris Associates L.P., which will celebrate its 30th Anniversary next year, used that same philosophy for managing each of its accounts. Our insistence on investing based on long-term fundamental value may at times frustrate some shareholders, but wondering whether or not well stick to our knitting need not be a concern.


We will continue to communicate candidly with you. Whether our results are good, bad, or in between, well always explain what happened and why we own the stocks we own. When we invest in companies we expect understandable, honest, and timely communication from them. You should expect the same from us. Much has been written about mutual fund investors actually achieving returns far below average because of their tendency to time purchases and sales poorly. We believe that investors who read our commentary will better understand our approach to investing, will have more rational expectations, and therefore will be less likely to have inopportune timing of their sales.


We will continue to invest our own money side-by-side with yours. One of the primary reasons we started The Oakmark Fund fourteen years ago was that we wanted to invest our own money in the same stocks that we were buying for our clients. Since then, every Fund launched by Oakmark was created because our investment professionals believed that potential returns were attractive for their own capital. In John Raitts Presidents letter, once a year you will find an update of our total personal Oakmark holdings. You can observe that the dollar amount is both significant and growing. I have also disclosed that my personal investments in The Oakmark Fund and The Oakmark Select Fund account for the majority of my liquid net worth.

Were excited about the outlook for the market. We are highly motivated. Our investment philosophy is unchanged, and our economic incentives are aligned with yours. We believe our portfolios are well positioned to capitalize on todays opportunities and to continue growing your capital.

And in the Oakmark tradition of being early, please allow me to be the first to wish you a Happy New Year!
Best wishes,

William C. Nygren, CFA
Portfolio Manager
[email protected]

[offshore-engineer]

จะมีสักกี่กองทุนในประเทศไทยที่แสดงปรัชญาการลงทุนของตนเองได้ชัดเจนและลงทุนตามปรัชญาของตนเองอย่างเคร่งครัด

[PP]

จะมีสักกี่กองทุนในประเทศไทยที่แสดงปรัชญาการลงทุนของตนเองได้ชัดเจนและลงทุนตามปรัชญาของตนเองอย่างเคร่งครัด

เท่าที่ได้ติดตามและฟังจากรายการ TV คงจะมีกลุ่ม Aberdeen Asset Management ที่เน้นปรัชญาการลงทุนแบบ Value Investing อย่างกับ Oakmark เขา    

ถึงตอนนี้สำหรับผมแล้ว ศึกษาและลงทุนเองน่าจะได้ความรู้ประสบการณ์ดีกว่า  และหากศึกษาด้วยแนวทางที่ดีและถูกต้องและเลือกลงทุนในหุ้นที่ถูกตัว ก้อน่าจะได้กำไรเป็นเนื้อเป็นหนังดีกว่านะ    และที่สำคัญไม่ต้องเสียค่าธรรมเนียมให้กับกองทุนซึ่งเขาคิดเป็นค่าบริหารจัดการกองทุนจากเงินที่ลูกค้าซื้อกองทุนนั่นแหละ

[offshore-engineer]

ผมมีความเห็นเช่นเดียวกับคุณ PP ครับ

แต่สำหรับ John C. Bogle เขาแนะนำให้ลงทุนใน Index Fund ครับซึ่งค่าธรรมเนียมในการจัดการไม่ได้สูงเท่ากับกองทุนที่ลงทุนในหุ้น แต่ Bogle ก็ยอมรับว่าเป็นเรื่องยากที่จะชักจูงไม่ให้นักลงทุนเข้าไปลงทุนด้วยตนเอง จึงแนะนำต่อว่า คุณควรจะมีหลักการการลงทุนที่ชัดเจนและคิดว่าจะให้ผลตอบแทนเป็นที่น่าพึงพอใจ โดยเริ่มต้นเพียง 5% ของพอร์ตก่อน หลังจากประสบความสำเร็จในช่วง 2-3 ปีแรกแล้วค่อยเพิ่มเป็น 10% ที่เหลือให้ลงใน Index Fund