Bill Nygren’s Market Commentary – Q1 2022


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“Fear and pessimism provide opportunities.” -Michael Price (1951-2022)

The commentary I wrote in 2016 for Oakmark’s 25th anniversary looked back at the performance of the Fund‘s investments and the stock market in the context of the many events in the world that worry investors. The conclusion was that investors were doing just fine despite one crisis after another, and that conclusion still holds true today.

The Oakmark Fund was launched in 1991 shortly after Operation Desert Storm, in which the United States led a multinational coalition that prevented Iraq from annexing Kuwait. Today, we remember this conflict primarily for the speed with which victory was won – six weeks of bombardment followed by only four days of armed combat. But before the fighting started, there were huge fears that we would lose to Iraq’s highly trained Republican army, that the loss of access to Middle Eastern oil could cause a global depression, and that the use by the weapons of mass destruction could kill people around the world. I remember one of the founding partners of Harris Associates, Myron Szold, saying, “Betting that the world will end is the worst bet you can make. You’re unlikely to win, and even if you do, you can’t cash out.

They say history does not repeat itself; it rhymes. Many of today’s worries about the tragedy in Ukraine seem analogous to investor worries about the war in Iraq when we were preparing to launch the Oakmark fund in 1991. An analyst report made headlines last month. last by predicting a 10% probability that Ukraine would spread and end civilization. It may seem cavalier to ignore this risk, but using Myron’s logic, there is no benefit in structuring a portfolio for the end of civilization. We believe it is reassuring to put current events into context as we determine how to invest our assets today.

At Oakmark, we are long-term investors. We try to identify growing companies that are managed for the benefit of their shareholders. We will only buy shares of these companies if their price is significantly below our estimate of intrinsic value. After the purchase, we patiently wait for the gap between the stock price and the intrinsic value to close.

Here’s an update to the list I used in 2016 of troubling events we’ve been through since we established the Oakmark Fund in 1991. We’ve been through the following, roughly by year:

  • Operation Desert Storm
  • Global recession
  • Hillarycare
  • The Fed raises interest rates
  • Bombing in Oklahoma City
  • US government shutdown
  • Mad cow disease
  • Asian flu
  • Clinton Impeachment
  • A2K
  • Technology bubble
  • September 11th
  • Afghanistan War
  • Recession
  • Iraq War
  • SARS
  • Hurricane Katrina
  • The Subprime Crisis
  • Bankruptcy of Lehman Bros.
  • Obamacare
  • Real estate crash
  • The global financial crisis
  • Greek bailout
  • S&P downgrades US debt
  • Oil price crash
  • Ebola
  • Ukraine/Crimea/Russia
  • Syrian migrant crisis
  • Brexit
  • Dividing presidential election
  • Impeachment of Trump
  • Trade war in China
  • Covid-19
  • Acceleration of inflation
  • Ukraine/Russia

It’s a daunting list. In 2016, I wrote that for all that was wrong with the world, an investor who bought the S&P 500 in 1991 and held their position until 2016 would have accumulated more than nine times their initial capital. And this comeback is happening despite eight corrections and three bear markets. (Corrections are defined as a decline of at least 10% in the S&P 500, a level reached in the last quarter; and bear markets are declines of more than 20%). and outside the market, it is difficult to improve this purchase and retention record by choosing the right periods to be absent. Similarly, over those 25 years, the Oakmark fund has seen periods of good and bad performance relative to the S&P 500, but an investor who first bought in 1991 and held until 2016 ended up with more than 19 times its starting capital. These 25 years have had many frustrating periods when fundamental value investing was not in vogue, but the 25-year return of more than double the S&P 500 would have been hard to improve trying to guess when our style investment was going to be in favor.

Updating these numbers to the end of March 2022 shows that over the past six years, the S&P 500 investor has more than doubled his capital, growing from nine times to more than 20 times the value of origin. This comeback came despite four corrections and two bear markets. And even though the Oakmark fund hasn’t quite kept up with the S&P 500 since 2016, our investors have grown their capital from 19 times to almost 40 times the original value, roughly double the return of the S&P 500.

In the face of global uncertainty, it can be hard to imagine what next year or even next month will bring, and it can be scary. But at Oakmark, we’re rooted in an investment philosophy that exploits the gaps between current prices and long-term values. We only own stocks that are selling at unusually deep discounts to what we think these companies will be worth in about seven years. Events that investors worry about could lead to significant reductions in current earnings, but this is usually transitory. Rarely do such issues result in significant reductions in long-term business value estimates. That’s why in times of high volatility, as was the case in the last quarter, we see opportunities and often make more changes to the portfolio than usual.

My favorite sporting event is March Madness. The early game clashes between David and Goliath are the most fun. Every two years, a big favorite gets knocked out by a small school we’ve barely heard of. In the first round of this year, bettors gave perennial favorite and No. 2 seed Kentucky a 95% chance of beating No. 15 seed St. Peter’s. And while that ruined my parenthesis, watching the children of St. Peter’s celebrating their victory is what makes March Madness television a must.

We don’t know which game will produce the huge upheaval of March Madness, but we expect them. There are eight games a year between 1 or 2 seeds and 15 or 16 seeds. If every underdog has a 5% chance of winning, there’s a 34% chance that a major upset will occur in any given year. I wish investors could think of stock market corrections like the upheavals of March Madness. They are to be expected, occurring approximately every two years. And just as the winning tranche is not the one that anticipates the most upheaval, the best long-term investment record is not the one that anticipates the most corrections. I’m not going to take the analogy so far as to say that you can actually enjoy corrections as much as you enjoy upheavals, but you can use them to your advantage.

We encourage shareholders to set a target for the percentage of their assets they wish to invest in the stock market. When stock prices fall, the stock will fall below this target percentage. But individual investors often sell after stock prices fall. This not only hurts their returns, but also takes their portfolios away from their goals. If you buy after your share percentage has fallen below your target and sell after it has risen above the target, you can avoid the trap of buying high and selling. at a low price.

When world events bring the stock market down, don’t join in the panic. Check your wallet. And if stocks have fallen significantly below your target weighting, take advantage of the cheaper prices. It won’t be as fun as watching St. Peter’s Day, but it can ease the pain and boost your yields.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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