Bill Nygren Market Commentary | 1Q14
March 31, 2014
"Sitting quietly, doing nothing, spring comes and the grass grows by itself"
-Zen Proverb quoted by Phil Jackson in Eleven Rings: The Soul of Success
It’s no surprise to our regular readers that I enjoy the overlap of sports with investing. Moneyball by Michael Lewis was a great example of how a baseball team could be successfully constructed using principles that were very similar to those used by value investors. Jonah Keri’s The Extra 2% examined how the rigorous use of data to analyze the success or failure of decisions helped turn around the Tampa Bay Rays. I wrote shareholder letters using those books as examples to discuss the Oakmark approach to managing our portfolios and our people. My vacation reading this year included Eleven Rings: The Soul of Success by Phil Jackson. Phil, for those of you who don’t follow the NBA, was one of the league’s most successful coaches, winning a record 11 titles in just 20 seasons. And the first six of those titles were with the Chicago Bulls, which is why he is revered in my hometown. Like the other books, Eleven Rings’ stories about motivating a highly talented group of individuals to achieve success as a team seem very similar to the challenge of running a successful investment firm.
If you watched any March Madness, you no doubt saw the NCAA public service messages stating that most of the 450,000 collegiate student athletes end up going pro at something other than sports. At the bottom of the athletic pyramid are 35 million kids, about two-thirds of the under-18 population, playing youth sports. Over half of high school students, 7.7 million, play for at least one school team. Less than 6% of high school athletes will play on a college team (all colleges, not just D1). And just over one-in-one-thousand college athletes will make their living from a professional sports career. Yet most of us who played youth sports had high aspirations. A study done by Georgia State found that 59% of high school football and basketball players believed they would get a college scholarship1. The real math is daunting: 17,856 high school basketball teams, only 351 D1 college teams. Thought of another way, if D1 colleges selected their teams from a pool that only included the top player from each high school team, over two-thirds of those high school stars would fail to get scholarships. Given what I observed when my kids played youth sports, many of the parents were as blind to the true probabilities as their kids were!
So what happens to those unmet athletic aspirations? At Oakmark we believe the competitive fire still burns and that it creates a drive to excel in non-athletic activities. Oakmark is full of frustrated athletes. Two made it to D1 soccer and baseball, several others achieved success in D3 football, basketball, and hockey. Many of us played on high school teams. My love of baseball faced the harsh realities of the athletic pyramid when I tried and failed to make my middle school team. Despite all of us eventually failing in our dream to become pro athletes, the important life lessons of commitment, goal setting, discipline and self-sacrifice for the benefit of the team were learned through athletics. And as parents and coaches, we try to pass those values on to our children.
So it was especially disappointing to read in Phil Jackson’s book that his biggest challenge in coaching was to get his players to stop playing as individuals and instead focus on what was best for the team. Perhaps that lesson is harder to learn at the peak of the pyramid. Athletes as talented as Michael Jordan and Kobe Bryant were no doubt encouraged as youngsters to carry their teams by relying on their own talent. And until they were competing for NBA Championships, that worked. But at the peak of the pyramid, individual talent isn’t enough.
There’s No “I” in Oakmark
Chicago Bulls fans still remember one win over Phoenix: trailing by two points with seconds remaining, John Paxson hit an open three-pointer to win the game and the 1993 NBA Championship. Though it was a truly remarkable shot, what was even more remarkable was that, with the game on the line, Michael Jordan passed the ball. Phoenix double- or triple-teamed him, rendering his usual late-game heroics nearly impossible. Instead of fighting the odds, he passed to Scottie Pippen, who in turn passed to Horace Grant, who then passed to a wide-open Paxson. It was a clinic in team basketball. Jackson referred to that victory as one of the most satisfying of his coaching career. Speaking of the journalists who covered the Bulls, Jackson said: “what they missed was the real story: the inner journey the players had gone through to transform the Bulls from an ‘I’m great, you’re not’ team into a ‘We’re great, they’re not’ team.”
The investment profession, like sports, has many statistics that measure individual contribution. That differs from most businesses where the judgments about who is adding value are largely qualitative. Even the most junior analysts at an investment firm can measure the profits made from their stock recommendations. That creates a temptation, to which some firms succumb, to create an “I’m great, you’re not” culture. Some firms use short-term stock price performance as the primary metric for determining their analysts’ bonuses. Unfortunately, many of those firms find that with everyone focused on producing better stock ideas than their colleagues, nobody is focused on the results actually achieved by their clients.
At Oakmark, our professionals learn quickly that the team is more important than the individual. Bonuses for new analysts are not based on the performance of their ideas, but rather on whether or not they can do research the Oakmark way. Our analysts are also explicitly judged on whether or not they are elevating the performance of those around them. When a stock performs poorly, it is a problem for all of us, not just the analyst who recommended it. We all have an opportunity to prevent a stock from getting purchased; so losing money is a group failure. Nobody financially benefits when somebody else makes a mistake. What Jackson referred to as a “We’re great” attitude can be seen at Oakmark in the way the group takes pride in how our Funds perform relative to competing funds, rather than how their own recommendations perform compared to those of other analysts. Professionals who don’t have a team first attitude don’t succeed at Oakmark.
Delegate to Involve Everyone
In discussing the challenges of getting a group of players to buy into the supremacy of the team, Jackson speaks of the need for each player to recognize the importance of his role, which required delegating responsibility to his players. He says, “After years of experimenting, I discovered that the more I tried to exert power directly, the less powerful I became. I learned to dial back my ego and distribute power as widely as possible without surrendering final authority. Paradoxically, this approach strengthened my effectiveness because it freed me to focus on my job as keeper of the team’s vision.”
An attribute of Oakmark that many find surprising is how horizontal our structure is. New analysts are taken aback by how active our debates are before new stocks are added to the Funds. Every investment professional here is encouraged to speak up—and is financially rewarded for doing so—in order to identify mistakes before they cost our shareholders one penny. Analysts know what we are looking for in new stock ideas, so instead of being given a list of companies to investigate, they are given the power to make that decision on their own. By empowering so many professionals, the most senior people at Oakmark can focus on maintaining the culture that has made our success possible.
Process, Process, Process
Jackson spends a lot of time discussing the Zen-like demeanor he displayed during games. He was known for relying on his players to settle themselves rather than using timeouts to stop runs, for not screaming during games and for his consistency in post-game interviews, win or lose. In explaining his calm, Jackson said, “The most we can hope for is to create the best possible conditions for success, then let go of the outcome. The ride is a lot more fun that way.”
Many visitors to our office are surprised by how quiet it is—more like a library than the out of control trading rooms portrayed in movies. They expect to see our passion expressed by yelling and screaming when we get bad outcomes and wild fist bumps when things work out well. Instead they find an academic-like focus on process and an understanding that a successful process will produce both good and bad short-term outcomes. The individual outcomes aren’t deserving of celebrations or floggings. The adherence to our rigorous process—and our constant effort to improve that process—is what determines whether or not we succeed. And like Phil Jackson’s basketball teams, avoiding the emotional ups and downs from each outcome makes our office a much more fun place to work.
Phil Jackson was a successful basketball coach because of his ability to get a group of talented individuals to perform as a team. I think Oakmark succeeds for the same reason. Investment advisors who visit our office always want to talk to the portfolio managers whose names they see in the press. I tell them they are making a mistake. To really understand the Oakmark advantage, talk to one of our teammates whose name you've never heard. Then compare our team's depth to other teams. I wouldn't suggest it if I wasn’t confident of how our team stacks up.
William C. Nygren, CFA
View other commentary and letters from Bill here.
1Georgia Career Information Center, Georgia State University and its licensors. Copyright 2006
The quoted passages are taken from “Eleven Rings: The Soul of Success” written by Phil Jackson and Hugh Delehanty and were published in 2013 by the Penguin Group.
The Oakmark Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
Because the Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.
The discussion of the Funds’ investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds' investment adviser, at the time of this letter, and are subject to change without notice.