Page 1 Bill Nygren, Harris Associates Interview with Graham and Doddsville, an investment newsletter from the students of Columbia Business School

Bill Nygren has been a was how easily available all That was how I learned to manager of the Oakmark the statistics were. I played behave as a consumer— Select Fund (OAKLX) Strat-O-Matic Baseball as a always trying to expand since 1996, Oakmark Fund kid and was always looking what my dollars could buy (OAKMX) since 2000 and in our local newspaper at by being very careful about the Oakmark Global Select Fund (OAKWX) the full page of baseball box the price that I paid. since 2006. He is also the scores that they had. Chief Investment Officer Coincidentally in the St. Paul Pioneer Press, the business for U.S. Equities at Harris “We would alter our Bill Nygren, CFA Associates, which he joined section was right next to Harris Associates in 1983; he served as the the baseball box scores and purchasing habits based firm's Director of Research that section had all the from 1990 to 1998. stock quotes on it. I was on prices that were

intrigued by this page of charged. That was how Mr. Nygren has received numbers that I didn't know. many accolades during his investment career, When I asked my dad and I learned to behave as a he told me that they were including being named consumer—always Morningstar's Domestic stocks and that the numbers Stock Manager of the Year represented dollars, it trying to expand what for 2001. suddenly became very interesting to me. So that my dollars could buy by He holds an M.S. in interest in stocks and Finance from the numbers was there from a being very careful University of Wisconsin's Applied Security Analysis young age. about the price that I

Program (1981) and a B.S. paid. ” in Accounting from the I also grew up in a very University of Minnesota traditional household. My (1980). dad worked outside the home and my mom raised Editor’s Note: This interview the kids. My mom was Additionally, there was a took place on September always on a very tight family trip out to visit an 30th, 2020. budget for grocery older cousin of mine who spending. Therefore, she was serving in the Air Graham & Doddsville would always shop specials. Force. This would have (G&D): Can you walk us When I was a little kid been, I guess, the tail end of through your background getting dragged to the the Vietnam War. The trip and what brought you into grocery store with my took us through Las Vegas the world of investing? mom, a weekly shopping and my dad took my older trip would usually involve brother and me into, I think Bill Nygren (BN): I grew three different locations so what was the Kroger up in a middle-class family in we’d buy the stuff that was grocery store across the St. Paul, Minnesota. In on sale at each store. If street from the Motel 6 that school, I always did better grapes were on sale one we were staying in. My dad with numbers than words week and cherries weren't, pulled out five nickels and and baseball was one of my we had a lot of grapes in the he said, "I'm going to show passions outside of school. house. We would alter our you two boys why you One of the things that purchasing habits based on should never gamble." He attracted me to baseball prices that were charged. (Continued on page 2) Page 2 Bill Nygren, Harris Associates

put the first nickel into a with understanding gambling then they had maybe 10 to slot machine and seven versus investing. My dad 20 books because it hadn't nickels came out. Then he worked in the accounting really become the national put the next one in and a department at 3M pastime to figure out how few more nickels came out. Company. He had a to day trade and invest. I could see my dad getting business background, so I frustrated because his knew he understood In my reading, I was always object lesson was going probabilities and dollars and attracted to the people who awry. what made sense for approached investing the investing. And here he was way my mom approached “It was important to telling me gambling was shopping. When Benjamin foolish. So, I started Graham said, "You buy have an investment studying all forms of stocks when they're on gambling. I learned that sale," that completely approach that was lotteries gave you an squared with the way I consistent with the way expected value of about 50 behaved as a consumer. I cents on the dollar and started to believe that my I thought about money horse racing was maybe 83 style of investing would be cents. If you played craps value investing. That's not and all other aspects— really well, you could get to say that I believe that's trying to get the most that up to 99. And if you the only thing that can counted cards in blackjack, work. But for me, it was value for my dollar and you had a chance to get important to have an investment approach that applying that same better than 100 cents. was consistent with the way process to investing. I All these things we called I thought about money and gambling had expected all other aspects—trying to wasn't fighting any values less than 100 cents get the most value for my cognitive battles inside on the dollar, but the things dollar and applying that we called investing gave you same process to investing. I my own head. “ more; if you bought bonds, wasn't fighting any cognitive you would usually come out battles inside my own head. just barely ahead of inflation But I was standing there while stocks gave you a Once I had the feeling that saying, "Dad, stop. You're much more significant an investing career is what I way ahead, stop, stop." And expected return. I became wanted to pursue, I thought he just got angrier and fascinated with stocks it made sense to spend a lot angrier and threw these throughout high school. of time learning the nickels in until they were all During college, almost all of language of investing, which gone and then said, "See my free time was spent is accounting. I majored in boys, you should never reading investment books accounting at the University gamble." By then my eyes from our local library and of Minnesota and I had an were huge and I thought, over the course of a few internship at Peat Marwick "This is fascinating. I just years, I read most of the and Mitchell, which was one watched my dad make books they had about of the Big 8 eight accounting multiples of his money. If investing. That's not as firms back then. But one of only he hadn't been so heroic as it sounds today the things that bothered me foolish to throw it all away." because I'm sure the local about an accounting career library would have hundreds was that it looked like if you That created a fascination of books on investing. Back were 10 or 20% better than (Continued on page 3) Page 3 Bill Nygren, Harris Associates

the person you were sitting That cemented that I time in a program where next to, you could maybe wanted to study the students got to invest get paid 10 or 20% more investments when I went to real money, it was a no- than that person could. business school. brainer for me to go to the There wasn't leverage. In University of Wisconsin. the investment business, the G&D: How did you decide Looking back, this was one average investor doesn't where to attend business of the best decisions in my add any value to an index school and where to launch career. fund, but someone who can your investing career? outperform the market can deliver tremendous leverage BN: I was at an internship “I loved the external on the value of their time at General Mills the summer and that had great appeal to before I started business focus of having very me. school. The last couple of broad, but more weeks there, they had And then one last story. My executives from different shallow knowledge as dad was a credit manager at departments taking us to opposed to knowing all 3M. I enjoyed the outward lunch to try and convince us focus of his job. It was an to work for them. I found the details about one interesting contrast myself saying, "What I'd between my dad and one of really like to do is work in company. “ my uncles who also worked the pension department and at 3M. My uncle managed work on investing the the forms department and pension money." And one of After Wisconsin, I took a knew more about the the guys said to me, "If job at Northwestern Mutual company than almost any you're really interested in Life in Wisconsin and other human did because he investing, General Mills learned two key things helped write the forms that probably isn't the place for during the two short years I drove the operations for you. A very close friend of spent there. First, it was every department. My dad, mine, Steve Hawk, is important to me to work at on the other hand, knew a running this interesting a company where little bit about a lot of program at the University of investment results drove companies because he had Wisconsin called the the success or failure of the to be responsible for credit Applied Securities Analysis firm. Northwestern Mutual decisions to 3M customers. Program. I'd suggest you go was driven primarily by its Anything that was in the down there and interview ability to sell insurance and business news usually with Steve because I think the brand that it had with overlapped with what my that program would be customers. It was important dad was doing. When really interesting for you." that they didn't screw up on Chrysler was going through the investment side but its bankruptcy, my dad was So I went and interviewed getting unusually good involved in decisions about with Steve. Madison, returns was not as whether or not 3M should Wisconsin wasn't really on important to them as the continue to sell them my radar, but when I found ability to sell insurance was. product. I loved the out I could get my master's Secondly, I worked in a external focus of having degree there in 12 months, I small department there with very broad, but more could start right after portfolio managers whose shallow knowledge as undergrad as opposed to investment process was opposed to knowing all the waiting multiple years and I kind of a mix of momentum details about one company. could spend most of my investing and trying to use (Continued on page 4) Page 4 Bill Nygren, Harris Associates

Wall Street buy was looking for a company the companies where I was recommendations to drive committed to value hitting a brick wall at my what was in the investment investing, where investment current firm. There was an portfolio. As an analyst results drove its success or intellectual meeting of the there, my managers and I failure. I called Steve Hawk minds that I'd never were like two ships passing and told him that I was experienced before. I ended in the night. I would look at going to be looking for up joining Harris in 1983. something that was on the another position and asked My thought at the time was, new low list. that he please let me know "I can learn a lot here and I if he were to come across know the next three to five I remember looking at a anything. years will be good. I don't company called Allied know beyond that." At that Stores, which owned point, I wasn't worried Brooks Brothers among “I learned that being about beyond three to five other things, and getting good at executing one’s years. And here we are excited because I thought today, 37 years later, and the real estate value of its personal investment I'm still in the same spot. properties was worth more philosophy didn't really than the stock price. G&D: It sounds like you Nobody on Wall Street was matter if the people had the Ben Graham value recommending it. I mentality early on and you presented my report and that you worked with were drawn to the they said, "There just were using a different statistical and the numerical doesn't seem to be enough side of things. But obviously interest in this stock for us philosophy. “ Oakmark is known for not right now, so let's keep an only being a value investor, eye on it." The stock did but also looking for high well and Wall Street started quality businesses that are recommending it. They A couple of weeks later, my well positioned. Could you came back to me saying, phone rang and it was talk a little bit about kind of "Hey, you like this Allied Steve. He said, “Bill, an how that transition Stores, let's look at buying alumnus you don't know emerged for you and maybe it." I responded, "Yeah, but I named Clyde McGregor delve into the strategy at liked it when the stock was from a firm you've never Oakmark? at $15 and I thought it was heard of, Harris Associates, worth $30 and it's selling at is going to be calling you in BN: I think part of it is just $27 now. I think there are a minute about a junior how business has evolved better things we could do." analyst job. You should take more than how we have I learned that being good at the job. I told him to call evolved. If you look back to executing one’s personal you so I have to hang up Graham's time, businesses investment philosophy now." were hard asset-based. didn't really matter if the Fixed assets on the balance people that you worked A minute later Clyde called sheet were depreciated and with were using a different and invited me to come there was a reasonably philosophy. Not that theirs down to Chicago to go out good correlation between was right or wrong; the to dinner with several stock prices and book value important thing was that it Harris partners. They were because competitive was different, so we had a asking about stocks I was advantages that didn't get mismatch. I decided that I interested in and were represented on the balance needed to change firms and genuinely interested in all of sheet tended to be (Continued on page 5) Page 5 Bill Nygren, Harris Associates

relatively temporary. A created through advertising, cable in the ground was textile company that was which was expensed and occurring at a much more first to invest in the newer, not capitalized. The same rapid rate on the accounting faster looms for a few years applies to customer statements than it was in would have a competitive acquisition costs and R&D real life. If you made the cost advantage. They would expenditures, which not accounting match real life, do really well, then their only didn’t increase book these companies had real competitors would make value, but also depressed book value and real the same investment and earnings. At Oakmark, we earnings. they were back to the same were always open to the lousy commodity-based idea that GAAP accounting We also felt that way about business that they had was not a perfect measure a company like Amgen always been in. for how business value was where very heavy R&D growing. spending was depressing But looking for discounts to earnings and making it look book value tended to very expensive relative to identify average businesses “At Oakmark, we were the pharma industry. But if that were out of favor. If you looked at enterprise you did that and were always open to the idea value to EBITDA plus R&D, patient and waited for a Amgen looked much reversion to the mean, you that GAAP accounting cheaper than the pharmas could be successful. In the was not a perfect and it also had much longer early 1980s, Warren Buffett patent protection and much was instrumental in measure for how better growth ahead of it. expanding the universe of That ability to make what we called value. He business value was exceptions to GAAP invested in a consumer growing.” metrics when we don't business that left a lot of his think GAAP reflects the real followers scratching their world carries through to heads because it sold at a today to positions that are multiple of book value. One example from the early important to us, like Buffett's comment was, "If days of Oakmark in the Alphabet, where its you look at the assets on early 1990s is the cable TV spending on “Other Bets” the balance sheet, you industry. We were seeing a goes through the income won't even find brand value, lot of private market statement, depresses and that's more important transactions taking place at earnings by something like than any of the assets that enterprise values of $1,000 $6 a share and is not are listed on the balance a subscriber or 11x reflected on the balance sheet." That started a move EBITDA. These were sheet. in the value community to companies that didn’t look look for important assets cheap on net income or If Alphabet were investing that weren't part of book book value, but there was with Kleiner Perkins value. clearly business value there. instead, it wouldn't be called We went through and an expense and there'd be It could be real estate that reconstructed income an asset on the balance was at a historical cost and statements and balance sheet called venture capital today was worth way more sheets acknowledging that investments. But they do it than it was when it went on customer acquisition costs themselves, which we think the balance sheet. It could had very long-term benefits is even better because it be brand value that was and that depreciation of helps them hire higher (Continued on page 6) Page 6 Bill Nygren, Harris Associates

quality engineers. But as a value manager own a think often the multiple result, it depresses the growth company like this?" that's being ascribed to earnings and inflates the those businesses is too low stated P/E multiple. Once If we can get growth and or people are not you adjust for that and the not overpay for it, that's a recognizing the quality. cash on the balance sheet, huge positive. I think there Could you expand on that? which earns almost nothing are mischaracterizations of today, you see that you're how value managers should BN: I think a lot of Wall really not paying much think—that we should be Street analysis tends to be more than a market confined into this universe relatively simplistic, where multiple for the Search of subpar businesses that someone will say, "Over the business. are destined to fail in the past 30 years, this industry long term. That’s not how has averaged X% of a Another example is Netflix, we at Oakmark think of market multiple, and based which very strongly rhymes value at all. We believe on that, the stock doesn't with the way we thought there's a way to value a look cheap today.” We've about cable TV companies. business fundamentally and been attracted to industries It isn’t reporting much in if we can buy a stock at a like auto parts where the the way of income and its big discount to that value, analysts who've covered book value is relatively whether it's a low P/E or a auto parts for a generation meaningless. A similar high P/E, it's a value stock. are basically stuck on the company like HBO got idea that those companies purchased by AT&T as part “If we can get growth ought to sell at 5-6x of Time Warner for a value earnings. But we think the of a little more than $1,000 and not overpay for it, industry has changed a lot per subscriber. On that for the better over the past basis, Netflix stock looked that's a huge positive. I 30 years. A generation ago, very cheap and based on think there are GM would design a part the subscribers they were themselves and would put it adding every year, it was mischaracterizations of out to bid to a handful of selling at a single-digit auto parts companies and multiple of the value it was how value managers say, "Here are the specs of adding. We don't think of should think—that we what we want, give us a value and growth as bid." opposites. Growth is a should be confined into positive characteristic in a this universe of subpar Today, they will say, "We company and as long as you need you to design a thing. don't overpay for it, it's a businesses that are The thing can't weigh more nice thing to have. than this and has to destined to fail in the accomplish all these We also owned Apple for a long term.” functions." The important long time, although we change is now the finally sold it last quarter. intellectual property is Almost the entire time we G&D: It seems like there sitting at the auto part owned the company, it was are situations in your company. It's not just a race selling at less than a market portfolio where you don't to the bottom of who can P/E multiple, yet it was necessarily think that be the lowest price supplier always the first question we analysts’ forecasts for the of a commodity product; got asked by clients or next few years are these companies are actually consultants. "How can a necessarily off base, but you designing solutions for the (Continued on page 7) Page 7 Bill Nygren, Harris Associates

auto OEMs. It's important flows should be discounted couple percent per year. to the auto companies that at a lower rate and that their suppliers be successful should result in a higher P/E We want to invest in because they've realized multiple. Most of Wall companies that will utilize that it doesn't make sense Street research still their free cash flow to to have one company simplistically says the eventually force a supplying the United States industry has typically sold at convergence of business and a separate company about 10-11x earnings, so value and stock price. supplying China and yet that is still appropriate. another company supplying G&D: With those two them in Europe. They want There's no particular sectors, it seems their parts companies to be acknowledgement that the like the market is very successful global businesses businesses are better today focused on cyclicality and that can follow them around and more competitively risk of disruption. Do you the world. I think the advantaged with larger scale think those concerns are market has been very slow that helps on mobilization, overblown by the market? to accept the idea that the fraud protection and relationship between OEM regulatory compliance. It's BN: I think cyclicality fits and parts supplier is no why the large banks are well into discounted cash longer focused on the OEM gaining more share today flow analysis and estimates just extracting a few pennies without having to buy the of valuation. You just need less in costs. It is actually a mid-sized banks. to be careful that you are true partnership today and not projecting either peak we believe that should G&D: If you’re right, what or trough returns for a express itself in a higher P/E causes stock prices to company into perpetuity. multiple. eventually reflect that The way we will look at a reality? cyclical company is to try to make as accurate a guess as “We want to invest in BN: Either the market we can of the next couple changes its opinion and of years of earnings. But as companies that will willingly elevates these we think out longer than companies to higher P/Es or that, we will look toward a utilize their free cash you get in a position like the reversion to the mean of flow to eventually force banks and the auto parts what the company has companies are in today typically earned on its a convergence of where there's almost no use equity or profit margin to for capital that can add as try to get to metrics that business value and much to per share value as make sure we're capitalizing stock price.” purchasing their own stock. normalized earnings. Pre-pandemic, we had a number of the large banks As far as disruption risk, that were not only paying a some of the auto parts Banks are another example. dividend yield that exceeded companies that we own, like We believe the banks that what you could get on a 30- TE Connectivity and Aptiv, have much higher capital year bond, but they were are leaders in electrification. relative to their assets today also repurchasing enough of Their content is significantly than they had a generation their share base that they higher on EVs than it is on ago are substantially less had double-digit EPS traditional vehicles. I think risky businesses. And growth, even though top they benefit from because of that, their cash line was only growing a disruption. Lear is a (Continued on page 8) Page 8 Bill Nygren, Harris Associates

company we own that's to discourage anybody from suppliers and banks? dominant in seating. I think trying to compete with the concern there relates them. If a company like Ally BN: Our view on capital more to whether we will Financial, which has the best allocation is that it's end up with a giant, shared auto lending business in the management's duty to car fleet in the United United States, sells at two deploy capital to the highest States of autonomous, thirds of tangible equity, long-term return potential. utilitarian vehicles where who in their right mind A company like Netflix nobody's really concerned would say, "I'm going to try could report a much higher about comfort of seating. and replicate that?" I don't profit today if it chose to by think a company like Square curtailing spending on I think what people are is really trying to acquiring new customers, missing is that as we move disintermediate the retail raising prices significantly toward a more autonomous deposit to a retail lending and then generating vehicle, you start thinking of business that companies, significant cash flow to the inside of your car like Bank of America, Wells repurchase shares. When becoming more like your Fargo, Capital One and Ally, we look at the return that it living room or your den, make the overwhelming is getting by giving us where comfort becomes majority of their profits bargain rates on Netflix so more important to you from. that it grows its subscriber because you aren't count as rapidly as it can constrained by needing to and by spending to try to drive the entire time. We “A company like Netflix grow that internationally, can see a future where the it’s much more attractive. average price of a seat in could report a much Netflix is adding something luxury vehicles is multiples like 25 million subscribers a of what it is today because higher profit today if it year, even in non-Covid it becomes an chose to by curtailing times. If you believe, as we entertainment center. do, that those subs are spending on acquiring worth $1,000, that's $25 So, I think if we were billion of value that they're new customers, raising invested only in auto part adding. Netflix’s market cap companies that relied on prices significantly and is around $200 billion today, fossil fuels and combustion so the annual return on engines, there'd have to be then generating spending for customer some concern about significant cash flow to growth is 12.5%. That disruption. But given where organic return is better than we are invested, I don't repurchase shares.” what it could likely achieve think our companies face by just buying back shares. that concern. For companies like banks, in Shifting to banks, the most G&D: How do you a low loan growth basic function of a bank is to evaluate management teams environment, using capital collect deposits and loan and capital allocation, and to buy back their own them out at a spread. I think do you think about capital business at a discount to the fact that the most allocation differently for stated book value is a very competitively advantaged some of the higher growth attractive use of capital, banks in the world today businesses that you own like especially because we are selling at less than a Alphabet and Netflix versus believe that the financials market multiple does a lot some of these auto parts are worth a significant (Continued on page 9) Page 9 Bill Nygren, Harris Associates

premium to book. We think a management team that's Or if you buy it at $50 and they deserve to sell closer aligned with us wanting to it goes up to $70, then to 1.5-2x book rather than maximize long-term per you're excited because it's the three quarters of book share business value. going higher, and why would that they sell for today. So If we feel we've lost any one you sell something that is the money that they're of those three items, we'll going up? It becomes a very investing in their own stock sell the stock. In an ideal difficult and very emotional is returning twice what world, we buy something at decision if you don't have a they're paying for it. It’s 60% of value and it goes up solid reason for owning that very hard to find that kind to 95% of value. If we don't stock. of organic growth think our value estimate has opportunity or acquisition changed, it's no longer opportunity. We don't have cheap, so we sell it and we “If you really know why a magic answer of what we move on to another cheap want to hear a company stock. But you also have you decide to buy a doing with its capital, but mistakes where you thought we want to hear a thought a business was going to be stock and why you own process that's consistent able to grow and as you're it, then the absence of with maximizing long-term tracking the results after per share returns. you purchase it, you those reasons becomes decided you were wrong the reason to sell.” with your original thesis. G&D: What is your That's a reason to sell the approach to selling? stock. You originally thought management was G&D: We discussed earlier BN: I’ve always thought acting in the shareholder how businesses that have that the reason people have interest trying to maximize become higher quality so much trouble with the long-term per share should merit a higher sell decision is because they returns. Then you see them multiple than they did in the didn't have a well-defined issue an undervalued stock past. How do you pick a buy decision. If you really for a full price acquisition. new absolute multiple that a know why you decide to You ask about it and they business should trade in buy a stock and why you can't explain it in terms that order to drive your value own it, then the absence of make sense to you. If you've estimation and your buy / those reasons becomes the lost confidence that sell decision? reason to sell. At Oakmark, management is trying to we're looking for three maximize long-term value, BN: We use a lot of things when we buy a that's a reason to sell the different methods and try to company. stock. get to a reasonable average. In the auto parts sector we First, we want a significant The danger is when people discussed, one thing we discount to current business will buy a stock without look at when comparable value. Second, we want that having a really disciplined companies get acquired for business value to grow over investment philosophy. cash is if somebody is willing time at a similar rate as the Then they’re at sea when to pay more than the 5-6x S&P 500, so growth in per the stock goes up or down. earnings at which analysts share value plus dividend If you buy something at $50 are valuing them. We keep income must at least match and three months later it's close track of acquisition what we expect from the $30, that's not what you multiples in each industry market. And finally, we want signed up for so you sell it. because we think a buyer (Continued on page 10) Page 10 Bill Nygren, Harris Associates

who's paying cash for an others because there's about the current entire business is likely a always a big synergy environment, especially a more informed buyer than opportunity," as opposed to few months ago when somebody who bought computing a naive average prices were more 1,000 shares of the stock. of the different approaches. depressed than they are today, they would always We'll also look at what want to make a comparison comparable public to 2008. I have a very hard companies are trading for. “The most important time saying that this market We might argue an auto message back in 2008 bears any resemblance at all parts company today is to 2008. In 2008, if you becoming more like a high- was simply to get your took a normalized earnings quality cyclical industrial number for the S&P, the business, which is trading at money invested in the market was selling at 7-8x 12x earnings in the market. Today, I don't that number. The most marketplace, instead of 6x. important message back feel that way at all.” then was simply to get your We'll do a discounted cash money invested in the flow analysis. As a value market. Today, I don't feel manager, we think our that way at all. crystal ball gets hazy faster I always find it funny when than growth managers tend somebody says, "My fair The multiple on the S&P is to think, so we'll build a value estimate for this somewhat higher than the detailed two-year forecast business is $74.70." We’re long-term average. I think and then use a five-year just trying to get into the you can argue that that's growth rate after that. After right ballpark and that's one deserved given the lower those seven years, we of the reasons we look for interest rate environment, model a regression to the big discounts. If a stock is but I wouldn’t argue that mean because we think it's selling at $50 and we can't the current market level is hard to project for any get pretty confident that so undervalued that you business that the advantages there's a way of looking at it should be shifting your asset or disadvantages we see that says it's worth more allocation much more to today persist beyond seven than $70, we'll move on to equities. years. We'll set a discount something else. The rate based on risk levels, precision isn't nearly as This reminds me much informed by where their important. It’s the idea that more of the market I went bonds trade and where there is a compelling body through earlier in my career comparable companies of evidence that gets to a in the late ‘90s, where the trade, and then we'll do a substantially higher number S&P looked a little high, not discounted cash flow. than where the market is crazy high, but you had this offering it to us today. massive divergence between If we compare those three where traditional businesses different methods and G&D: What are your were selling and where dot- they’re wildly different, we thoughts on the current com stocks or large-cap, want to understand the environment, and how does rapid growers were selling. differences. Once we it compare to prior market understand, we can environments during your Banks were selling at 5x thoughtfully say something career? earnings and food stocks at like, "Maybe the acquisition 7x earnings, but GE was at price is out of line with the BN: When people ask 50x and Home Depot was (Continued on page 11) Page 11 Bill Nygren, Harris Associates

at 70x. For the fastest 10x. In the couple of years discussed earlier, I believe growers, you couldn't even after that, it came crashing that as well but not to the compute the multiple back down and started sine- magnitude that would justify because they were losing waving between 2-3x again. these stocks selling at 10x money. Back then people greater multiples than low would say, "Well, this People talk about value P/E stocks. Another massive gap is deserved underperforming for a common argument is that because these traditional decade, which is true, but the value of the future businesses are dying, for the first six years of that becomes infinite as interest everything's moving online." decade, there was a pretty rates go to zero. That’s Having been through that tight correlation between mathematically true, but we before, it makes me less the Russell Value and the don’t believe it makes sense willing to believe it today. Russell Growth. It's really to project interest rates the last four years where staying at zero forever. The chart above compares the divergence has become Eventually you have to multiples on the fastest extreme. Today, that chart return to a world where growers to the lowest P/E of relative multiples has investing is getting a return stocks. If you look at that again gone from 2-3x up to for being willing to defer the over the past 70 years, it 10x. utility of present looks like a sine wave going consumption. To lend between 2-3x. So if the One common argument money long term, people cheapest stocks were at 7x supporting today’s extreme will have to get back more earnings, the most price for growth is that the than they expect inflation to expensive growers were shortcomings of GAAP be. We are not willing to do usually 14x to 21x. The line accounting are even greater a DCF at 3% for a rapid goes crazy around 1998 to today than they were two growth company today. 2000, getting up to about decades ago. As we (Continued on page 12) Page 12 Bill Nygren, Harris Associates

In a normalized the midst of it, nobody G&D: Do you think this is environment in which knew why it was happening, a dangerous environment inflation is going to be but that 10x multiple for the S&P index as a around 2%, like the Fed is premium that investors whole? targeting, long government were willing to pay for bonds would be 1% more growth relative to cheap BN: I want to be careful than that, corporates a bit started to collapse all of a there because we part ways more than long bonds and sudden. with a lot of our value peers then equities a couple of who believe the FANG hundred basis points above We think this environment stocks are grossly corporates. I think as is very similar to that late overvalued. As I mentioned interest rates recover to 1990s, early 2000 earlier, we own Alphabet sustainable levels, it makes environment. and Netflix, which we think sense that this P/E gap are value stocks. Same with comes back to normal. I'm writing my quarterly Facebook, which no longer letter right now and going looks that expensive based back to comments I made on its projected P/E because 20 years ago about how it's grown so much from the “We think this small companies with large time people started valuations were taking over complaining about how high environment is very the large-cap universe. I the multiple was. Those similar to that late wrote back then that three stocks alone are a investors who thought they pretty big part of the S&P. 1990s, early 2000 were getting a low risk environment.” portfolio because it was We owned Amazon at one large cap were actually point. For a brief second, deluding themselves people thought we were because they were taking on brilliant as value investors a magnified risk with smaller buying Amazon in the The next question businesses that had bigger $200s. We thought that on everybody always asks ranges of fundamental a percentage of sales, it was today and asked me back in outcomes on top of the risk cheaper than the brick-and- 2000 is, “What do you think of very high valuations. mortar stores it was putting is going to cause a out of business and it was reversion?” Even having This analogy is important making an investment lived through it, it is difficult today as we see big decision to depress earnings to pinpoint what caused the businesses that were and grow the scale of the collapse of the dot-com and previously large cap, like company. The stock hit large-growth bubble of Schlumberger, Phillips 66 or $600 within a year as 2000. I think the rubber Dollar Tree, falling out of people started getting really band expanded too far and the large-cap universe and excited about AWS. At the finally snapped. Low-price being replaced by smaller time, we were not equipped companies were able to companies with very high to make a reasonable increase their value more valuations. I think that business value case for through share repurchase creates a dangerous AWS. Our thesis for while high-price companies situation for the large-cap owning it as a retailer was started to make acquisitions investor who thinks they running out. We sold the of more traditional have a relatively low risk stock too quickly. Instead of businesses–like the AOL/ portfolio. being the geniuses who Time Warner merger. In bought it in the $200s, we (Continued on page 13) Page 13 Bill Nygren, Harris Associates

became the idiots who sold portfolios at Oakmark. Our the world of travel will it in the $600s. But where typical peers own something evolve in post Covid-19? Amazon stock is today, I like 150 stocks in their And also, how do you think it's tough to make a diversified funds, while we maintain a sense of value case. own about 50. We also run optimism in the markets concentrated portfolios that when something like Covid- I mentioned Apple earlier, have 20 stocks. I can't tell 19 hits in March? which we used to own. In you how much time and the past quarter, you've energy we've had to spend BN: Part of what makes seen almost no change in explaining to people why we that easier is the history and earnings estimates for thought it was prudent to temperament of people Apple, yet its price has gone have positions that we really who are attracted to long- up nearly 50%. It's all liked in a concentrated term value investing. In multiple expansion. That's a portfolio represent over 5% trying to estimate the value tough one for us to of the assets. The index of a business and having that understand at this price. But investor today who owns drive all of your decisions, the craziness to us is not in the NASDAQ, or even the the focus is much more on the FANG names. It's in the S&P, is starting to get a lot what you think the world companies that might have of wealth concentrated in will look like 5 to 10 years $1-2 billion of sales that are just a handful of very large from now than what the now large-cap stocks companies. first quarter of next year because they have will look like. capitalizations over $35 billion. And we think they “The index investor When we went into have the fundamental risk of lockdown in March, we unexpected outcomes that today who owns the immediately had our you would expect from analysts change their companies that are that NASDAQ, or even the estimates for companies to small. Most of them have S&P, is starting to get a be based on the Fed's competitors that are very severe adverse scenario just well funded. You don't lot of wealth because we thought that know what the market was a reasonably good concentrated in just a share structure of their indicator of what we could industry will look like a handful of very large expect in this super sharp decade from now, much self-imposed decline we had less knowing what the companies.” in the economy. We demand for the product will modeled a slow recovery be. with 2022 being the first year that was above 2019 Those names have very high I don't think that's and then normal growth fundamental risk coupled necessarily a valuation risk, after that. with very high valuations. but it is a concentration risk That is the area we think that any problem at one of What it highlighted was could be very risky for those companies can have a how advantaged the asset- investors. bigger impact on the light businesses were that portfolio than you would were in the eye of the One risk I do think is there expect for an indexed storm, like the travel and for the S&P investor is portfolio. leisure areas. We owned concentration risk. We tend American Airlines at the to run concentrated G&D: How do you think time and it looked tough for (Continued on page 14) Page 14 Bill Nygren, Harris Associates

them. The stock had been compared to what we more than the average selling at 4-5x earnings, but estimated back in March. stock. That’s the kind of the business has a lot of That’s not what we’re used thinking that went into financial and operating to. Usually, value investors rearranging our portfolio. leverage and was entering assume earnings are going My only regret is that we an environment they'd to be a lot better for their were moving as fast as we never seen before where companies than the market could and I wish we could global travel basically went thinks, and over time, those have gone faster. to nothing. We didn’t have estimates fall somewhat. In confidence that airlines this situation, our earnings G&D: Do you worry about would survive, but an asset- estimates have increased the risks if the recovery light, franchise business from the bottom. from COVID takes longer model like Hilton wasn’t than anticipated? even going to lose significant In February and March, money. For Hilton, we just when everything fell by BN: I’ll start by saying that had to bake in a couple about 50%, our immediate the forecast we have of a years of lost income. Same move was to analyze our gradual recovery from the for a company like Booking companies on an unlevered trough isn't a non- Holdings. We thought basis and see if we had an consensus forecast. There Booking would actually opportunity to trade up to are some people who are emerge stronger because its higher quality balance sheets even higher than we are on traditional competitors now because they've 2021 earnings. We think were not as well financed actually become cheaper 2021 starts to make and had asset-heavier than the companies that significant progress back models. were highly levered. We toward 2019, but is unlikely also looked where the to exceed 2019. When you “We are invested in market was giving us an get into distinctions like, opportunity to move out of “Could S&P earnings be companies we think can the eye of the storm to 20% worse than we had businesses that might thought,” the question I survive even if this actually benefit from the come back to is, how environment lasts for lockdown, without having to important is that 20% to the pay much of a premium. At long-term discounted cash several years.” the end of the first quarter, flow value of business? For we bought companies like an index that sells at 20x Match.com and Pinterest, earnings today, 100% of one The fact that our valuation while we sold a company year's cash flow would would have to drop by a like American Airlines. represent only 5% of the couple of years of lost current value. earnings doesn’t really Pinterest fell from low $30s change the multiple that we to $14. It had $3 in net cash So I don't think an extra believe these businesses are on the balance sheet, so the year or even two years of worth down the road. enterprise value fell more getting past Covid concerns We’ve now had two dramatically. With people would change long-term quarterly earnings reports spending more money on discounted cash flow values since we went into our their homes, engagement by that much. The adverse scenario and on was increasing on Pinterest. uncertainty of when Covid average, the analyst We thought Covid might will end, whether it’s at the revisions to those estimates have increased the business end of this year, middle of have been slightly positive value and instead it fell next year, middle of 2022, is (Continued on page 15) Page 15 Bill Nygren, Harris Associates

why we're focused more on funded with customer giving up the branch the quality of the balance deposits. structure convenience. Ally sheet. We are invested in has moved now to where it companies we think can In banking, you've got two is almost entirely funded by survive even if this basic business models today. retail deposits. The asset environment lasts for You've got the companies side of its balance sheet is several years. that are spending about 100 almost entirely car loans. I basis points per dollar of think what investors seem That ties back to why we deposits on a nice brick-and to question is how a eliminated airline stocks -mortar network with company like Ally can make early on. We think travel tellers where you can go money in such a low will come back because into the bank and conduct interest rate environment. we're all getting sick of your business. That's a virtual meetings and we're model that we see Bank of There is not a rush of new anxious to sit down and America, Wells Fargo and money trying to figure out meet in a room together. JPMorgan using. how to create auto loans. We want to do our Because of that, spreads on management meetings in both new and used auto their offices across the table loans are higher than they “Before Covid, Ally from them. It might be a have been traditionally and couple of years until we can earned about $3.70 per are more reflective of the do that again. And if it's a rates that Ally is paying to couple of years, most of the share, which represents its retail depositors. Ally is airlines need help to get about 7x P/E at the still earning a very good through that period. When spread income. Additionally, you're relying on strangers current stock price. We even though Treasury rates to help you, that's usually are down to about zero, it not good for equity expect post-Covid, it can still pay 1% because it shareholders. will very quickly get doesn’t have the branch network. Ally is still G&D: Are there any back to that number. “ collecting deposits and particular ideas you want to lending them out as car discuss in more detail? loans.

BN: One holding we’re Then you've got the Ally’s valuation is excited about is Ally companies, like Ally and compelling. Book value is Financial. Ally's basic Capital One, which are supposed to be about $31 business is providing used more internet-based at the end of this year and it and new car loans both to businesses. They don't have sells at $25 now, so 80% of dealers and ultimate the fixed costs, so they can book, and that's after taking consumers. Traditionally, take the 100 basis points the hit from all of the Ally had been funded by that the largest banks are charge offs that they expect short-term debt, so there spending on brick and Covid to ultimately cost was a risk that when mortar and return it to the them. markets seized up, it would customer as interest be unable to roll over all its income. A consumer will Before Covid, Ally earned short-term financing. When typically earn 1% better by about $3.70 per share, that happened in 2008, it led putting money in Ally or which represents about 7x the company to shift to a Capital One than Bank of P/E at the current stock business model that was America in exchange for price. We expect post- (Continued on page 16) Page 16 Bill Nygren, Harris Associates

Covid, it will very quickly everything for this to be a the ultimate protection is get back to that number. very good stock from for Ally to go back and Ally was using most of its current price levels. repossess the car. Back in cash flow to repurchase March, we were all shares because that swamps G&D: How do you get assuming that used car the return it could get on comfortable with the default prices would fall anything else. Because of risk in their auto loan dramatically because people Ally’s leadership position in portfolio with wouldn't have as much auto loans, we think it unemployment so high and money. Instead they've risen ought to be earning a low- all the COVID disruption? dramatically because people teens return on equity. It want more private should still be selling at a BN: Part of it is the transportation than they discount to the S&P, but if accounting rules, which wanted pre-Covid. So the the S&P is going to be at a mandate that Ally has to worst case outcome is if the high-teens multiple, Ally estimate what it is going to customer stops paying, they could sell at a low-teens lose throughout the life of a now have to repossess the multiple. That would equate loan and record that as a car and the salvage value is to 1.5-2x book value, which charge against income. This going to be higher than they is 2-2.5x the current stock impacted Ally heavily over had previously estimated. price. the past two quarters. Second, we get to see how G&D: What’s your view on If we're wrong on P/E its charge offs are the risk of autonomous multiple expansion, the comparing to other public driving, which we discussed company should be able to companies that have similar earlier, disintermediating buy back more than 10% of quality loan books. We're Ally’s business? its stock each year, pay us a comfortable that Ally has dividend that's more than been in line with those BN: It depends on what we could earn on a long- charges. assumptions we need to get term Treasury and have the our money back. With Ally Additionally, we listen to selling at 80% of book, if what management says there's a disruption risk and when they speak publicly. we all quit buying personal “When we look through They have spoken about autos so that Ally doesn’t a pile of hundreds of how delinquencies have not have a way to grow been as high as they thought anymore, simply winding resumes of students they would have been. The down the business and decapitalizing both debt and who are interested in individuals who took advantage of forbearance equity would get us more one opening, somebody have come back current on than our money back, so we their loans at a faster rate don't worry too much with a strong than Ally had projected. about that as a downside accounting background You can never be rock-solid case. We'd worry about it certain, but we're hearing a more if Ally was selling at really sticks out.” consistent message from all 1.5x book and our target of the consumer banks that was 1.75x book. credit losses do not look as dividend grow by the same bad as they had originally G&D: What advice would rate that its earnings per estimated they would be. you give to MBA students share are growing. We who are interested in don't need to be right on If the consumer doesn't pay, pursuing a career in (Continued on page 17) Page 17 Bill Nygren, Harris Associates

investment management? because you're going to be miserable in this career if it's BN: One thing I'm really not an honest passion you're surprised by is how little presenting. interest there is in accounting at most schools. G&D: How do you spend When we look through a your time outside of work? pile of hundreds of resumes of students who are BN: I love wine. When I was interested in one opening, younger, I had no interest in which we are in the wine and couldn't understand fortunate position of being people who did. Over a in today, somebody with a generation, it has become a strong accounting passion. I joke that my background really sticks out. hobbies basically involve I also think it's so important either food or wine and one for people who are going to of the reasons I want to keep be successful in this business working is because I don't to be passionate about it. If want to have more free time you’re passionate about to spend on my hobbies—it investing, you can’t turn it wouldn't be healthy! I also off. I can't go into a store love sports. Baseball is a without seeing how shelf passion, and despite the space has changed between stock market being super different companies. My exciting today, this reading list is almost always afternoon, I'm going to be at about things that I think will a rooftop to watch the Cubs make me a better investor. first playoff game.

I get puzzled when I'm I am also involved in interviewing a candidate charitable activities. Rather who claims to have that than mention any individual level of passion about names, I’ll just say that my investing and you ask them passion is trying to give what they're reading and disadvantaged kids the same they say, "Oh, my reading educational opportunities time is pretty much that I had. Most of my focus consumed by school. I don't is on inner city education. get much free time to read." When I was in school, I was G&D: Thank you very much trying to get my hands on for speaking with us. every Wall Street research report I could. I was reading investment books that were not part of any course I was taking. That passion comes through in an interview and I think it's really important to be able to demonstrate it. It’s not something to fake Graham and Doddsville – October 28, 2020 | Interview with Bill Nygren, Harris Associates

As of September 30, 2020, the holdings mentioned above comprise the following percentages of the Fund's total net assets:

Security OAKMX OAKLX OAKWX Allied Stores 0.0% 0.0% 0.0% Ally Financial 3.5% 6.3% 0.0% Alphabet Cl A 3.8% 10.3% 10.0% Amazon 0.0% 0.0% 0.0% American Airlines 0.0% 0.0% 0.0% Amgen 0.0% 0.0% 0.0% AOL 0.0% 0.0% 0.0% Apple 0.0% 0.0% 0.0% Aptiv 0.0% 0.0% 0.0% AT&T 0.0% 0.0% 0.0% AWS 0.0% 0.0% 0.0% Bank of America 3.0% 4.7% 6.1% Booking Holdings 2.7% 4.1% 3.5% Capital One Financial 3.1% 4.2% 0.0% Dollar Tree 0.0% 0.0% 0.0% Facebook Cl A 3.7% 5.9% 0.0% General Electric 1.4% 2.9% 0.0% General Motors 2.1% 0.0% 0.0% HBO 0.0% 0.0% 0.0% Hilton Worldwide 1.9% 2.8% 0.0% Home Depot 0.0% 0.0% 0.0% JP Morgan 0.0% 0.0% 0.0% Lear 0.0% 3.7% 0.0% Match.com 0.0% 0.0% 0.0% Netflix 3.6% 5.1% 0.0% Phillips 66 0.0% 0.0% 0.0% Pinterest 0.0% 0.0% 0.0% Schlumberger 0.0% 0.0% 0.0% TE Connectivity 1.8% 5.9% 6.3% Time Warner 0.0% 0.0% 0.0% Wells Fargo 1.40% 0% 0%

Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks. Current and future portfolio holdings are subject to risk.

Please visit Oakmark.com to view the full list of holdings as of the most recent quarter-end.

The Funds’ portfolios tend 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 and the Oakmark Global Select Fund are 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.

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Investing in foreign securities presents risks that in some ways may be greater than U.S. investments. Those risks include: currency fluctuation; different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.

The Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.

Book Value refers to a company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill.

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EBITDA refers to Earnings Before the deduction of payments for Interest, Taxes, Depreciation and Amortization which is a measure of operating income.

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The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. This index is unmanaged and investors cannot invest directly in this index.

The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values. This index is unmanaged and investors cannot invest directly in this index.

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The NASDAQ Composite Index is a broad-based market-capitalization weighted index of all common type stocks on the NASDAQ Stock Market, including common stocks, American depositary receipts, ordinary shares, shares of beneficial interest or limited partnership interests, and tracking stocks. The index includes all NASDAQ listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures. This index is unmanaged and investors cannot invest directly in this index.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.

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