Over the past few weeks, you haven’t been able to read a business magazine or watch financial news on TV without being exposed to commentary about the upcoming Facebook (FB) IPO. Facebook has obviously been an amazing success story and is clearly newsworthy as the largest IPO ever. This week, investors are being asked to decide whether or not Facebook is a worthy investment at a market cap of $100 billion. The debate over whether or not to invest at that price reached an absurd level this week when Apple founder Steve Wozniak said that he would buy Facebook on the IPO regardless of its price.
At Oakmark, that is a statement, applied to any investment, which makes no sense to us. No matter how attractive a business is, there is always a price above which it becomes an unattractive investment. Is the Facebook IPO above that price? I will answer that with the one comment I have yet to hear the experts say – we have no idea. That’s the beauty of this business – we can admit that, most of the time, most companies sell at prices that make us lack conviction about their investment merits, and we don’t need to invest where we don’t have conviction. As Warren Buffett has said, investing is like being the batter in a baseball game where there are no called strikes. You can simply wait for the pitches you believe you have the best chance of hitting.
Facebook doesn’t make much money today for a company with a $100 billion market cap. But what the company earns five years from now is likely to be wildly different from what it earns today. Perhaps future earnings will make this week’s IPO look like a bargain; perhaps it will make the buyers look foolish. Other than our general bias that IPOs, on average, don’t perform as well as the stock market, we don’t have an opinion, so we aren’t swinging.
Unlike Facebook, our most important positions tend not to be front-page news. How often have you recently seen analysts debating the merits of owning Capital One, Comcast, Discovery Communications, Liberty Interactive or TE Connectivity (the five largest holdings in Oakmark Select)? Probably never. Also unlike Facebook, these companies sell at modest multiples of current earnings, have business models that appear reasonably predictable, and are allocating excess capital to share repurchases. As value investors, we are used to investing in companies when there is relatively little media interest in them, and we have learned the rewards that come from following a disciplined investment approach.
We wish the owners and new investors in Facebook well. But we at Oakmark are watching with our bat on our shoulder.
As of 3/31/12, Capital One Financial Corp. represented 5.0%, Comcast Cl A 5.1%, Discovery Communications, Inc., Class C 8.4%, Liberty Interactive Cl A 5.9%, TE Connectivity 6.0% of the Oakmark Select Fund's total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Because The Oakmark Select and Oakmark Global Select Funds are non-diversified, the performance of each holding will have a greater impact on the Funds' total return, and may make the Funds' returns more volatile than a more diversified fund.
The discussion of investments and investment strategy (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) represents the investments and views of the portfolio managers and Harris Associates L.P. at the time of this report, and are subject to change without notice.