Why not Mattingly?

Don Mattingly is looking for a job, since he was let go in LA.  Even though I’m sure he knows about the Nats toxic clubhouse, he was a success with the Dodgers.  Apparently he may be interested in the Marlins manager position, one that to me looks even less desireable than coming to Washington.  The owner, Jeffrey Loria, seems to like changing managers as often as he brushes his teeth!  And he also has a penchant for selling off half the team every time they make the playoffs.  Anyhow, on the off-chance that “Donny Ballgame” doesn’t really want to commit career suicide by going to the Marlins, the Nats ought to invite him for an interview.

He would be better than Dusty Baker, and as good as Bud Black.  He lead the Dodgers to 3 straight post-seasons.

Advertisements

If You Don ‘t Know Where You Are Going, You Might End Up Somewhere Else!

Party Like It’s 1908
Patience is generally a virtue in management of a baseball team, a business or an investment portfolio.

By Bill Nygren | Posted: 10-08-15 | 11:47 AM | Email Article
“If you don’t know where you are going, you might wind up someplace else.”
-Yogi Berra
(May 12, 1925 – September 22, 2015) RIP

Bill Nygren is a Portfolio Manager of the Oakmark fund, the Oakmark Select fund, and the Oakmark Global Select fund.
As I write this, something wonderful is happening in Chicago: There is excitement about winning an October baseball game for the first time in twelve years.1 The Chicago Cubs are finally back in the playoffs. As every Chicago Cubs fan knows, it has been a long road back from our last World Series win in 1908. In 2003, we were one game from going to the World Series, leading the Florida Marlins three games to one, but went on to lose three consecutive games to the eventual champions. Since then, the Cubs compiled a cumulative regular season record of 90 games below .500 and lost all six of their playoff games, bringing their post-season losing streak to nine games. Until this year.
Twelve years ago, in our June 2003 report, I wrote about the Michael Lewis book Moneyball. It tells the story of how Oakland A’s general manager Billy Beane built a team that made the post-season, even though it had one of the lowest payrolls in Major League Baseball. Beane used advanced statistics to identify valuable players whom other teams had given up on. (I liked how Beane’s approach resembled Oakmark’s approach to buying stocks.) In 2002, after taking the A’s to the playoffs for three consecutive years, Beane turned down an offer from the Boston Red Sox to become baseball’s highest paid general manager.
Spurned by Beane, the Red Sox instead hired another young statistical guru, Theo Epstein. The Red Sox had just missed the 2002 playoffs despite having one of baseball’s highest payrolls, and the owners had lost patience with the team’s direction. By 2004, Epstein had overhauled the roster, hired a new manager and won the World Series. From 2003 through 2011—while the Cubs struggled—the Epstein-led Red Sox won two World Series, went to the playoffs six times and ended each season an average of 25 games over .500.
In 2011, the Cubs’ record was 71-91. The Cubs’ owners lost patience with the team’s direction, so they hired Theo Epstein away from Boston. With a starting point of 20 games under .500, the Cubs were more of a teardown than the Red Sox had been. But by 2015, the roster had been overhauled and a new manager was put in place. The team’s record improved to 32 games over .500, they earned a spot in the playoffs and they are now widely considered the most promising young team in baseball.
Baseball and Business Aren’t That Different
Though I enjoy writing about baseball and the Cubs, the purpose of these reports is to share how we think about investing. Baseball is just a convenient analogy for examining businesses. An owner of a baseball team gets frustrated, hires a new GM and watches for signs of a turnaround. The shareholders of a poorly performing business get frustrated, the board of directors hires a new CEO and everyone watches for signs of a turnaround.
In both baseball and business, a turnaround isn’t always immediately apparent in the numbers. In Epstein’s first year with the Cubs, the team lost 40 more games than they won, 20 worse than the prior season. The next two seasons weren’t much better, totaling 46 games under .500. But beneath the surface, the culture was improving as toxic veterans were replaced by highly talented, motivated rookies. Strategic trades took advantage of teams that were focused on the short term. (Can you believe we got Jake Arrieta for a three-month rental of Scott Feldman? Or Addison Russell for three months of Jeff Samardzija?) A new manager was hired, Joe Maddon, who had a proven track record of getting the most from young players. Individual goals finally took a back seat to team goals. But it still took three painfully long years before that progress was visible in the number of wins.
I remember many years ago talking to Warren Batts, then-CEO of Premark, which he headed after it was spun out from Kraft. (We owned it in the Oakmark Fund.) Batts said that a new CEO needs about two years to complete strategic acquisitions or divestitures and to build a new team of top managers. Then it takes those managers a year to build their teams. So three years in, the turnaround is finally in gear, yet investors have often already given up. If Theo Epstein’s tenure with the Cubs was judged by the one-, two- or three-year win-loss record, it would have been deemed a failure. In year four, he looks like baseball executive of the year. Similarly, we’ve often used Oakmark’s long investment horizon to try to gain an advantage over shorter term investors. Patience is generally a virtue in management of a baseball team, a business or an investment portfolio.
What Is the W-L Record of a Business?
In baseball it is generally agreed upon that the number of wins defines success. (Some might say success should be measured by World Series Championships, but I agree with the purists who argue that luck plays too big a factor in an individual series whereas it tends to even out over the course of a 162-game season.) In business, however, there isn’t a generally agreed-upon metric to grade the success of a CEO. In a recent political debate, a particular candidate’s tenure as CEO of a public company became a topic of discussion. Various statistics were cited, including changes in sales, earnings, stock price, number of people employed and dollars spent on R&D. Depending on which statistic was used, the resulting conclusion ranged from miserable failure to huge success.
Of those metrics, the one that interests us most is the change over time in stock price. Stock price presumably takes into account all of the other metrics and weights them appropriately. If markets were perfectly efficient, we’d say that change in stock price is the best measure of a CEO. But since we have seen markets sometimes overwhelmed by irrational exuberance or pessimism, we believe that an individual CEO can be unfairly blamed or credited for what is in fact a broad shift in valuation of many similar companies. When Jack Welch retired as CEO of General Electric in 2000, he was replaced by current CEO Jeff Immelt. Say what you will about Immelt’s tenure as CEO, but it wasn’t his fault that it started just as the large-cap bull market of 2000 was ending, when GE traded at 40 times earnings, a multiple at which almost no large company sells today. So, we need a better metric than stock price.
At Oakmark, we believe CEOs should have one goal: to maximize the long-term value of the business (including dividends), adjusted for net-debt and measured on a per-share basis. Interestingly, during the political debate, not one person mentioned any metric that included changes in the balance sheet or the number of shares outstanding. I don’t know any business owners that would judge success or failure based on how their businesses grew without also considering how the balance sheets or their equity ownership percentage had changed. If a company doubles its size by doubling its share count, it is effectively just running in place. Many acquisitions that increase a company’s sales and earnings fail to add value when considering the cash or stock that was paid to the seller.
Today it seems unpopular, especially in the political arena, to say that a CEO’s goal should be to maximize value for the owners of a business. When you hear that view being challenged, remember that a company can only maximize long-term value by treating its employees fairly (or they will work elsewhere), by treating its customers fairly (or they will buy elsewhere) and by allocating its capital to the highest return projects. When a company doesn’t have high return projects to invest in, returning excess capital to shareholders either through dividends or stock repurchase frees that capital to be invested in other businesses that do have growth opportunities. A no-growth company building new plants doesn’t help anyone in the long run. For example, think of the societal gain that occurred when declining mainframe computer companies returned capital to shareholders and that money was invested in Internet startups. Capital returned to shareholders doesn’t just get stuffed into mattresses.
At Oakmark, we believe the win-loss record of a CEO is the change in value per-share over his or her tenure. A good CEO will build a team to help maximize that change, just as a good baseball GM will build a team to maximize the number of wins. I hope by the time you read this the Cubs have passed their first playoff challenge and are on their way to the World Series. But if not, we fans will take comfort that the foundation appears to be in place for long-term success. It’s a lot like our investment portfolios: When Oakmark invests in undervalued businesses run by CEOs with good win-loss records, our portfolios might not perform well next quarter or even next year, but we believe the foundation is in place for long-term success.
William C. Nygren, CFA
Portfolio Manager
oakmx@oakmark.com
oaklx@oakmark.com

View other commentary and letters from Bill here.
1I’m ignoring 2005 when the White Sox won the World Series, and 2008 when they won one game in the playoffs against the then-Joe-Maddon-coached Tampa Bay Rays because in Chicago, Cubs fans ignore the Sox’s accomplishments and vice-versa.
As of 09/30/15 Premark International, Inc. represented 0% and 0%, Kraft Foods Group, Inc. 0% and 0%, and General Electric Co. 2.3% and 6.6% of the Oakmark Fund and Oakmark Select Fund’s respective total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
Click here to access the full list of holdings for The Oakmark Fund as of the most recent quarter-end.
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.
Oakmark Select Fund: The stocks of medium-sized companies tend to be more volatile than those of large companies and have underperformed the stocks of small and large companies during some periods.
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.
Comments 1-5 of 5 CommentsCardsFan 3 hours, 43 minutes ago
Flag
Might have to sell out my Oakmark positions. The Cubs are doing pretty well now after tanking for years and stacking up draft choices. How will they hold up if they become a perennial contender?

Mets up 2 zip. yawkey5 9 hours, 48 minutes ago
Flag
Just for the Record, Billy Beane and the A’s have got only as far as one AL Championship Series and NO World Series in 18 years. Meanwhile, the Team he turned down, the Red Sox have won 3 World Series. ClemG 15 hours, 1 minutes ago
Flag
I like the Oakmark process and understand it. I agree with it. They will be the last fund family I probably would ever sell. Unless something dramatic changes you’ll have to pry my OAKWX shares from my cold dead hands. I wish I could have invested in OAKLX back in the late 90’s like I really wanted to. Because of my situation I couldn’t at that time in my life.

I own OAKWX & OAKBX along with FMIJX & SEEDX. Greg Jackson at SEEDX was the manager of OAKGX before he left. Actually the best yrs of the fund.

I’m an Oakmark fan…tbonds67 20 hours, 23 minutes ago
Flag
>>The team’s record improved to 32 games over .500, they earned a spot in the playoffs and they are now widely considered the most promising young team in baseball.

Not only that, but the Cubs may go on to win the world series.BravesFan 22 hours, 1 minutes ago

The Chase Utley Dust-up

I have been too busy watching the exciting playoffs to add much on this site recently.  But I must say Utley’s slide at second base Saturday night breaking Ruben Tejada’s leg was ugly, dirty and he ought to be suspended far more than two games!  He ought to be fined $100,000.  The play ranks up there with the play that broke Buster Posey’s leg a couple of years ago and forced MLB to change the rules regarding what catchers can do around home-plate.

The play also changed the outcome of the game.  The Mets would likely have won if Tejada had not been injured, as they would have got a double-play rather than a broken play.  The rule now in the books allows the umpires to call both Utley and the batter out, but in this instance the umpires closed their eyes and held their noses!

MLB should take this opportunity  to change the rules about sliding into second base just as they did regarding the above Posey incident at home.  Today’s Washington Post (Nov. 13) has an excellent Boswell article providing more details.

Crying in Baseball?

Craig Stammen says “every year there are one or two games that make me cry all night.”  Craig (one of the stalwarts of the Nats bull-pen over the years) has been out all year due to injury.  He (and Tyler Clippard) have been much-missed all this long season!

I’ve got to say,……….the Mets are a very good team, and are fun to watch.  They fight til the “Fat lady sings.”  When a team can come back from a late-inning deficit night after night one knows that he/she is watching a team that ought to be playing in October.

Bullet Bites Nats on August 7

Every reliever has a bad night once in a while, and it has been a very long time since something like last night happened to Drew Storen.  When the “slammer” was hit in the 8th inning, the Nats had 2 innings left for their offense to just score a run or two.  The Mets came back from deficits three times last night, but the Nats hitters could not muster even one comeback.  A rookie struck out Bryce Harper to end the game.

The Nats chances of making the playoffs have taken a BIG hit in the past 8 games!

Nats Bite a Bullet!

I was glad to see the Nats make a tough decision as the NL East competition heats up.  Sending the veteran Doug Fister to the bull-pen showed in favor of keeping Joe Ross in the starting rotation is a clear sign the front office is serious about the run for the playoffs.  Starting Danny Espinosa at SS the other day was a similar indication.  And the move to start Robinson at first base yesterday worked well as did sending Ryan Zimmerman in the pinch-hit late in the game!

Baseball is a very fickle game, but yesterday “the gods” were smiling on the Nats:)

Maryland vs Virginia–Today!

Yep, it is happening like it did last year.  Today at 4pm UVa plays UMd in the NCAA playoffs.  Virginia was victorious last year, and they went all the way to the final game in Omaha.  Both teams have had up-and-down seasons, but appear to be peaking at the right time now.  Starting pitchers are Mike Shawaryn (13-2) for Maryland and Connor Jones (6-2) for Virginia.

I would have to say Maryland appears likely to go farther than UVa this year.  Both knocked off higher rated teams recently to get to today’s game.  And Virginia lost some of their best players from last year.  The best of three tournament will begin today on the U.Va. home field.

An October Preview?

I’m still savoring the just-completed series with the Cubbies!  I would not be surprised if both teams meet in October; the Cubs have improved A LOT and they are a fun team to watch, with so many young studs:)  Kris Bryant grew up playing with Bryce Harper as a kid in Las Vegas and it was fun watching the 2 of them hugging in the outfield before one game and bantering back and forth during the games.  Each game was a nail-biter and I think only 11 runs (total for BOTH teams) were scored in the entire series!

We got to see what a gem Mike Rizzo found in Casey Jansen.  He pitches like a combination of Scherzer and Fister (in-your-face aggression, only high 80s speed and good control).  And the spectacular way he fielded Dexter Fowler’s surprise bunt and threw him out at 1B was jaw-dropping. He may make us do the unthinkable and forget Tyler Clippard!

The Nats bullpen (I’ve said this before) is jelling and Mgr Matt Williams (and “Cat” too) deserves a lot of the credit for learning how to use every one of the guys from Treinen to Storen.

 

 

Read My Lips!

I have said this several times in several posts:  Stephen Strassburg should not start a game in the playoffs.  Why?  Because he cannot command his fastball consistently.  If you don’t believe me, then take a gander at Tom Boswell’s article on the subject in today’s Post.  Anyone who watched Strass pitch yesterday should understand what I’m talking about.

Fastball commands determines the effectiveness of all a starting pitcher’s repertoire of pitches.  Strass has had this inconsistency his whole life; I watched him pitch in college.  He gets hammered when he can’t spot his fastball, over, over and over again.

OK, one more time for Nats fans:  Strass should not be used as a starter in the playoffs.  Fister, Roark and Zimmerman should be the starters.