Dear fellow investors,
Investors who have come to us in the last three to four years are probably wondering if we’ve been here before. By here, we mean a stretch of significant underperformance relative to our benchmarks. The answer is, yes. Let’s review those prior circumstances to see if we can learn something about where we might be headed.
I started building common stock portfolios using our eight criteria for stock selection in 1993 under the umbrella of larger firms. As a clue to what was to come, we used to say, “Only the Lonely Can Play,” which came from The Motel’s song of the same name. Being value investors and contrarians frequently puts us at odds with popular securities and owning stocks, the prices of which are temporarily getting abused. We made very strong compounded returns from 1994-1998, but the tech bubble took over in 1998 and lasted for two more years. We massively underperformed the back-to-back 20%+ index gains of 1998 and 1999. We added to the misery by being underwater absolutely until the bubble broke in March of 2000. From that break to three years later, we got rewarded with immense outperformance.
Smead Capital Management was started in July 2007, just in time to catch the worst 21 months in the stock market of my 45 years in the investment business. Effectively, the stock market was chopped in half by the financial crisis and the deepest recession in decades. Rather than outperforming a down market, we “walked the loneliest mile and smiled without any style.”
At the time, I felt like blood was coming out of every orifice in my body. We were overweight the normally blue-chip financial companies that were brought to their knees and any company with leverage was punished severely. We underperformed the S&P 500 Index and had the highest turnover of any year of the strategy’s existence at 55%.
However, as the song says, “Hold on here we go, hold on to nothing we know.” Little did we know at the time, but that decline in the stock market blessed us over the next ten years. We were the best-performing large blend/large value strategy in the Morningstar database and received back-to-back industry awards. All this came from the bargains that were offered to us in 2008-2010 in the most anemic economic recovery from a deep recession. The key to understanding us is we don’t mind being lonely and we are optimistic as contrarians when others drown in pessimism.
We had done well from the beginning of 2018 to early 2020 until Covid shut everything down. The stock market fell off a cliff and we declined 40% in 60 days. We also didn’t bounce back immediately but were offered amazing bargains on stocks that nobody else wanted (SPG, MAC, COP, CLR, etc.). We bought into industries that others had no hope for, much like we are doing now with industries hurt by the tariff fears and new policies by the Trump administration. God blessed us by getting our money back by the end of the year 2020 and set us up for great results from 2021-2023.
As you might have noticed in our recent writings and presentations, we expect the overall stock market to be a major drag for the foreseeable future. Much like prior episodes, we are taking a beating in the early stages of this episode. Here is the good news: we’ve been here before, and Sir John Templeton used to say, “If you can see the light at the end of the tunnel, you are too late.” Leverage is the enemy in a decline and is what cripples firms/people. Our company and our funds carry no leverage. Templeton reminds us that “bull markets follow bear markets and bear markets follow bull markets” and that will never change.
Fear stock market failure,
William Smead
The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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