Author: Cole Smead, CFA

DXYZ: An Old Form of Ignorance

Many investors are bullish, or not fearful, of the future of stock returns. At Smead Capital Management, we continue to explain to our investors how poor the outcomes will be. Some ask when this view will change. To quote Keynes, “When the facts change, I change my mind. What do you do, sir?” The facts are not changing. Instead, we continue to find mountain evidence of the danger present. In this piece, we will explain an analogous instance from the past. […]

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Looking for the Outsiders

William Thorndike’s book “The Outsiders” has been considered a classic for some time now. His story teaches readers about the business performance of Henry Singleton, Katherine Graham, John Malone and Daniel Burke. These are people who weren’t household names like Jack Welch, but produced results that would make any investors feel jealous of the success they had. At a moment like today where the world seems vastly different than where we have been for much of the last decade, we would like to use this piece as a way to remind ourselves where “The Outsiders” may sit and provide an example of ones that we’ve witnessed, but others don’t recognize. […]

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The Great Conflagration

We consider Ben Bernanke to be the father of 21st-century central bank policy. His work in dealing with the credit crisis in 2008-2009 was just the right policy at that time. The problem for economists is that they tend to fight the last war. The Great Financial Crisis was an economic problem where demand was dropping off from credit evaporating. The government tried to spend money to replace this destruction, but couldn’t politically equal the loss of economic output. The central banks could only pray that the most accommodative monetary policy would ease the fiscal belt that wasn’t loosening at that time. This was the last war for economists and has dominated economic research. Like anchoring or recency bias would tell us, this may have little to do with the problems in our future. […]

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Chronological Snobbery

C.S. Lewis coined the term ‘chronological snobbery’. According to Lewis, the definition of chronological snobbery is “the uncritical acceptance of the intellectual climate of our own age and the assumption that whatever has gone out of date is on that count discredited.” In our minds, it is how humans undercut the wisdom of a prior time by assuming that we are so much more advanced in our current day. […]

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Grantham’s Contradictions

[…] Let me also start this missive by saying that we at Smead Capital Management believe Jeremy Grantham is doing a great job of telling people how high the likelihood of stock market failure is. He’s trying to scare people and that is prudent advice. We tip our cap to him. We want to go into a second-level thinking discussion of how to take advantage of Mr. Market right now using Jeremy’s comments as a benchmark. […]

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Stock Investors in Barbieland

[…] Investors should fear death like Barbie did. We call it stock market failure. These valuations won’t go up like a six-inch heel. Flats may be more fitting for thinking about stock returns going forward. The only way to fight this for stock investors is to be scrutinous about the businesses you own and what you are paying for those stocks. In the Barbie movie, Ken wandered the real world trying to make sense of things. He only came to bad conclusions and never ended up with Barbie. Stock investors could be no different in their own fantasy land.

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Energy Investors are Jaded

[…] Mr. Market knows that low ROE produces low multiples and high ROE produces high multiples. He’s just very manic when he is jaded. We are seeking high-return businesses that are mispriced. By God’s grace, there are a lot of jaded investors and a lot of mispricing in this space. We’re sorry that Mr. Market is jaded. The right business managers can take us places. These companies are lonely now and (in comparison) we love it. We are sorry that investors are jaded.

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Buy Energy. I am.

In October 2008, Warren Buffett penned an op-ed in The New York Times titled, “Buy American. I am.” Warren argued that though things looked terrible, he was buying stocks personally. He was selling government bonds he held to buy these securities. He argued how poorly cash would do at that time and in the foreseeable future.

Fast forward to today when Berkshire Hathaway (BRK) sits on $130.62 billion in cash. It’s not deploying capital very quickly via Warren, Charlie Munger, Todd Combs and Ted Weschler to investments, let alone stocks. There is one thing that has burned a hole in Warren’s pocket though: OXY. […]

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Good Odds and Odd Goods

My father and I both attended a small liberal arts college that was one of the strongest academic institutions in its region and was tough to get into. While it sat far away from the amenities of a large city and was historically weak in sports, it produced a lot of success out of its powerful educational rigor. It was also highly likely for you to marry someone you went to school with. The paradox that this marriage potential created at the college was that the odds are good, but the goods are odd. This is the statement that can be made for common stock investing today. […]

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The Game Has Changed

[…] In many respects, there is a three-point line that has arisen in the stock market, whether investors or money management firms recognize it. The higher percentage, two-point shots have come in the form of owning the S&P 500 Index or blue-chip quality American companies. However, the investors shooting these highly successful shots haven’t won in the stock market recently, particularly over the last 15 months. Instead, it has been more cyclical, capital-intensive businesses, or as we think about it, higher risk, like the three-point line. Energy companies, commodity-oriented businesses and other lesser-known industries have been putting the most points up on the board. […]

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