Author: Cole Smead, CFA

Academics argue that there are three proven factors of investing: Value, quality (Asness’s QMJ) and momentum. For our discipline, we don’t believe we can add alpha in the latter. Momentum is a weird thing, though proven. To emit a yogi-ism, you either have it or you don’t. Value and quality, in comparison, are easier to price in the security analysis of our investment discipline. While investors have looked at the last decade of failure in value, we would conjecture a new question. Just as no one thought that the brightest academic minds could have produced the failure and banking crisis of Long-Term Capital Management, what if another factor fails terribly for an elongated time? To put it simply, what will happen When Quality Fails? […]

The future is always unknown. One of the most common fallacies that we’ve heard over the last two years is investors saying to us what the stock market or bond markets are telling us about the future. We find this interesting because it doesn’t tell you anything. As Buffett says, these market prices can serve you, but they can’t instruct you. We would like to share a couple of historical examples to settle this debate. […]

The news of Berkshire Hathaway’s purchases in Occidental Petroleum (OXY) has been seismic in our minds, but to most investors it has been but a whimper. We believe there are two main reasons for this. First, Buffett hasn’t had a hot hand in recent years, so the normal copycats aren’t quick to repeat Buffett’s actions. Second, he’s buying an oil company. Oil has been a three-letter swear word to most investors. Therefore, it’s been much ado about nothing. […]

[…] Buffett wondered if there was something in the water in Omaha. We know it wasn’t the waters of the Pacific. It was the people and their traditions. They practiced a craft that was learned from others, who had mastered it before them. Like these traditions, great investors have left behind things for us to study and refine the same practices they used, applied in today’s world. This is not dissimilar to what the people groups of the Pacific did. They migrated people, customs and culture toward a destination using mastered skills despite unknowns along those journeys. We are blessed to understand their story that helps contextualize our role from the teachings of people like Graham, Buffett, Templeton, Lynch and other great investors. We know this accomplishment may be against the odds perceived by the western world.

[…] In my 15-year career in the investment business, I don’t think there has been nearly as much weight to making money as there has been in limiting volatility. This creates a good picture of what investors will focus on. It also leaves the stock markets with a problem. If stocks have more volatility than in the recent past, investors will pay less for a broad basket of stocks like the S&P 500 Index, regardless of its underlying economics. Again, they’ve only been trained to pay for or reward strategies and assets with less volatility. […]

Ben Graham is ascribed as being the father of value investing. The intellectual framework he brought to investors was using the available accounting to measure value of a business. His way of measuring was book value, the total assets minus all liabilities. By figuring out this number, he could then divide this metric by the total shares outstanding to understand how much book value per share (what some may call net worth) a company had versus what the price the shares were trading for in the stock market. […]

The beginning to 2022 has been dark to say the least. The year has begun with losses in the index with much deeper red ink spilled across many recently exciting investments. The ominous feeling of the moment reminds me of the suspense I first felt watching The Silence of the Lambs. It was creepy, dark and intellectually intriguing to figure out what would transpire next. Allegorically, the final scene of that movie is like the first week of stock trading in 2022. […]

[…] Investors today have these inviting memories of low-inflation, stable bond prices and booming stock markets. The flip side of these are “altogether mighty frightening.” Plausibly negative equity returns, bond losses and an end to euphoric animal spirits is frightening. As our Chief Investment Officer, Bill Smead (occasionally called dad) recently wrote in his piece “Inflation is a Wolverine,” the inflation that we are seeing is a wolverine. There is no natural predator to kill it off. It’s not a cute, adorable puppy. The only thing adorable in 10 years will be listening to the stories of investors that thought they wouldn’t have to deal with prior tough equity eras like the 1970s and 2000s. We refer to these as stock market failure. Many millennials that have just begun their investing journeys will have their “head” in their “hands” while they “sit and cry.” […]

[…] As Buffett has said a multitude of times, “price is what you pay, value is what you get.” In 2014, you didn’t get much value at those prices as the bandwagon was long and very noticeable. Fast forward to 2021, the bandwagon of other energy forms is very noticeable. There are practically religious orders being built up in other forms of energy like solar and other renewables. Are these other forms of energy subject to the laws of economics? Yes. They may end up with the same victim mentality that energy investors in 2014 did. […]

Today’s atmosphere is one that we rarely see as investors. This is not like junk bonds in the 1980’s or the run up in Valeant Pharmaceuticals and the other generic drug companies in the 2010’s. There is not a narrow way of looking at today. It is broad. To explain what the psychology is, someone would have to explain an opinion on central bank policy, inflation, crypto currencies, ventures, gamified trading and SPAC-money raising. Our issue with the psychology is that this era is being treated like these things all add up to something greater than the sum. In other words, we are on the steps of something that we’ve never had before. […]