Author: Smead Capital Management

When you are in a financial euphoria episode, like the one we are in currently, it is hard to visualize the impact it has when it breaks. Historically, it is the leading cause of stock market failure. We thought it would be helpful to discuss the secondary impact of the euphoria on common stocks. What do companies not in the center of the euphoria do when the fever breaks? How much portfolio adjustment do you need to do to protect yourself? What are the investment implications of owning common stocks whose prices have been inflated by mania, but are not in the center of the storm?

[…] We believe we are at the beginning chapters of a wonderful economic era globally where the consumer and economy will have slack to build upon for years. With rates this low and many stocks so cheap, it seems illogical to us that investors are so unaware that stock market failure could transpire out of today’s circumstances. The problem is that logic has nothing do with what is going on. As James Grant wrote in his 2019 book Bagehot, “Logic is as poor an argument against a boom as it is against a love affair.” […]

In the business of common stock portfolio management, most of your time is spent practicing your own specific discipline. However, extremes of mass psychology force you to take very uncomfortable positions for extended periods of time. When folks are scared to death of owning common stocks, like in late 1987, late 1990, late 2008 to early 2009, and in March through May 2020, we must provide evidence to “be greedy when others are fearful.”