Author: Smead Capital Management

[….] We are asking you to use your “head” and “forget” owning stocks at enormous price-to-sales ratios or ones which are massively over-owned by indexes and other passive vehicles. We know your “heart is sayin’, don’t let go!” Most investors in financial euphoria episodes “intend” to “hold on to the end” and suffer the consequences. We call the consequences stock market failure.

Warren Buffett’s annual letter was great in all the easy ways and disappointing in the ways that matter the most to his shareholder partners. Last week, Charlie Munger reiterated the idea that successful investing is “an unusual combination of patience and aggression.” The communication of the May 1, 2020 Annual Meeting and this letter tell us that the aggression was absent in the spring and appears to be in hiding in January of 2021.

[…] We sit at a juncture where we tell clients that the S&P 500 is likely to make 2% compounded over the next 10 years, including dividends re-invested. We are excited for our clients and as investors ourselves because of these problems. We believe the secret of life is staring at us in the S&P 500: weak competition. We plan to take advantage of this by playing Bobby Fischer in any game except chess.

[…] Our research shows that most of the investable assets in the U.S. are in the hands of baby-boomer investors, who are looking for income in retirement. Your opportunity cost is skipping the 1.53% dividend yield in the S&P 500 Index or the 1.15% yield on the ten-year Treasury Bond. Long-term bonds and the S&P 500 are what Warren Buffett would describe as “the secret of life”. This is because on an income basis they are, in his words, “weak competition.” We would say it is a ticket to stock market failure. The rebound in the mall REITS could bring them back into favor as a source of retirement income and lay some serious capital gains in the laps of those who step when Simon says!

[…] we find this environment to be the opportunity of a lifetime. Humans do one thing extremely well: they buy high and sell low. The majority of investors suffer stock market failure. In a Charlie Munger approach, you would invert today’s circumstances to recognize that there is a myriad of businesses that don’t require you to look into the future like the zero-coupon bond or the company that will someday produce free cash flow. In fact, you can buy many businesses for less than the value of their assets and not have to worry about the cash flow in the near-term or long-term.

We have enjoyed watching what happens in the late stage of a financial euphoria episode play out in the escapades of millennial investors on Reddit, who seem to “rule the nation.” While politicians, regulators, the media and others try to sort this out, we thought some historical perspective might be helpful. How do Tesla (TSLA) and GameStop (GME) compare from a fundamental analysis standpoint and what do these circumstances tell us historically?

There have been a small number of consistent alpha-creating axioms in the U.S. stock market over time. Value beat growth over long time frames, tech stocks hit bottom in the summer and crowded trades separate you from your money, to name a few. None has been more consistent in my 40 years in the investment business than “the January effect.”