Author: Smead Capital Management

Over a three-year time period, stock prices tend to mean revert. This has spawned numerous investment approaches which try to squeeze capital gains out of those reversions. Classic deep value investing, as popularized by Benjamin Graham at Columbia Business School, taught that you would succeed by buying fifty-cent dollars and selling them when and if they reverted to the mean. The “Dogs of the Dow”strategy of buying the ten highest yielding Dow stocks was born out of mean reversion.

We at Smead Capital Management are in the camp of long-duration investors who believe we’ve entered an extended period of intermittent interest rate increases, a reversal from the 35-year era of intermittent declining rates we have experienced since 1981. The following chart shows that speculators have placed very heavy bets on rising interest rates in November. The placement of these heavy bets indicates that we could be close to the first temporary peak in the 10-year Treasury bond moving from the historically low rates around 1.5%. It looks to us like the first inning of a nine-inning game; the last game of this kind lasted 30 years.