Author: Smead Capital Management

At Smead Capital Management we are conscious of the few, but significant pitfalls which we believe exist for the long-duration common stock investor. One of the main pitfalls we want to avoid is the over-capitalization curse. This is a situation where investor enthusiasm gets very high, prices get historically high and investors drown the company, industry or sector with capital. In our experience, it pays to avoid the over-capitalized areas for as long as five to ten years as they work their way back to being hated and contentious.

Howard Gold is an inquisitive writer for Marketwatch.com and we think has done us all a great favor in his latest column titled, “Not even a bull market can interest people in stocks.” He points out via the chart below that—despite a huge rebound the last five years in US common stocks—equity holdings as a percentage of global investable assets just climbed to levels only seen at major stock market low points. Relative to the past 50 years, this stock market has been abandoned and orphaned even as it had made participants wealthy.

We at Smead Capital Management have been discussing some of the follies common to human nature and what we see as some pervasive trends in the investing world. These conversations got us imagining what C.S. Lewis’s, The Screwtape Letters, might sound like if they were applied to today’s investment environment. The satirical letters are written by an advice-giving bureaucrat in Hell named Screwtape, to his nephew Wormwood, a young demon who is learning how to lead humans astray. Taking some liberty with Lewis’s work, we present what we believe Screwtape might say if he were trying to advise Wormwood on how to lead investors astray.