Author: Smead Capital Management

At Smead Capital Management, we have our own Efficient Market Theory. Ben Graham observed and Warren Buffett repeated, “The stock market has a very efficient way of transferring wealth from the impatient to the patient.” We would add that over ten to twenty years the stock market moves money “efficiently from the those who over-think the stock market to those who don’t.” In this missive we will explain why we believe the patient benefit at the expense of the impatient and why those who over-think the stock market are incredibly inefficient and move their money to those with less complicated views on finance.

Many years ago, United Airlines had the slogan, “Fly the Friendly Skies.” At Smead Capital Management, we like to own companies for a long time which are “friendly” to their public shareholders. In this missive, we will define what it means in our eyes to be shareholder friendly and give a company specific example of this friendliness.

At Smead Capital Management, our fourth criterion for stock selection is the generation of high levels of free cash flow. To us, long duration common stock ownership is very similar to owning an entire business. In our opinion, the free cash flow represents the money the owner receives which does not have to be plowed back into the business to perpetuate its success. In effect, it is the “real” and measurable wealth creation of the business.