Author: Smead Capital Management

We at Smead Capital Management believe that prolonged faith in China’s economy and the belief that emerging market growth will be an elixir for developed market multi-national companies is the erroneous gift that just keeps giving. If China’s economy has been successfully soft landed from its boom, why is the internal Shanghai Composite index making new lows as recently as last week (November 29th, 2012)? From its peak on October 16, 2007 through December 3, 2012, the Shanghai Composite is down over 64.8%, whereas the S&P 500 is up 2.7% on a total return basis. We at Smead Capital believe that China’s boom and the boom in commodity prices which it undergirded do not pass the smell test!

A tremendous amount of energy and effort has been expended in the US on behalf of wealthy investors to secure returns while reducing risk. Like any useful endeavor, it started out as a wise thing and reached its stride in the late 1990’s as a way to deal with a massive asset misallocation. As Warren Buffett always says, “What the wise man does at the beginning, the fool does at the end”. It appears to us that the efforts to eliminate risk in the US capital markets have reach the “foolish” point.

As we approach the end of 2012, those of us at Smead Capital Management are struck by how helpful the band, The Who, could be to those who are interested in relative performance. Their comments on demographics, psychology and relative value are as beneficial to the contrarian investor today as they were 40 years ago when their songs were first popularized.