Category: Missives

We were watching CNBC recently and an analyst mentioned what practically nobody besides us has said. She called Amazon’s (AMZN) entry into the grocery business a “failed experiment.” Amazon has been very successful with its Prime subscription model in other areas. Why do experiments usually fail, even among companies which have made other experiments succeed? As the stock market grieves the mass destruction of capital in the early stages of the tech/growth bear market, let’s delve into this very important subject. […]

Ben Graham is ascribed as being the father of value investing. The intellectual framework he brought to investors was using the available accounting to measure value of a business. His way of measuring was book value, the total assets minus all liabilities. By figuring out this number, he could then divide this metric by the total shares outstanding to understand how much book value per share (what some may call net worth) a company had versus what the price the shares were trading for in the stock market. […]

[…] This brings us to Chevron CEO, Mike Wirth. So far, he has neither joined with the European oil producers, who have drunk the ESG Kool Aid. Nor has he led the company to take full advantage of the stock market circumstances/low interest rates and followed up on what he believed was a “perfect fit” nearly three years ago. He needs to figure out what Chevron is going to be. Will he be like the European major oil producers or will he seek to be an oilocrat like Harold Hamm? […]

The beginning to 2022 has been dark to say the least. The year has begun with losses in the index with much deeper red ink spilled across many recently exciting investments. The ominous feeling of the moment reminds me of the suspense I first felt watching The Silence of the Lambs. It was creepy, dark and intellectually intriguing to figure out what would transpire next. Allegorically, the final scene of that movie is like the first week of stock trading in 2022. […]

Most professionals who employ our strategy are wide-asset allocators. We fill a sleeve in the U.S. stock ownership category and for most, that is in the large-cap space. We compete with other value funds and ETFs, which represent themselves as value strategies. Using the James 1:27 test, how do we stack up at the beginning of 2022 with other value strategies and large-cap managers that are portrayed as value managers? […]

[…] Warren Buffett says, “Invest in a company as if the stock market won’t be open for the next five years.” At Smead Capital Management, we try to do in already public company shares, many of the same things that Blackstone has done in private equity. First, we seek value in undervalued assets and underestimated business models. Second, our people are invested side-by-side with our investors.

Third, we like to make investments which meet our eight criteria for common stock selection at what John Templeton called, “The point of maximum pessimism!” He said, “If you can see the light at the end of the tunnel, you are too late!” Fourth, we try as much as possible to patiently wait for wonderful companies to get dumped into our lap by temporarily difficult and distressful events. […]

[…] Investors today have these inviting memories of low-inflation, stable bond prices and booming stock markets. The flip side of these are “altogether mighty frightening.” Plausibly negative equity returns, bond losses and an end to euphoric animal spirits is frightening. As our Chief Investment Officer, Bill Smead (occasionally called dad) recently wrote in his piece “Inflation is a Wolverine,” the inflation that we are seeing is a wolverine. There is no natural predator to kill it off. It’s not a cute, adorable puppy. The only thing adorable in 10 years will be listening to the stories of investors that thought they wouldn’t have to deal with prior tough equity eras like the 1970s and 2000s. We refer to these as stock market failure. Many millennials that have just begun their investing journeys will have their “head” in their “hands” while they “sit and cry.” […]

Overall common stock index performance can be a very confusing thing to most investors. From a cyclical standpoint, the history of stock price performance in the U.S. is closely associated with the Federal Reserve Board. When the Federal Reserve Board reverses an accommodative interest rate policy, it is affectionately referred to as “pulling the punch bowl.” Why do stock prices fluctuate with monetary policy and where are we in that cycle? Did the Federal Reserve Board Chairman, Jerome Powell, just “pull the punch bowl” on November 29, 2021?

Warren Buffett and Charlie Munger always refer to Aesop as the originator of investment logic. His first dictum was “a bird in the hand is worth two in the bush.” His second dictum was the fable of the “Tortoise and the Hare.” We have been getting many questions about the strength of our results and the strength of the stock market in general. We want to remind everyone that investing is a marathon, and in our case, Aesop’s marathon. […]

[…] As Buffett has said a multitude of times, “price is what you pay, value is what you get.” In 2014, you didn’t get much value at those prices as the bandwagon was long and very noticeable. Fast forward to 2021, the bandwagon of other energy forms is very noticeable. There are practically religious orders being built up in other forms of energy like solar and other renewables. Are these other forms of energy subject to the laws of economics? Yes. They may end up with the same victim mentality that energy investors in 2014 did. […]