Category: Missives

[…] 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. […]

[…] Unless something bad happens to our very defensive list of relatively unpopular value-oriented names in the next two months, we could have the best year of the nearly 14 years of our strategy. Unfortunately for them, many investors would rather tell us what to buy, and that tells us that they will go off the cliff in the not very distant future. This means that we believe most investors will suffer stock market failure and dismal returns over the next decade. We don’t plan on being one of them.

[…] Therefore, based on history, what could happen as the bond market adjusts to much higher permanent rates of inflation as 90 million millennials replace 65 million GenXers in the key 30–45-year-old age bracket dominated by house and car purchases? Where will interest rates go and how will that affect the stock market that is overweighted in technology and multi-billion-dollar growth stocks? Which stock sectors can make money in a much more difficult stock market dealing with much higher interest rates and strong economic growth? […]

Today’s atmosphere is one that we rarely see as investors. This is not like junk bonds in the 1980’s or the run up in Valeant Pharmaceuticals and the other generic drug companies in the 2010’s. There is not a narrow way of looking at today. It is broad. To explain what the psychology is, someone would have to explain an opinion on central bank policy, inflation, crypto currencies, ventures, gamified trading and SPAC-money raising. Our issue with the psychology is that this era is being treated like these things all add up to something greater than the sum. In other words, we are on the steps of something that we’ve never had before. […]

We have entered the phase when the body politic and public opinion are aware that Facebook is disturbing our society. This is very important to us as investors, because the big tech companies make up a disproportionately large part of the S&P 500 Index. The Sherman Antitrust Act was written and enacted because our early leaders were concerned about ruining this experiment in Democratic Capitalism. They felt that the most likely “disturbance” would be “the concentration of capital in vast combinations.” We believe we have reached that point with the FAANG stocks. […]

The talk of inflation today looks much like housing did in 2007. Evidence is mounting everywhere that this is a real long-term problem that is only getting worse. You can read this in the media, but yet security prices don’t reflect how damaging this may be. Bond investors’ pivot from greed to fear could crush seemingly safe investments. Equity investors could be hurt by the stock market failure of an elongated equity euphoria that finally got the dumbest investors on board (millennials). This would be damaging to net worth for individuals and institutions alike. It just goes to show how powerful incentives are. What we will learn is how swiftly they can change. […]