Category: Missives

[…] We sit at a juncture where we tell clients that the S&P 500 is likely to make 2% compounded over the next 10 years, including dividends re-invested. We are excited for our clients and as investors ourselves because of these problems. We believe the secret of life is staring at us in the S&P 500: weak competition. We plan to take advantage of this by playing Bobby Fischer in any game except chess.

[…] Our research shows that most of the investable assets in the U.S. are in the hands of baby-boomer investors, who are looking for income in retirement. Your opportunity cost is skipping the 1.53% dividend yield in the S&P 500 Index or the 1.15% yield on the ten-year Treasury Bond. Long-term bonds and the S&P 500 are what Warren Buffett would describe as “the secret of life”. This is because on an income basis they are, in his words, “weak competition.” We would say it is a ticket to stock market failure. The rebound in the mall REITS could bring them back into favor as a source of retirement income and lay some serious capital gains in the laps of those who step when Simon says!

[…] we find this environment to be the opportunity of a lifetime. Humans do one thing extremely well: they buy high and sell low. The majority of investors suffer stock market failure. In a Charlie Munger approach, you would invert today’s circumstances to recognize that there is a myriad of businesses that don’t require you to look into the future like the zero-coupon bond or the company that will someday produce free cash flow. In fact, you can buy many businesses for less than the value of their assets and not have to worry about the cash flow in the near-term or long-term.

We have enjoyed watching what happens in the late stage of a financial euphoria episode play out in the escapades of millennial investors on Reddit, who seem to “rule the nation.” While politicians, regulators, the media and others try to sort this out, we thought some historical perspective might be helpful. How do Tesla (TSLA) and GameStop (GME) compare from a fundamental analysis standpoint and what do these circumstances tell us historically?

There have been a small number of consistent alpha-creating axioms in the U.S. stock market over time. Value beat growth over long time frames, tech stocks hit bottom in the summer and crowded trades separate you from your money, to name a few. None has been more consistent in my 40 years in the investment business than “the January effect.”

As we begin 2021, the investing public is tied up in a “frenzy,” to quote Charlie Munger from a recent interview. This “frenzy” can be captured a couple ways. Whether by the investment banking activities that usually coincide with poor market returns going forward (stock market failure), or by the sell-side research analysts playing hopscotch to raise their price targets over their competition in the most exciting stocks. Rather than look at Wall Street, who can often exact nefarious schemes and ideas on investors, we think it would be best to look at market participants to understand where we sit.

As we enter 2021, it appears that Buffett had things upside down in 2020. The things which had gone up the most by the end of 2019, went up the most in 2020. We invest on behalf of clients who want to avoid stock market failure and history shows most investors are impatient and are like a car stalled on the railroad tracks. […]

We were fortunate to watch a recent interview Charlie Munger did with Caltech as a distinguished alum. We consider him to be one of the most successful contrarian investment thinkers on the planet. At 96 years of age, he has no fear of being politically incorrect. We contrast this with the mountain of writing, media and rhetoric associated with the topic of climate change.

[…] The publicly-traded home builders, whose market share and moat grow by the minute, make up only a scant 0.23% of the S&P 500. At Smead Capital Management, we are practicing what Warren Buffett describes as the Mae West Theory, “too much of a good thing can be wonderful.” We currently own around 14% of our portfolio in home builders. As they prosper the next ten years and interest rates rise as a result of Millennial household formation, this could be one of the few industry groups which won’t suffer from valuation contraction. […]

[…] Heed this advice for the current stock market activities: Fear stock market failure! Wall Street is pumping out IPOs, SPACs and all kinds of neat, shiny ornaments. They are selling what is in season. To name a few of these themes: WFH (work from home), TAM (total addressable market), food delivery, eGaming, remote learning and technology dependence. These are wonderful slogans for selling ornaments to willing buyers. […]