Category: Missives

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. […]

[…] Barbra Streisand sang it best; academic studies prove that people who get normal human interaction have much better mental health. Despite this fact, investors have been scrambling to capitalize companies which benefit from people voluntarily imprisoning themselves in their own homes. Work from home, exercise from home, cook from home, movies from home, sports from home and just about everything else from home is all the rage. Every newbie tech company attached to this phenomenon is capitalized at an enormous price-to-sales ratio and a huge price-to-earnings ratio, if they have one. […]

While the designs and lifestyles around us are changing, the human experience is constant. We are born, we age, we meet many people (including for most our spouse(s)), we procreate, and we die. This chain has not been broken for 10,000 years! While this seems so simple on its face, many confuse their experience for something more unique. In academia, some may term this ‘chronological snobbery’. In the investment business, we call it financial euphoria. The number one cause of stock market failure!

We came up with a theory many years ago to address how important psychology is to owning common stocks. We found that the risks go up in a stock market, or in an individual stock, when a “well-known fact” (WKF) was acted on in the extreme. It is a leading cause of stock market failure for professional and individual investors alike. In our world, a well-known fact is a body of economic information which is known to everyone, has been acted on by everyone and has attracted the most speculative investors (aka investors using borrowed money or options).

When you run an equity portfolio which is concentrated in 25-30 common stock selections, there are usually three stocks which stick out as particularly attractive at any given time. It is tempting to cherry pick and buy those outside of our strategy. As of the end of October 2020, there are more than ten of our stocks which appear to be worthy of extra attention and affection.

Joe Kennedy was getting his shoes shined in 1929 and the shoeshine boy was giving him stock tips. Think of how humiliating it might have been to Kennedy, who had dramatically reduced his common stock ownership. This upstart had been making money and couldn’t wait to pass along his wisdom to Mr. Kennedy. Joe quickly surmised that there was nobody left to buy stocks and established a huge short position in the stock market. The fortune he made by betting against stocks was part of the wealth which led his son, John F. Kennedy, to become President of the United States in 1960.