Category: Missives

[…] In psychology, there are two main forms of rejection (duration and magnitude). For those of us who know history and appreciate the rhymes that Twain taught us, this mania has already lasted longer (duration) and been more all-encompassing than the DotCom bubble (magnitude). It has taken the S&P 500 Index to a more expensive position relative to most of the respected valuation metrics (Schiller CAPE, Buffett’s stock market indicator, US household equities as a percentage of US financial assets), to name a few. And anyone who stays late at this party could run the risk that Cinderella took at the ball. Warren Buffett said, “At midnight, everything is going to turn to pumpkins and mice! But the trouble is, there are no clocks on the wall.” […]

For over eighteen years, we have maintained the same investment discipline and the same eight criteria for stock selection. We have deliberately sought opportunity in the sectors and structures the market has decided are too complicated, too cyclical, or simply no longer fashionable. This philosophy has rarely felt more necessary or more lonely than today. […]

My first experience with a major economic/stock market bubble was the dot-com bubble of 1998-2000. Many investors forget that the Nasdaq and S&P 500 Index bubble that ended March 10, 2000, was the first bubble in a series of three bubbles. In this missive, with the help of the band Foreigner, we will walk through the three bubbles that cursed investors from early 2000 through 2015. […]

One of the things we have in common with Warren Buffett is that we started our risk-taking career handicapping at racetracks. Buffett handicapped the horse races in Omaha, and I handicapped greyhound races near Portland at Multnomah Kennel Club in Gresham, Oregon. Buffett was too young to bet, so he created a tip sheet which he sold at the track. I was in college and most of the time was sending bets with my relatives while working swing shift at the Crown Zellerbach paper mill in Camas, Washington. […]

[…] The combination of increasing returns at scale, with a secular tailwind of new household formation working with an aging housing stock, leads us to believe we have entered a new era of the supermajor in US homebuilding. Like the emergence of Exxon and Chevron as supermajors, first coined by Morgan Stanley analyst Doug Terreson in 1998, we believe that D.R. Horton and Lennar will be at the forefront of homebuilding consolidation in the United States – an industry which we believe today more closely resembles a manufacturing business, as opposed to a real estate business.

While there has been a lot of controversy around the Trump administration’s policy toward the Federal Reserve recently. What is less obvious to most investors is what they’re aiming to accomplish. Trump continues to talk about getting rates lower, and this has been echoed in other parts of the administration as well. He has also talked about rates affecting housing. Let’s unpack the Administration’s reasoning and goal. […]

[…] Like the current era, the late nineteenth-century American investment landscape offered tantalizing new technologies – from mechanical typesetters to the light bulb – but lacked the safeguards and information networks today’s investors take for granted. Examining Mark Twain’s forays in investing highlights a fact of life that we often discuss at Smead Capital Management: excellence in one field does not necessarily translate into another. […]

As summer comes to a close and life adjusts back to normal for most of us, we thought it was a great time to get back to basics and take a look at the current U.S. stock market. Our basics include owning strong companies that fit our eight criteria for stock selection, primarily in industries that are out of favor, as well as multi-year winners that we allow to compound for years. As we have echoed Warren Buffett for years, sins of commission hurt (buying losers 30% of the time), but sins of omission can hurt long-term results and affect long-term returns immensely more than losing duds. […]

[…] We own a portfolio of stocks that are massively under-owned by the S&P 500 Index and, in many cases, out of favor among active stock pickers. Stock picking itself is well discredited by the momentum of the last 15 years. Healthcare and energy are as small a part of the index as they have ever been. In a stock market that could become difficult at some point, we feel we are at a competitive advantage over most participants.

Investors have talked a lot about the Buffett indicator since the Oracle of Omaha began commenting on it. Buffett compared the market cap of the US stock market to GDP. Assumably, he uses it as a long-term indicator of the attractiveness of overall stock prices. While we have other favorite measures, like the St. Louis Fed data on equities as a percentage of US household financial assets, there are plenty of disturbing aspects to Buffett’s data. The Buffett indicator sits at roughly 217% today, the highest ever. […]