Category: Missives

A friend of our stock picking discipline reminded us of a very important force in the stock market. It was called the 70/20/10 rule, and it was promoted by Roger Edelman, Richard Evans and Gregory Kadlec in an early 2013 Financial Analysts Journal article. We had written about this in 2016, but today’s circumstances beg for a reminder. […]

[…] First, the S&P 500 Index is likely to produce very poor inflation-adjusted returns for the next 10 to 15 years. Second, we believe money can be made in the shares of companies which benefit from inflation like oil and gas stocks. Third, the most common question we get is, “When does the incredible run end for the 10 stocks that have made most of the returns in the last ten years?” Our answer is that it doesn’t make any difference to us when it happens, because we won’t own them now or when they get their reckoning.

The year 2008 and the subsequent Global Financial Crisis (GFC) stand as a watershed moment in the annals of our capitalist society. It was a bailout prompted by poor capital allocation, deficient risk management, and unchecked greed. More significantly, it marked a seismic shift, both financially and psychologically. Financially, it represented a substantial transfer of debt from corporate and private balance sheets to the balance sheet of the US Government. Psychologically, it sent a clear message to investors: if you are deemed systemically important, the degree of risk mitigation employed matters little in terms of being held accountable. […]

As bottom-up stop pickers and long-term investors, sentiment indicators don’t rank very high on our list of important considerations. However, there are times when extremes of sentiment occur and can have an impact on which stock sectors we avoid or ones we get attracted to researching. […]

[…] Even though we are eternal optimists by nature as long-only value managers, we relished Jim’s thoughts and studied his logic. He attempted to do on the short side what we try to do on the long side. He sold short popular and unmeritorious common stocks with confidence that economics would win out over time. He did this even though there has been a strong positive bias to the performance of the stock market. […]

[…] In The Godfather movie, peace didn’t last long. Michael Corleone took over from his father and proceeded to murder the leaders of the other mafia families in the New York area. The truce only provided temporary life support. AI looks like tech stock and S&P 500 Index life support to us. If they turn on each other, which their latest earnings reports show they are doing, won’t it get bloody? What happens if the seven stocks that have propped up the passive S&P 500 Index go through what every stock of popularity has done historically? This is just another reason to fear stock market failure!

[…] Let me also start this missive by saying that we at Smead Capital Management believe Jeremy Grantham is doing a great job of telling people how high the likelihood of stock market failure is. He’s trying to scare people and that is prudent advice. We tip our cap to him. We want to go into a second-level thinking discussion of how to take advantage of Mr. Market right now using Jeremy’s comments as a benchmark. […]

Close your eyes and imagine the elimination of gasoline-powered automobiles. Among people who believe in a quick transition away from gasoline to electric vehicles, they conveniently overlook the second-order effects, one of which is what might happen to the price of electricity with such an increase in demand. Is there a magician out there who can create the electricity needed to replace the gasoline we use today? Let’s sit in on a good first-year economics class to see how supply and demand are adding up. […]

When you are in a long-term bull market in growth stocks, you move from acorns growing into trees to asking trees to grow into a forest. We prefer to find meritorious acorns that could grow into trees, and this stock market is providing lots of opportunities in the smallest neglected large caps, and the largest neglected mid-cap stocks.

[…] We have taken the view that our eight criteria for stock selection will guide us to invest in great companies at very favorable valuations allowing us to be able to compound our returns over the long term. We don’t particularly care what the theme of the month or year is. This style of investing, while superior over the long run, takes a balanced blend of humility, conviction in the research process and a willingness to take risks through a contrarian asset allocation. It’s easy to say but very hard to do. It is our willingness to follow our process and invest regardless of the conventional market view that we believe sets us apart from our peers (particularly ETFs). This is not just something we say, a quick glance at our portfolio demonstrates it’s what we do as well. […]