Category: Missives

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. […]

A wise man once said that generally accepted accounting principles (GAAP) is where you start. It may not be the most economic way of looking at a business for various reasons. To look back at how investors could be affected by this, we always recommend “Quality of Earnings: The Investor’s Guide to How Much Money a Company is Really Making” by Thornton L. O’Glove. The author walks through multiple examples of situations where he believes investors should make adjustments when analyzing financial reports. […]

Our long-time investors are probably wondering why we haven’t made any gains over the last 18 months. First, we have no ability to predict what already popular stocks will stay or get more popular. This includes tech stocks, AI stocks, wide-moat high-quality consistent growth stocks and up and coming future tech leaders. Momentum has been the single best of the factors in factor investing for 15 years! We are paid to be greedy where others are fearful and fearful when others are greedy. To say we’ve been fearful would be an understatement. […]

A mania associated with electric production companies providing electricity to technology enterprises pursuing Artificial Intelligence (AI) agendas looks familiar. An announcement this week by Meta that they signed a deal with Constellation Energy (CEG) and the corresponding surge in the share price of CEG rang a big bell in our minds. Our regular readers will be reminded that a few weeks after the 2024 US presidential election, we made the case that we were in the stock market at the polar opposite of the late-1980 euphoria over President Ronald Reagan’s victory. Stocks were massively under-owned in 1980, interest rates were sky high, and inflation had run rampant. […]