Category: Missives

When you are in a financial euphoria episode, like the one we are in currently, it is hard to visualize the impact it has when it breaks. Historically, it is the leading cause of stock market failure. We thought it would be helpful to discuss the secondary impact of the euphoria on common stocks. What do companies not in the center of the euphoria do when the fever breaks? How much portfolio adjustment do you need to do to protect yourself? What are the investment implications of owning common stocks whose prices have been inflated by mania, but are not in the center of the storm?

[…] We believe we are at the beginning chapters of a wonderful economic era globally where the consumer and economy will have slack to build upon for years. With rates this low and many stocks so cheap, it seems illogical to us that investors are so unaware that stock market failure could transpire out of today’s circumstances. The problem is that logic has nothing do with what is going on. As James Grant wrote in his 2019 book Bagehot, “Logic is as poor an argument against a boom as it is against a love affair.” […]

In the business of common stock portfolio management, most of your time is spent practicing your own specific discipline. However, extremes of mass psychology force you to take very uncomfortable positions for extended periods of time. When folks are scared to death of owning common stocks, like in late 1987, late 1990, late 2008 to early 2009, and in March through May 2020, we must provide evidence to “be greedy when others are fearful.”

[…] This got us thinking about business models and how profitable they can be. These companies are in e-commerce and have had the state governments of the U.S. shut down most of the physical locations of their competitors. The last three months were effectively two Christmas selling seasons spread from late winter into spring. Why is one of these business models responding so well to these circumstances? How profitable have these two platforms been in the past? Why does eBay sell for such a steep discount to Amazon? […]

The oddity of today’s stock market is exactly what any God-fearing value manager should pray for. There are very few scenarios in the last 50 years that can be used to model or forecast what is currently going on. We are strong believers in Mark Twain’s saying that, “History never repeats itself, but it rhymes.” While you can’t precisely forecast the future, the rhymes of past eras can help provide a mental model to produce potential outcomes to help us as stock pickers. Our model for thinking about today’s circumstances is the inversion of what took place in 1972, matched against the opportunities available in 1974.

At Smead Capital Management, we believe one of our competitive strengths is the ability to visualize how good something of merit will be when it is deeply out of favor. We also think we have the ability to avoid excessive optimism attached to extrapolation of the recent past. Elon Musk and SpaceX just shot a NASA rocket into outer space this weekend. Like popular expensive glamour stocks, everything comes down to earth eventually. […]

Great investment opportunities are lonely. History shows us the crowd behaviors to avoid and the investment market circumstances to capitalize on. We believe we are at one of the great junctures, where the crowd thinks they unequivocally know the future. Simultaneously, they have left the stocks related to the unknowns for dead. What does history tell us about situations like this? What stocks are mega-cheap based on the unknowns?

We are big fans of Buffett’s theories about businesses with low capital requirements and the ability to throw off cash to owners. Unfortunately, he recently emphasized indexing and didn’t shy folks away from today’s glamour tech stocks which require more and more capital. In Berkshire’s 2007 Letter to Shareholders, Buffett outlined what “The Great, the Good and the Gruesome” businesses look like. He profiled “gruesome” business by using airlines as his poster child and described them in the opening quote of this letter. Buffett would have been well served by listening to his 13-year-younger self, and we think his description of gruesome stocks should serve us well in assessing today’s market.

The capital markets are a highly complex system, where perturbations can cause a tidal change. Every business around the world has been affected by Covid-19. For a profitable business anywhere, this is a calamity. For a business that was losing money before this, it’s a tombstone. The funding markets lately have been pretty fickle. American businesses were binging on debt like you’ll rarely see prior to this. Now, raising debt isn’t easy. This is the nature of friends on Wall Street. […]

…The coronavirus has done a surprise attack on the U.S. stock market and economy over the last six weeks. Gruesome statistics on new cases of the virus and lost lives are being dropped on us by the biggest barrage of information human experience has ever known. Traditional media and digital media have bombarded people into a panic in the stock market and into a much needed and massive economic time out. Brains, emotions and reasoning got fried by this information overload. Why was this the most violent decline and fastest bear market of my 40 years in the investment business?…