Category: Missives

While the circumstances of today seem strange and awkward, they are in the probabilities of what we must be willing to live through as a capitalist society. We want to focus our time and energy on what this environment provides in opportunities for our clients, shareholders and our firm at Smead Capital Management. While we watched stocks that were considered economically-sensitive get pounded the last few weeks and watched the market coronate perceived winners from everyone hiding at home, our reading and thoughts from the past great buying opportunities started to ring in our ears and have caused our minds to pump with adrenaline and excitement.

This year feels so much like late in 1981, late in 1999 and late in 2008 to us. The first reaction by investors was to flush whatever they had left in economically sensitive stocks. Then, as if there hadn’t been enough torture for value investors today, Saudi Arabia decided to chop the knees out from under the oil industry in the U.S. This has exacerbated the crisis in economic confidence to an even higher panic level. What would history suggest we do in the middle of this fairly violent decline in stocks and seemingly bottomless coronavirus circumstance?

Investors have been awoken to the carnage of the last three weeks. These circumstances, while unenjoyable, may be hiding the actual problems with today’s market. The unforeseen circumstances of today are no different than the past. […]

A truly interesting contradiction is developing in stock markets around the world. A number of major corporate executives are calling for businesses to be judged by something other than the net present value of their future earnings or other conventional business/investment metrics. This comes under the heading of ESG, which stands for environmental, social and corporate governance. The idea is measuring how good businesses are in ethics, for society, as well as for future profits.

In the annual letter to Berkshire Hathaway shareholders in early 2000, Warren Buffett attempted to remind everyone why value investing works, despite the financial euphoria all around him at that time. We will revisit this valuable lesson and draw implications for reviving enthusiasm for value investing at a point eerily similar to early 2000. The fast growing spread between growth and value in the last 30 days looks to us very much like the first 67 days of 2000 and the entire year of 1999.

In 1936, John Maynard Keynes penned his work The General Theory of Employment, Interest and Money. Most of the work was trying to strike against the consensus of economics. Many in the intellectual communities of the west believed in the classical theory of economics. We will describe it briefly by saying that these economists believed that humans function much like an algebraic response to prices or stimuli. Keynes struck out against this notion in his work, allowing thoughts of entrepreneurship, experience and some of the unexplainable human responses to rebut this linear view of human behaviors in economics.

When we are on the road, we like to tell the story of our imaginary bottled water company. The first year we manufacture one million bottles of water at a cost of $1. To attract customers, we sell them for 90 cents per bottle. In our second year we make two million bottles for $1 per bottle. Again, we sell them for 90 cents per bottle.

In financial euphoria episodes, investors become immune to the risks of capital destruction by blacking out to their normal risk aversion. Usually these episodes come from extrapolating the recent past out many years into the future. What can we learn from other disciplines about blacking out? How did this happen with investors in the past and where are risks in the U.S. stock market blacked out today?

We live in a world defined by change. Anyone in doubt need only wait a few days to be reminded. Humans endeavor to measure it, describe it, and develop strategies designed to control it. Sometimes these observations persist long enough for emerging beliefs of changing paradigms or constructs. At the end of cycles, reversion to the mean gets lost as the “new normal” removes old norms from consciousness.

Printable Version Dear Fellow Investors, Michael Milken rose to the top of Wall Street by way of the Wharton Business School with Drexel Burnham Lambert in tow. Milken’s work at Wharton was founded on the core theory that bond investors were rewarded by taking junk