Category: Missives

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

Over the last ten years we’ve seen the rise of the Battle Royal markets and the shift away from one-on-one investing. There are all sorts of different battle royal’s, but the ones I watched as a kid were the biggest events in pro wrestling, where 12 wrestlers were put in the ring together and they attempted to toss each other out until one wrestler was left standing. Only the winner received prize money.

We believe money always goes where it gets treated the best. A recent article detailing the most attractive places in the U.S. for millennials to buy a house included the following cities, and that has implications for investing, not just nesting:

As rates fall to zero in most of the world, the line that has been ringing in our mind is “You can check out any time you like, but you can never leave!” This is a chorus investors have sung through their capital allocations. We believe the Eagles provided an excellent understanding of what today’s market is giving investors in their song, Hotel California.

In a recent interview by CNN’s Fareed Zakaria with Bill Gates the founder of Microsoft, Gates reflected on the wizardry of Steve Jobs and his ability to “cast spells on people.” Since Gates was a tech-magnate in his own right, his “minor wizard” status gave him the ability to identify the spells Jobs cast on employees and the world at large. Gates used the example of a company called NeXT, which Steve Jobs founded and according to Gates made very expensive computers which were “complete nonsense and yet he [Jobs] mesmerized those people.” Steve Jobs succeeded in attracting attention and wonder around NeXT so effectively that Apple bought it in 1996.

There are many ways to practice value investing and many ways to add value to your stock selection. We refer to ourselves as contrarians because we do not allow the crowd fears to deter us. We believe this perspective enables us to enter at lower prices on good quality securities when there is some form of tribulation surrounding an industry or company. In today’s missive, we would like to discuss the tribulation arising out of political scrutiny and the industries and companies suffering at the hands of political football.

On a recent trip to visit clients in Denmark, I had some free time and visited the Viking Wooden Ship Museum in Roskilde. The museum houses cargo and military ships made from oak trees, crafted with materials all formed by hand. They took years to build and helped make Denmark one of the world’s most important trading crossroads. Assumedly, the patience required to practice commerce in the 13th century generated massive cash flow for merchants at that time.

At the age of 35, I’m almost thirteen years into my career in the investment business. I was lucky to get a job right out of college in the brokerage business before joining Smead Capital Management at our formation. For most millennials like myself the last ten years have formed what we believe the business to be: a bull market reinvigorated by the whims of the Federal Reserve Board. If anchoring is a powerful force in investor behavior, the anchor at the depths of our millennial beliefs is that value hasn’t worked. We’d like to contextualize value stocks underperforming to frame whether this is a fundamental problem or if other factors outside of value are deluging the underperformance.