Category: Missives

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.

A series of important factors in the U.S. stock market are in play which beg the question, “Are we at a beginning of a risk cycle or at an ending?” The answers will have a bearing on what to own and where to be positioned going forward. These thoughts won’t be exhaustive, but we hope to get you thinking on a few important subjects.

As we watched this year’s Berkshire Hathaway Annual Meeting, one thing struck us. There was sheer enthusiasm around the annual shareholder meeting for anything tech-oriented. Yes, it was disclosed that Berkshire had taken a position in Amazon that Friday, but it goes deeper.

Many are wondering why the market for Initial Public Offerings (IPOs) has performed so poorly, even though the flood of hot new ones came to market recently. It took three years to choke demand for money-losing dot-com IPO companies back in 1997, even though Federal Reserve Chairman Alan Greenspan called the mania for tech stocks in late 1996 an “irrational exuberance.” What has killed the goose which traditionally laid the golden eggs on Wall Street?

We have written a good deal about the parallels of today’s market with the tech and telecom bubble of the late 1990’s. While no two time periods are ever the same, today’s rhymes are eerily similar in some respects, with the latest development in initial public offerings (IPOs) as the latest example. Like past market peaks that ultimately corrected due to excessive valuation levels, markets are now working to suck in fresh capital as they sell the sizzle before anyone has tasted the steak (vegetable based or not). Today’s reverence for disruption and innovation have created such myopia that we might be beyond meat altogether.

We believe the U.S. stock market will come down to a clash between one very positive forward-looking set of facts and a very negative set over the next ten years. Demographics argue for a much stronger economy, higher interest rates and a change in dynamics associated with stock market popularity. The parabolic move the last five years in e-commerce and other tech-related securities has unknowingly cursed forward-index performance and turned a whole generation of investors into growth stock aficionados.