Category: Missives

In preparation for a talk, I began to review Sir John Templeton’s track record with the Templeton Growth Fund (TEPLX), which he managed from 1954 to 1991. At the age of 34, with a father that broke into the investment business in 1980, I was very aware of Templeton’s success in his career, but unaware of how the results came to his clients. What you walk away with after reviewing his track record is the knowledge that very few people in our industry (particularly academics) are conscious of what it took to produce that success. After Templeton, we also reviewed Sequoia Fund (SEQUX) from inception to date. We walked away thinking that the ride that the investors had with these vehicles wasn’t the most important part of the experience, it was the results. Academia says otherwise. We will unpack this.

Our long-time readers are aware that we analyze the U.S. stock market through the prism of what we call “well-known facts.” A well-known fact is a body of economic information which is pretty much known to all market participants and has been acted on by almost everyone with available capital. Former Intel CEO Andy Grove use to say, “when everyone knows something is so, nobody’s knows nothin’.” Today there are several well-known facts which we believe are leading investors down a destructive path.

Investors have called their five-year love affair with technology stocks into question over the last 35 days. For this reason, we at Smead Capital Management are calling in John Lennon and Paul McCartney’s beautiful ballad “If I Fell” to help answer the following questions. Should investors continue to fall in love with these glamour growth titans? How have past love affairs with tech ended? Where might the bottom be over the next five years if history is any guide? Lastly, how will agnostic index and ETF investors react if the stocks which made their wealth grow the last five years become a source of financial heartache?

Most people tend to see what’s right in front of them, especially when it comes to housing affordability. Consider that most of the media organizations in the U.S. reside in the expensive coastal cities. These cities are suffering a decline in home values and contributing to a discussion on what higher home prices and higher interest rates could do to the number of new homes built nationwide. An examination of the laws of supply and demand are essential to this discussion, as well as a review of human behavior in markets based on affordability. We remind ourselves that coastal cities—like our own Seattle—are the exception, not the norm.

In 1720, the South Sea Bubble arose from what seemed to be good intentions. The South Sea Company was given an exclusive monopoly on the Spanish Americas in exchange for assuming a large part of England’s debt. The debt holders received preferred shares in the South Sea Company that paid 6% interest. The business operators of the South Sea Company seized on their de-facto government backing to continue offering shares to pay off all the country’s debt.

We have written profusely about the investment myopia of today which has focused on “growth at any price companies” without regard to profits or free cash-flow. We do this because we know success in investing requires a healthy degree of discomfort for it to be profitable, and we know how much comfort today’s investor has found by owning what has worked.

The U.S. government must determine how to deal with the negative consequences of some of the last decade’s most successful internet-based businesses. Google, Facebook and Amazon grew up as strangers and have developed monopolies in search, social media and in e-commerce. The stock market has been very excited about the control over people they have attained and the “big data” they use in advertising and e-commerce. In many ways, these tech behemoths are “three identical strangers.”

It is no secret that the U.S. stock market has been completely addicted to discounting the future success of the most popular technology stocks. Momentum-based growth investing has had many bouts of success in the past, but this is the first episode in an era where indexed mutual funds and exchange traded funds (ETFs) were the largest aggregate owners of the largest capitalization companies. In comparison, as recently as 20 years ago, individual and institutional investors were the biggest aggregate owners of the nation’s largest companies through direct ownership. It is almost like the old-time owners of individual stocks were smoking cigarettes and today’s owners are vaping.

The word encore is a French word, meaning ‘again, some more’. We typically think of it as coming after a concert is over, where the band returns from backstage to play some of the most crowd-pleasing hits. As the stage temporarily goes dark, the band is encouraged by the masses to reemerge through their loud applause, cheering and chanting. When new to the American scene, the spontaneity of this phenomena would often result in multiple encores for an unrelenting crowd.

We believe the math of common stock investing is pretty simple. When you buy a stock without leverage, you can only lose your original investment. Your gains can be unlimited over the longest term (long duration). Most of the benefit (90%) of diversification is reached by owning a twelve-to-eighteen stock portfolio, if the owners are willing to put up with the relatively random way returns are handed out over time. Valuation matters dearly to portfolio results. Stocks purchased at depressed prices (as a group) outperform those which are more expensive over longer-run time periods.