Category: Missives

Marketwatch.com writer, Ellie Ismailidou, wrote an interesting article on July 5, 2016 proposing that the drop in the U.S. 10-year Treasury Bond Yield below 1.4% represents an “insatiable demand for safety.” As contrarians, we love these kinds of well-written thoughts as the media makes folks more and more aware of what has worked in the stock and bond markets this year. We thought it would be helpful to put today’s circumstances into a historical context and look at clues for the best possible behavior for investors in the past and in the future.

In the aftermath of the financial meltdown in 2007-2009 and the lending shenanigans ignored by regulators and politicians prior to 2007, the Federal Reserve Board executes annual stress tests on systematically important financial institutions. The ongoing effort includes running the numbers on economic scenarios as bad as the 1930s and includes high capital requirements dictated by regulators. It is soon followed by regulatory approval for the capital plans of the major banks and insurance companies on the list. These “stress tests” have taken center stage for investors in these companies.

We believe that Billy Joel is perhaps the most preeminent singer/songwriter of the U.S. baby-boom generation. Art, like Billy Joel’s music, has a tendency to mirror culture and economics. Thanks to his recent tour in the U.S., we were reminded of how four of Billy’s greatest hits speak to our current circumstances in the stock market and give incredible advice about how to behave as investors over the next ten years.

As we enter April, baseball comes to mind while the Major League Baseball Season begins. Commissioner Giamatti’s thoughts are apropos and reflect on baseball across the seasons of the year for players and the fanatics of the sport. Baseball carries many similarities to investing. There are a myriad of investment opportunities among stocks, bonds and other investment products much like there are thousands of events in a baseball season like plate appearances, outs and runs. The one constant in the investment world and baseball is change. Change during the year. Change over the years.

At Smead Capital Management, we make it a practice of constantly reviewing our discipline of stock selection and portfolio management. Like a sports agent compares athletes, one of the ways we do this is to follow competitiors with proven track records of success. Many portfolio managers of U.S. large-cap equity funds have had a very difficult time during the last several years in the U.S. stock market. The market has been especially harsh on many high-conviction, long-duration portfolio disciplines lately. What do history and current circumstances teach us about our stock picking discipline?

The United States has one of the most successful biotech/pharmaceutical industries and arguably the premier banking institutions in the world. During the current presidential race, populist politicians on both sides of the aisle have gained a great deal of popularity by turning these two industries into political punching bags.

At Smead Capital Management, we have great respect for the most successful long-duration investors. Warren Buffett is among those investors. He gives the public access to his thinking in his annual Berkshire Hathaway shareholder letter. In his recent 2015 letter, he reminded readers of a few of the things that should matter most to investors. We at Smead Capital Management like to buy wonderful companies at cheap prices. Buffet’s letter dwells on the need for businesses to be cheap in a wise way. He also reviews what makes a company “wonderful.”

I recently saw the movie, The Big Short. While the movie entertained as much as the book, the movie’s release coupled with the rough start to the year probably left a lot of investors feeling anxious. As long-duration common stock owners, we at Smead Capital Management believe a review of the circumstances preceding the financial meltdown of 2007-2009 and a comparison to where we are now in the U.S. economy would be helpful. Since residential real estate was the centerpiece of the movie, and traditionally is a centerpiece of our economy, we will dub our current view as “The Big Long.”

At Smead Capital Management we are in the business of attempting to gain a clear understanding of what we refer to as a “Well Known Fact.”…
With that in mind, as we assess what has gone on in the back-half of 2015, we are cognizant of the question we get asked about the most. This question beats most others by a wide margin: what is our view of the commodity complex in general, and oil in particular?

We make no effort at Smead Capital Management to have any control over stock market results, volatility, unpredictability and relative performance. We haven’t got any special ability to know what stocks will do next year or how we will fare on a relative basis. What we do try to control is what we own, how cheap it is, how often we make changes to our portfolio (we subscribe to “lethargy bordering on sloth”—Warren Buffett) and what kind of quality we demand from the companies we buy and own.